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Fourth IASB Research Forum - papers and case studies

24 Nov 2017

The International Accounting Standards Board (IASB) will host its fourth Research Forum on 28 and 29 November 2017 in Brussels. The papers to be presented and case studies to be discussed are available on the IASB website.

The first day will see the presentation of five academic papers, followed by a response of an academic and an IASB representative, again followed by a discussion with the audience. The papers are the following (all links to the IASB website):

On the second day, IASB staff will present case studies for discussion by the audience. The case studies will be (all links to the IASB website):

FRC announces thematic reviews for 2018/2019

20 Nov 2017

The Financial Reporting Council (FRC) has announced the thematic reviews that it will undertake in 2018/19.

The thematic reviews, which will supplement the FRC’s routine monitoring work, will cover “certain aspects of corporate reports and audits where there is a particular shareholder interest, and scope for improvement and learning from good practice”.

Within the areas of corporate reporting the FRC will undertake thematic reviews in the following areas:

The FRC has indicated that it will write to 40 smaller listed and AIM quoted companies prior to their year-end, informing them that it will review two specific aspects of their next published report and accounts. These specific aspects will be drawn from five areas of FRC focus that have featured in recent thematic reviews or Financial Reporting Lab reports.

The FRC will also review and report on companies’ disclosures in December 2017 reports in relation to the future impact of IFRS 16 Leases and will also review June 2018 interim reports of a number of companies in industries whom it expects that IFRS 15 Revenue from Contracts with Customers and IFRS 9 Financial instruments will have the most material impact.

Within the area of audit, thematic reviews will be conducted in the following areas:

  • Transparency Reporting: A comparative analysis of transparency reports of firms with public interest entity (PIE) audits.
  • Audit Quality Indicators (AQIs): An assessment of the development and use of AQIs by UK audit firms, which will draw heavily on international best practice.

In addition to the thematic reviews, noted above, the FRC will focus its routine corporate reporting review and audit monitoring activity on the reports and audits in the priority sectors of:

  • financial Services, with particular emphasis on banks, other lenders and insurers;
  • oil and gas;
  • general retailers; and
  • business support services.

It will particularly focus on:

  • first and last year audits;
  • the audit of fair value investments, including goodwill impairment;
  • the nature and extent of the use of auditor’s experts and specialists; and
  • the approach to the audit of controls.

Click for (all links to the FRC website):

FRC issues revised Practice Note 15

09 Nov 2017

The Financial Reporting Council (FRC) has published a revised Practice Note 15: ‘The Audit of Occupational Pension Schemes in the United Kingdom’.

The main drivers for the revisions are:

  • revisions to UK auditing standards (ISAs (UK));
  • changes to UK accounting standards (Financial Reporting Standard (FRS) 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland) and the revision of the pension Statement Of Recommended Practice (SORP);
  • continuing developments in regulatory codes and guidance issued by The Pensions Regulator (TPR);
  • changes in relevant legislation; and
  • the increase in master trusts in the pension sector.

The FRC has also withdrawn Practice Note 22 – The Auditors’ Consideration of FRS 17 – Retirement Benefits – Defined Benefit Schemes.

The press release, revised Practice Note 15, feedback statement and impact assessment are available on the FRC website.

FRC publishes the results of three thematic reviews to assist companies with improving the quality of their reporting

10 Nov 2017

The Financial Reporting Council (FRC) has published the results of three thematic reviews that it expects companies to look to in order improve the quality of their corporate reporting and “raise the bar on their disclosures”.

Thematic reviews supplement the FRC’s Corporate Reporting Review (CRR) function’s monitoring of company reports and accounts for compliance with the Companies Act 2006, applicable accounting standards and other reporting requirements. The aim of these reviews is to identify and share examples of good practice reporting and highlight areas where improvements can be made.

The thematic reviews cover three areas that the FRC has identified are “acknowledged areas of difficulty” for preparers – judgements and estimates, pension disclosures and alternative performance measures.

Judgements and estimates

The FRC reviewed the significant accounting judgements and sources of estimation uncertainty disclosures of 19 FTSE companies (three FTSE 100, 12 FTSE 250 and four smaller listed entities) and one company from the AIM market, having informed them of this in December 2016. The objective of the review was to “encourage better quality reporting that enables readers to assess the quality of management’s decisions and to identify better practices”.

