ESMA considers the following key topics to be especially relevant for the examinations of listed companies' financial statements:

• application for the first time of IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers, and
• disclosure of the implementation and expected impact of IFRS 16 Leases.

In addition, this year’s priorities highlight the requirements to disclose non-financial information, with a focus on environmental matters, and specific aspects of ESMA’s Guidelines on Alternative Performance Measures. ESMA also highlights the importance of disclosures analysing the possible impacts of the decision of the United Kingdom to leave the European Union.

ESMA and European national enforcers will monitor and supervise the application of the IFRS requirements outlined in the priorities, with national authorities incorporating them into their reviews and taking corrective actions where appropriate. ESMA will collect data on how European listed entities have applied the priorities and will publish its findings in a separate report.

Please click for the following documents on the ESMA website:

• Press release
• Public statement on enforcement priorities, providing more background on each of the focus areas

During its October meeting, the Board discussed criteria the IASB staff have developed for the Board to apply in assessing whether a concern warrants considering an amendment as well as 25 concerns/issues identfied by the staff. In a podcast released today, IASB member Darrel Scott noted that first decision making in this context is expected in 1-2 months. This is not reflected in the updated work plan yet.

Below is an analysis of all changes that were made to the work plan since our last analysis on 25 September 2018.

Maintenance projects

• Accounting Policies and Accounting Estimates (Amendments to IAS 8) — A decision on the project direction is now expected in December 2018 (was: October 2018)
• Definition of a business (Amendments to IFRS 3) — As the amendments were published on 22 October 2018, this has been removed from the work plan

Research projects

• Disclosure initiative — Principles of disclosure — A project summary is now expected in the first quarter of 2019 (no date given before)

Other projects

• IFRS Taxonomy update — 2018 general improvements — A proposed update is expected in December 2018 (was: fourth quarter of 2018)

The above is a faithful comparison of the IASB work plan at 25 September 2018 and at 26 October 2018. For access to the current IASB work plan at any time, please click here.

The podcast features IASB Board member Darrel Scott interviewed by IASB technical manager Roberta Ravelli. The interview is not so much about the details discussed by the Board but more of a general and balanced assessment where the Board currently stands. During the meeting, the Board first discussed the criteria the IASB staff have developed for the Board to apply in assessing whether a concern warrants considering an amendment and then used these criteria in a kind of a test run against the 25 concerns/issues identfied by the staff. However, no decisions were made.

By way of an outlook, Darrel Scott mentions in the interview that first decision making of the IASB is expected in 1-2 months (the November meeting is rather early in the month and the deadline for the staff to submit papers would be at the end of next week). He also mentions that the Board would need to think about the effective date - and the implications discussing the effective date would have - soon.

The podcast can be accessed through the press release on the IASB website.

SORPs are intended to supplement accounting standards and other legal and regulatory requirements to reflect transactions or circumstances that are unique to particular sectors such as housing.

The updated SORP reflects the Amendments to FRS 102 – Triennial review 2017 – Incremental improvements and clarifications issued by the Financial Reporting Council in December 2017.  The key changes include:

• Clarifying what is included and excluded from operating surplus.
• Removing the “undue cost or effort” exemption in valuing investment properties.
• Allowing an accounting policy choice to carry property rented to other entities at either cost or fair value.
• Drawing attention to the requirement to include a net debt reconciliation as part of cash flow disclosures.

The revised SORP is effective for accounting periods beginning on or after 1 January 2019, although early adoption is permitted.

Copies of the amended SORP are available from on the NHF website.

For the Primary Financial Statements project, the focus was on the labels the Board will use to describe subtotals. The Board decided that the labels be operating profit or loss; operating profit or loss and share of profit or loss of integral associates and joint ventures; and profit or loss before financing and income tax (with entities being prohibited from using the term ‘EBIT’ for this subtotal).

The Board supported a recommendation by the IFRS Interpretations Committee that the IASB amend IAS 12 Income Taxes in relation to the initial recognition of a lease, by a lessee, and decommissioning obligations. 

The staff gave an oral update on the Management Commentary project, reporting on the first meeting of the Consultative Group supporting the project.

The Board decided to revise the Preface to International Financial Reporting Standards, removing redundant material on the structure of the IASB and its due process requirements.

