Finalisation of draft agenda decision

The Committee will consider the public feedback on a request related to IFRS 3 Business Combinations on the acquisition of a group of assets, which the Committee had tentatively decided not to add to its agenda.  The staff are recommending that the Committee finalise this decision.   

Continued discussions

In its September 2017 meeting, the IC tentatively decided to add a project to clarify the meaning of the term ‘unavoidable costs’, which is used in the definition of an onerous contract in IAS 37 Provisions, Contingent Liabilities and Contingent Assets. The staff are recommending that the clarification be by way of an amendment to IAS 37 and that the scope of the project be limited to clarifying the meaning of ‘unavoidable costs’, and not consider broader issues related to identifying or measuring an onerous contract. 

In its September 2017 meeting, the IC asked the Staff to research into the scope of a potential narrow-scope amendment to IFRS 1 First Time Adoption of International Financial Reporting Standards with the aim of reducing compliance costs when a subsidiary becomes a first-time adopter later than its parent. The Staff are recommending the development of an amendment IFRS 1 to allow a subsidiary that applies paragraph IFRS 1.D16(a) to measure cumulative translation differences using the amounts reported by the parent based on the parent’s date of transition to IFRS.

New issues

There are three new issues. Two relate to IFRS 15 Revenue from Contracts with Customers:

• Revenue recognition in a real estate contract that includes the transfer of land
• Right to payment for performance completed to date

The third relates to IAS 1 Presentation of Financial Statements and IFRS 9 Financial Instruments:

• Presentation of interest revenue for particular financial instruments

For all three issues the staff are recommending that the Interpretations Committee not add the issue to its agenda. 

Future items

The Staff are analysing requests received on whether a dual currency bond meets the solely payments of principal and interest condition in IFRS 9; whether an instrument for which the notional amount varies depending on the outcome of a transaction can be a hedging instrument applying IFRS 9; and how the initial recognition exemption in paragraphs 15 and 24 of IAS 12 applies to the recognition of right-of-use assets and lease liabilities arising under IFRS 16.

Further in­for­ma­tion

The full agenda for the meeting and our pre-meet­ing summaries can be found here. We will update this page for any changes to the agenda and our Deloitte observer notes from the meeting as they become available.

The report The Female FTSE Board Report 2017 – Women on Boards – Back on track (the Cranfield report”) indicates that there has been a number of successes to improve female representation at the top of the UK’s biggest companies.

According the Cranfield report there are now only 8 all-male boards in the FTSE 350 and the number of FTSE 100 companies with at least 33% women on boards stands at 28%. These results, the Cranfield report says, is down to the effort of many parties including the UK businesses and the government and “continues to be spearheaded” by the Hampton-Alexander Review. However more needs to be done to achieve the targets set by the Hampton-Alexander review for FTSE 100 companies to have at least 33% of their executive pipeline positions filled by women by the end of 2020.

The key findings in the Cranfield report are:

• The percentage of women on FTSE 100 boards has risen to almost 28% (27.7%) “after a year of stagnation”. It indicates that as long as the current momentum is maintained the target for 33% of women on FTSE 100 boards by 2020 could be “within reach”.
• Within the FTSE 250 there has been a rise to almost 23% (22.8%) but “a greater push” is required in order to meet the 33% target.
• The percentage of women holding FTSE 100 NED positions is “at an all-time high” of 33.3% but there is still a low percentage (just under 10%) holding executive directorships.
• All FTSE 100 companies have at least one female director with this figure at 242 in the FTSE 250.

The Cranfield Report also reviews the board evaluation industry and their role in promoting gender balance in the boardroom. Interviews conducted with board evaluators “to ascertain their views on gender diversity in the boardroom”. The Report adds significantly to the evidence base around the importance of diversity on boards and demonstrates the crucial role Chairs play in promoting diversity on boards.

Recognising that “behavioural review are more likely to comprehensively address issues of diversity” the report makes two recommendations:

• the Financial Reporting Council considers that disclosure in the Annual Report should include information on which type of external evaluation was undertaken, in addition to a summary of actions taken since the evaluation.
• the board evaluation industry adopts minimum standards for reviews, in the form of a Code of Conduct, kitemark or other method by mutual agreement.

The report concludes that although the “pace of change has once again picked up” and the target of 33% of women on the boards of FTSE 100 companies by 2020 appears “back on track”, “it is important to realise, across the FTSE 350, that it is not job done and that the Davis’ 25% target was only ever a stepping stone to greater gender parity”.

Click for: 

• press release (link to Cranfield School of management website)
• The Female FTSE Board Report 2017 – Women on Boards – back on track (link to Cranfield School of Management website)
• Our previous UK Accounting Plus story on women on boards

EFRAG considers that the proposed amendments “raise a number of substantive questions” and does not believe that these are fully addressed in the ED. EFRAG also highlights that the proposed amendments affect a wider range of transactions and circumstances than the issue submitted to the IFRS Interpretations Committee. It therefore recommends that the IASB “considers taking on a broader project that would address the underlying principles and issues, and assess the effects on current practices, more comprehensively”.

The press release and full comment letter are available on the EFRAG website.

The amendments address the concerns about how IFRS 9 Financial Instruments classifies particular prepayable financial assets. They become effective for annual periods beginning on or after 1 January 2019, with earlier application permitted.

In order to allow European preparers enough time to implement the amendments before their effective date and possibly together with IFRS 9 (which has an effective date of 1 January 2018), the EFRAG moved uncommonly fast in order to allow sufficient time for feedback on the draft endorsement advice, the final EFRAG endorsement advice now published, the ARC vote (expected in 2018), and final endorsement (aimed for in 2018).

The endorsement advice can be found here and a corresponding press release here (both links to the EFRAG website). Please click here for an updated EFRAG status report.

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.

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.

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.

The topics covered during the meeting were the following (numbers in brackets are ref­er­ences to the cor­re­spond­ing para­graphs of the summary):

• Primary financial state­ments (1–15): ASAF members discussed (1) the results of a New Zealand user-needs survey related to alternative performance measures and (2) feedback from the UK Financial Reporting Council’s Discussion Paper Improving the Statement of Cash Flows.
• Rate-regulated activities (16–27): ASAF members received an updated on the Board’s discussion on a possible new accounting model for activities subject to defined rate regulation and identified factors to considered in three areas: (1) nature of the asset, (2) appropriate discount rate to use with discounting is used, and (3) timing of recognition of gain or loss under certain conditions.
• Definition of a business (28–36): ASAF members provided feedback on the Board’s tentative decisions reached at its April and June 2017 meetings.
• Goodwill and impairment (37–51): ASAF members provided views on the following approaches to improve the impairment testing of goodwill: (1) goodwill accretion approach, (2) pre-acquisition headroom approach, and (3) single method.
• Project updates and agenda planning (52–53): ASAF members were updated on the IASB technical projects and how the IASB used the ASAF advice from previous meetings.

A full summary of the meeting is available on the IASB's website.

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.

The Monitoring Group is a group of international financial institutions and regulatory bodies committed to advancing the public interest in areas related to international audit standard-setting and audit quality.

The consultation seeks stakeholders’ views on “how best to safeguard the independence of the standard-setting process and its responsiveness to the public interest”.

A press release and the consultation paper, which runs until 9 February 2018, is available on the IOSCO website.