The report indicates that the FRC were “encouraged” to see that most of the companies in the sample had responded to the advance warning of the review by making improvements to their disclosures. Although not as significant as in their other thematic reviews, the FRC indicates that the improvements showed signs that “companies were focusing on the right areas”. Improvements identified included:

  • Companies clearly distinguishing between judgements and estimates.
  • Better quality reports identifying a fewer number of judgements and estimates but, for those, providing detailed information regarding supporting assumptions and changes from prior year. The FRC indicates that “users of these reports would have a clearer picture of which decisions taken by the board had a significant impact on the company’s performance”.
  • Companies focussing on genuinely critical judgements where management decisions had a significant impact on results.
  • Many companies improving the granularity and level of detail of disclosures but still keeping them clear and concise.

The report includes more detailed findings by the CRR team and contains examples of good practice. It also identifies that “there is clear scope for further improvement” in this area”. Going forward, the FRC has indicated that it will continue to challenge companies where it does not see (taken directly from the report): 

  • clear differentiation of estimates from judgements;
  • detailed disclosures of the judgements that have the most significant effect on amounts recognised;
  • distinction made between estimates that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next year, and other estimates such as those that may affect carrying amounts in the longer-term;
  • company-specific disclosures that pinpoint the areas of estimation uncertainty and provide useful additional information, avoiding the use of boilerplate;
  • quantification of the specific amounts of estimates at risk of material adjustment within the next year;
  • quantification of assumptions underlying estimates, where necessary; and
  • sensitivity analysis or disclosure of the range of reasonably possible outcomes.

The full thematic review is available on the FRC website.

Pension disclosures

The FRC report shares the results of its targeted review of certain aspects of pension obligation reporting. The FRC wrote to 20 companies informing them that its CRR team would review the pension disclosures in their next annual report and accounts. Pensions accounting was an area that the CRR team identified where there was a “general need for increased transparency of the relationship between a company and its pension plans”. The sample comprised four FTSE 100 companies, one FTSE 250 company, 13 smaller listed entities, one listed bond holder and an unlisted company.

The report indicates that “most companies responded positively to advance notification” of the review and certain aspects of their pension disclosures improved. Such improvements included:

  • Improved pension disclosures in the strategic report including companies who provided more information about risks and uncertainties arising from their pension schemes.
  • Disclosures about contributions expected to be paid for several years into the future which is helpful to investors as it provides an indication of the likely future cash payments that a company expects to make to its pension scheme.
  • Companies providing more informative disclosure about the assets held by their pension schemes by disaggregating the analysis of quoted and unquoted assets into further sub-classes.
  • Disclosures as to why companies with material net pension assets consider the asset to be recoverable.

The report includes more detailed findings by the CRR team and contains examples of good practice. Going forward, the FRC has indicated that it will continue to challenge companies where (taken directly from the report):

  • information in addition to that required by the standard has not been provided but is necessary to understand the risks associated with their pension schemes and how they may affect the amount, timing and uncertainty of the companies’ future cash flows;
  • a net pension asset has been recognised, or it appears that required future contributions may create a surplus, but there is no explanation of the judgements made when assessing trustee’s rights;
  • there appears to be an asset-liability matching strategy but it has not been adequately described;
  • the strategic report does not refer to the pension scheme but it appears appropriate to do so;
  • plan assets of different nature and risk have been aggregated into classes; and
  • it is not clear how unquoted plan assets have been valued.

The full thematic review is available on the FRC website.

Alternative Performance Measures (APMs)

The FRC report shares the results of its targeted review of certain aspects of companies’ APM disclosures. The FRC wrote to 20 companies informing them that its CRR team would review the APM disclosures in their next annual report and accounts. The review aimed to establish the extent to which the companies’ reports and accounts were consistent with the European Securities and Markets Authority (ESMA) Guidelines on Alternative Performance Measures (“the Guidelines”). In carrying out the review, the FRC took into consideration those areas of concern identified from an earlier review of a sample of interim reports in 2016. By comparing company reports with those of the previous year, the FRC was also able to identify steps companies had taken to achieve greater consistency with the Guidelines.

The sample comprised eight FTSE 100 companies, nine FTSE 250 company, two smaller listed entities and one company from the AIM market.