For the Disclosure Initiative, the focus was on accounting policies. The Board decided to clarify that not all accounting policies relating to material transactions, other events or conditions are material. They also decided to develop guidance and examples for inclusion in the Materiality Practice Statement to help entities apply effective judgement when deciding whether accounting policies are material.

The Board discussed IFRS 17 Insurance Contracts, to help it determine how it should respond to concerns that have been brought to its attention regarding this Standard (the papers include a description of 25 identified concerns). The Board decided on the criteria to apply in assessing whether, in each case, it should propose an amendment to IFRS 17. The staff will bring the 25 items back to future meetings, assessed against those criteria.

The staff gave an update on the Rate-regulated Activities project.

The staff presented their proposed outline for a Discussion Paper on Goodwill and Impairment. The main sections would focus on improving disclosures, simplifying the impairment test, and simplifying the accounting for goodwill. The Board expressed concerns about the proposed timetable, which was for the DP to be published in the first half of 2020, and asked the staff to accelerate that process.

Please click to access the detailed notes taken by Deloitte observers for the entire meeting.

In his response to the ESA's letter, the EFRAG President refers to EFRAG's letter regarding IFRS 17 sent to the IASB in September and explains that EFRAG is now waiting for the IASB's reaction. If the IASB decides not to re-open IFRS 17, EFRAG will proceed with developing a draft and then a final endorsement advice on IFRS 17. If the IASB decides to re-open IFRS 17, EFRAG will suspend the development of an endorsement advice for the duration of the IASB's redeliberations and contribute to the IASB's due process during that period.

Please click to access the EFRAG letter to the ESAs on the EFRAG website.

The two days will see the presentation of six academic papers, followed either by a response of an academic and an IASB/AASB representative or by a panel discussion. In both cases, the audience will be invited to participate in the discussion. The papers are the following (all links to the IASB website):

• Non-GAAP Earnings and the Earnings Quality Trade-off
• Disclosure Overload? An Empirical Analysis of IFRS Disclosure Requirements
• Equity Financial Assets: A Tool for Earnings Management – A Case Study of Youngor Group
• Accounting for Intangibles: Can Capitalization of R&D Reduce Real Effects and Improve Investment Efficiency?
• Extractive Industries Reporting: A Research Review
• Independently-certified Industry-specific Disclosures to the Capital Market: The JORC Code in the Australian Mining Industry

The year-end advice covers the following key areas:

New Accounting Standards

The letter draws the reader’s attention to two new accounting standards - IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers, which will be effective for December 2018 year-end reporters.

The FRC has performed thematic reviews looking at the disclosures on the impact of both standards within the June 2018 interim reports of a sample of companies. The results of the thematic reviews will be published in November 2018 but in advance of those the FRC sets out the disclosures that it expects to see at year-end relating to these new standards.

IFRS 15

Companies are encouraged to invest sufficient time during their year-end preparation to ensure that:

• explanations of the impact of transition are comprehensive and linked to other relevant information in the annual report and accounts;
• changes to revenue policies are clearly described and explained, reflecting company specific information – as are any associated management judgements;
• performance obligations are identified and explained, with a focus on how they have been determined and the timing of delivery to the customer; and
• the impact of the standard on the balance sheet is also addressed, including accounting policies for contract assets and liabilities.

IFRS 9

The main impact of IFRS 9 will be felt by banks and the FRC thematic review will focus on how banks have implemented the new requirements. Although the effect may not be as significant for non-banking companies, the FRC indicates that it still expects companies to:

• have updated their hedging documentation and assessed the effectiveness of existing hedges on application of the new requirements;
• explain and, where possible, quantify material differences between IAS 39 Financial Instruments: Recognition and Measurement and IFRS 9, including key assumptions adopted on implementation;
• remember that the scope of the impairment requirements has been extended to include, for example, IFRS 15 contract assets, lease receivables and will also apply to loans to subsidiaries and other undertakings in individual parent company accounts;
• take particular care when considering the application of the standard to embedded derivatives and the different treatment required where the host contract is a financial asset compared to where it is a financial liability;
• reconsider the accounting for previous debt modifications, such as refinancing, that did not result in derecognition;
• reflect the additional disclosure requirements of IFRS 7 Financial Instruments: Disclosures; and
• if relevant, explain why the impact is not material, particularly where significant financial instruments are recognised in the accounts.

The FRC has also conducted a ‘light touch’ thematic review of the disclosures relating to IFRS 16 Leases in June 2018 interim reports. Although only mandatorily effective for accounting periods beginning on or after 1 January 2019, the FRC does indicates that it expects companies to be “in a position to provide specific disclosure in their December 2018 reports and accounts explaining the impact of the new requirements on their business”. Specifically the FRC expects companies to:

• provide meaningful information about the application of the standard with a focus on their specific facts and circumstances;
• disclose qualitative and quantitative information, identifying any lease portfolios that are significantly impacted by the new requirements;
• explain the specific judgements and policy changes prompted by the new model and provided detail about the structure of their implementation projects; and  
• identify the exemptions that companies intend to apply.

Findings from its monitoring work

The FRC’s monitoring work, as detailed in its Annual Review of Corporate Governance and Reporting published concurrently with the letter to Audit Committee Chairs and Finance Directors, highlights areas where the FRC still sees areas for improvement. The most significant areas are:

Critical judgements and estimates

The FRC indicates that whilst it has seen some better disclosures in this area “there is still significant scope for further improvement”.   The FRC draws attention to its thematic reviews which indicate what ‘good’ looks like in respect of key judgements and estimates reporting, APMs and pension disclosures. Improvements are expected when the December 2017 reports and accounts are reviewed. Specifically the FRC expects:

• a clear distinction to be made between judgements and estimates as different disclosure requirements apply;
• clear disclosure of the sensitivity of carrying amounts to the assumptions and estimates underlying a measurement calculation, or, if more meaningful, disclosure of the range of reasonably possible outcomes within the next year in respect of the carrying amounts of the relevant assets and liabilities; and
• identification of any voluntary additional disclosures provided in respect of estimation uncertainty, for example, where the impact of any possible material change in estimate is not anticipated to have effect until a period outside the twelve-month window required by the standard.

Control environment

The FRC highlights what it sees as an increase in “basic” errors and non-compliance in areas of reporting caused by a poor control environment. The FRC indicates that management “need to have effective procedures in place to ensure compliance with the basic reporting requirements of IFRS, which investors take as a given in audited reports and accounts”.

Topical areas in corporate reporting

Brexit

The FRC indicates that it has seen “companies take a variety of approaches to reporting on the risks associated with Brexit” with the nature and depth of disclosure, in part, dependent on the potential impact of Brexit on the business and the mitigating actions that the company had been able to put in place. As there are still uncertainties surrounding Britain exiting the EU, the FRC recognises that this poses particular challenges for Boards as they prepare December year-end reports ahead of the March 2019 deadline. Specific areas of focus for the FRC include:

• Impact on business models: Companies are encouraged to provide disclosure which distinguishes between the specific and direct challenges to their business model and operations from the broader economic uncertainties which may affect them.
• Sensitivity disclosures:   The broad uncertainties that may still attach to Brexit when companies report will require disclosure of sufficient information to help users understand the degree of sensitivity of assets and liabilities to changes in management’s assumptions. The FRC expects that many companies will want to consider a wider range of reasonably possible outcomes when performing sensitivity analysis on their cash flow projections and which should be disclosed and explained.
• Viability and going concern: It will be up to companies to decide whether Brexit uncertainties impact their statements on viability and even their ability to continue as a going concern.
• Post balance sheet events: The situation is likely to change between the balance sheet date and the date of signing the financial statements. Companies should ensure that they incorporate a comprehensive post balance sheet events review in their year-end reporting plan to identify both adjusting and non-adjusting events and to make the relevant disclosures.

Complex supplier arrangements

The FRC indicates that it expects the strategic report and the disclosures in the financial statements to describe the nature and amount of any material supplier financing arrangements and the impact on the company’s liquidity. It draws attention to its December 2014 press release on complex supplier arrangements which company’s should still refer to.

Risk and viability reporting

The FRC indicates that this remains a key area of focus for investors. It highlights that “viability reporting should be based upon a robust risk assessment of the principal risks that would threaten the business model, future performance, solvency and liquidity of the company”.   It encourages Boards to apply apply a two-stage process to the viability statement: firstly, assessing the future prospects of the company; and secondly, stating whether directors have a reasonable expectation that the company will be able to continue to operate and meet its liabilities as they fall due (potentially over a shorter period). The FRC draw attention to the Financial Reporting Lab’s implementation study issued in October 2018.