The report indicates that “compliance with the Guidelines was generally good across the sample”. Improvements identified included:

  • All companies providing definitions for their APMs which “conveyed an accurate description of each APM” and explanations for the use of APMs was given by all companies. Fewer companies used boilerplate wording.
  • All companies providing reconciliations but not for all APMs.
  • The majority of companies in the sample giving equal prominence to APMs and IFRS measures. The FRC did, however, identify that equal prominence was more of an issue in areas such as the Chairman’s statement.

The report indicates that the greatest concern was companies using the terms such as “non-recurring”, “unusual”, “infrequent” and “one-off” in connection with items such as restructuring costs and impairment charges. The FRC indicates that “for larger companies in particular, there will be few occasions when there is only one event in a period of years which drives such charges”. The FRC recommends that companies remove such descriptions from their definitions and “select more accurate labels”.

The report includes more detailed findings by the CRR team and contains examples of good practice. Going forward, the FRC has indicated that it will continue to challenge companies where (taken directly from the report):

  • definitions are not given for all APMs used;
  • a term such as non-recurring is used and that description does not appear to apply in the circumstances;
  • good explanations for the use of APMs are not provided;
  • a reconciliation to amounts appearing in the financial statements for each APM is not disclosed;
  • APMs are displayed with greater prominence than measures directly stemming from the financial statements;
  • there is no discussion of either the IFRS results themselves or of the adjustments made to those results to arrive at adjusted profit;
  • the IFRS results are not highlighted at an early point in the narrative section of the report and accounts;
  • no explanation is given for changes made in the APMs used;
  • explanations are not presented of why items have been excluded from adjusted profit; and
  • items are excluded on the basis that removing them better reflects the underlying performance of the business and it is unclear why this is the case; for example, share based payments.

The full thematic review is available on the FRC website.

The press release is available on the FRC website.

FRC revises Practice Note 11

20 Nov 2017

The Financial Reporting Council (FRC) has issued a revised Practice Note 11: ‘The Audit of Charities in the United Kingdom’.

The main drivers for the revisions are:

  • revisions to UK auditing standards (ISAs (UK));
  • changes to UK accounting standards (Financial Reporting Standard (FRS) 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland) and the revision of the charities Statement Of Recommended Practice (SORP);
  • continuing developments in regulation and guidance issued by the Charity Regulators; and
  • changes in relevant legislation. 

The press release and revised Practice Note 11 are available on the FRC website.

FRC withdraws Practice Note 21

10 Nov 2017

The Financial Reporting Council (FRC) has withdrawn Practice Note 21 – The Audit of Investment Businesses in the United Kingdom.

The Practice Note has been withdrawn as it has been superseded by the issue of the FRC’s Client Asset Assurance Standard in 2015 and the remaining parts are dated.

The Practice note has been withdrawn with immediate effect.

A press release is available on the FR website.

FRC’s Financial Reporting Lab issues report on risk and viability reporting

28 Nov 2017

The Financial Reporting Council’s (FRC’s) Financial Reporting Lab (“the Lab”) has published a report on risk and viability reporting. The report seeks to understand the views of companies and investors participating in the project on the key attributes of principal risk and viability reporting, their value and use. The report also provides illustrative examples of the types reporting that investors favour in this area.

The report reflects the views of 25 representatives from companies and 27 members of the investment community. The Lab also carried out a survey of approximately 200 private investors.

The report indicates that “investors are unanimous that understanding those principal risks faced by a company is important both before making an investment and during the holding of that investment”. It highlights that, in response to an increased focus on risk management, there has been an improvement in the reporting of principal risks. This enhanced reporting and better engagement with companies has led to an increased understanding by investors as to how boards are identifying and managing risks to protect the sustainability of the company.

However, the report highlights that further improvements can be made to ensure that there is an appropriate balance in the disclosure; managing the conflict between providing succinct and useful information to investors whilst attempting to avoid disclosures that may give away competitive advantage.

Attributes of good principal risk disclosure include:

  • Reporting risks that are specific to the company that avoid jargon and are not boilerplate.
  • Highlighting the principal risk and how it is being managed by the company including how the risk links to the company’s ‘story’ and mitigating actions.
  • Linking principal risks to the business model and how they have changed year on year including potential impact.

The report finds that, since the introduction of the viability statement, most companies have placed greater focus on risk management at board level. It indicates that “performing stress testing and scenario analyses has improved decision making and helped companies determine their risk appetite”. However, it continues that “the value of this greater focus is often not reflected in the viability statement disclosures themselves” with investors looking for better explanation of the long-term prospects of the company. The Lab notes that “the current practice is often that viability statements are prepared as longer-term going concern statements with a focus on liquidity rather than as a means to communicate how the company will remain relevant and solvent in the long-term and be able to adapt to emerging risks”.

The report encourages companies to develop their viability statements in two-stages – firstly to assess prospects, and secondly to make their statement of viability. It indicates that investors are not looking for a viability statement which covers the period over which they assess their investments. They are actually encouraging companies to consider prospects over a longer-term relative to their specific business.

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Full Programme for the 7th ANC Symposium on Accounting Research

07 Nov 2017

As already pointed out, the Autorité des Normes Comptables (ANC), the French standard setter, will host its 7th Symposium on Accounting Research on 11 December 2017 in Paris. The full programme for the event, which takes place under the general theme "Accounting and digitalisation", is now available.

Monday 11 December 2017, 9:00 - 18:00

  • Opening remarks
  • Updates and future trends from 2015 and 2016 symposium topics
    • Conceptual Framework: Beyond traditions, a European dynamic?
      • Policy paper
      • Roundtable
      • Address: Is digitalisation a test for Conceptual frameworks?
    • Performance: Is a convergence possible on key indicators?
      • Two policy papers
      • Roundtable
      • Address
  • Risks and gains of digital transformation for accounting standard-setting
    • The digital economy: New paradigms
      • presentation
    • Impact of digitalisation on financial information: New definitions, new ways of publishing, new ways of qualification?
      • Policy paper
      • Roundtable
      • Address on “a framework for a digital reporting”
    • Financial information being tested by the digital economy: New concepts for new transactions?
      • Policy paper
      • Roundtable
      • Address
    • European public good and the accounting challenges of the digital economy
      • Roundtable
  • Closing remarks

Details on the presenters, roundtable participants and speakers are available in the programme on the ANC website.

IASB Chairman comments on the IASB's role in wider corporate reporting

10 Nov 2017

In a speech given at a Brazilian international accounting seminar held on 9 November in São Paulo, IASB Chairman Hans Hoogervorst discussed the IASB's present initiative on better communication in financial reporting, support of implementation and application of IFRSs, and the IASB’s role in reporting that goes beyond the financial statements.

On better communication Mr Hoogervorst offered no new insights but confirmed that the IASB feels that it now have a good suite of standards that cover the vast majority of transactions and would, therefore, prioritise better presentation and formatting of the information in the financial statements in the coming years. Similarly, on support of implementation and application he mainly stressed the importance of the work of the IFRS Interpretations Committee but offered no detailed insights.

Turning then to wider corporate reporting, Mr Hoogervorst stated that the IASB is often asked questions about its role this space and that some constituents would like the IASB to play a more central role in trying to create more uniformity in the multitude of sustainability standards. He admitted:

[T]he IASB knows that financial reporting in the narrow sense has its limitations. There are many elements of value creation which are important to the investor but which are not adequately captured in the financial statements. Investors need to understand a company’s business model and its strategy for long-term value creation. They need to understand the intangibles that are vital to their business model. And, yes, sustainability issues can also be important for long-term value creation in certain industries, just think of mining and car manufacturing.

And yet he also stated:

Let me be clear; we do not plan to get into environmental and sustainability reporting. That is not our area of expertise. There are many other players. Our remit is, and will remain, financial reporting—with focus on the participants in the capital markets. That is investors and potential creditors.

In conclusion, Mr Hoogervorst offered that there has been a lot of development in this area since 2010 when the IASB published its Management Commentary Practice Statement and the therefore, the IASB "is considering" whether to update the practice statement to capture the developments. (This topic is indeed on the IASB's agenda for its meeting next week - see our summary of the agenda paper).

The full text of Mr Hoogervorst speech is available on the IASB website.

IASB discusses investors’ reactions to IFRS 17

20 Nov 2017

The IASB has issued an article by IASB board member Nick Anderson that discusses the top five question investors and analysts have on IASB’s new insurance contracts standard, IFRS 17.

The five questions discussed include:

  1. Will IFRS 17 affect dividend payouts?
  2. How can a principle-based Standard like IFRS 17 improve comparability between insurers?
  3. Will IFRS 17 bring global comparability to the insurance sector?
  4. What are the main differences between IFRS 17, regulatory reporting and embedded value reporting?
  5. How will removing insurance premiums from the income statement improve comparability?

For more information, see the article on the IASB’s website.

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