Strategic report

The strategic report remains an area that the FRC continually challenges in its monitoring work. It expects companies to ensure that their reports include a fair review of the company’s business that is a balanced and comprehensive analysis of both performance and position paying particular attention to:

• Alternative Performance Measures (APM’s). The FRC expects all companies that report alternative performance measures to apply the Guidelines produced by the European Securities and Markets Authority (ESMA). Specifically it expects to see:
  • definitions for all APMs used;
  • good explanations for their use;
  • reconciliations to IFRS amounts appearing in the financial statements;
  • no greater prominence for APMs than measures directly stemming from the financial statements; and
  • explanations for changes in APMs to be provided, which may include how they are defined or calculated.

The FRC draws attention to the Corporate Reporting Review’s thematic report in this area and also the Lab’s report, Reporting on Performance Metrics which provide insights as to what investors expect to see in this area.

• Non-financial information statement. The FRC highlights the new non-financial reporting disclosure requirements, incorporated in their updated guidance on the strategic report, which are effective for the 2017/18 reporting season. It indicates that for those companies within scope, the Strategic Report should include a non-financial information statement covering information (or references to where that information is disclosed in the strategic report) relating to environmental matters, employees, social matters, respect for human rights and anti-corruption and anti-bribery matters. For companies within scope, the FRC expects disclosures to focus on the impact of these activities in respect of these matters, the policies it has in place, any due diligence processes introduced through which it assesse and tracks their effectiveness and the related outcomes.  

The press release and full letter are available on the FRC website.  Our Governance in brief publication is here.

The two main topics for the meeting are:

• Enhancing the comparability of sustainability reporting: Selection of core indicators for entity reporting on the contribution towards the attainment of the Sustainable Development Goals
• Issues of practical implementation of international standards of accounting and reporting in the public and private sectors

The background papers for these two topics plus UNCTAD guidance on core indicators for entity reporting on the contribution towards the attainment of the sustainable development goals are available in Arabic, Chinese, English, French, Spanish, and Russian and can be accessed here.

Speakers at ISAR 35 include Michel Prada, former Chairman of the Trustees of the IFRS Foundation, Amaro Gomes, IASB member, representatives of AOSSG, EFRAG, GLASS, and PAFA, as well as representatives of IOSCO, IPSASB, CDSB, HLEG, IIRC, and ACCA. Their presentations are currently being posted here.

The workshop before the ISAR meeting this year focused on "Digital currencies and blockchain: implications for accounting“. Speakers included representatives of the Australian standard-setter AASB and the Japanese standard-setter ASBJ who are both conducting research in the area of digital currencies. All presentations from the workshop are available here.

The World Business Council for Sustainable Development (WBCSD) has released the 2018 edition of Reporting matters. This year’s report aims to show how companies are linking reporting and decision-making through three topic-specific addendum reports focused on climate change, water and human rights. The press release on the WBCSD website offers a summary of the key findings and access to the full report.

The United Nation's Sustainable Stock Exchanges (SSE) initiative and the International Finance Corporation (IFC), a member of the World Bank Group, have initiated a collaboration to raise environmental, social, and governance standards across emerging capital markets. The goal is to help build investor trust, attract capital, and grow strong local capital markets. Please see the press release on the SSE website.

The SSE has also released a new report focusing on how securities regulators can help promote the sustainable development goals. With 35 examples from 19 markets, the report provides a snapshot of what is happening around the world today. The report is available on the SSE website.

Another report released by the SSE is its biennial report on progress documenting a steep increase in a number of sustainability activities at stock exchanges. The report is available on the SSE website.

A group of leading global investor organisations has convened to address open questions relating to corporate Environmental, Social and Governance reporting to provide guidance and an investor perspective to the global Corporate Reporting Dialogue and its members.  A Discussion Paper presents the preliminary outputs from the group on a range of ESG reporting issues, calling attention both to points of broad consensus, and where opinion may still be divided.  Key points in the Discussion Paper include that there is a clear business case for ESG reporting for investors and companies and that there is no single solution – one set of metrics or a single framework – that will satisfy all users of ESG data.  The full report is available here.