The study looks at IFRSs from Sharia'a, Islamic accounting, and Islamic finance accounting perspective and stresses the information needs of Shari'ah conscious users of financial statements. The authors, both of whom are from Pakistan, primarily cover Islamic finance accounting but also include general accounting observations and unique aspects of Sharia'a based reporting.

An electronic version of the 200 page study can be accessed free of charge on the AAOIFI website.

Since IFRS 17 was issued in May 2017, the Board has been monitoring the implementation and has learned about concerns and implementation challenges, among them the issues identified in the EFRAG letter sent to the IASB last month.

There were four papers for the meeting: A summary of the TRG meeting held in September, the TRG submission log, the criteria the staff of the IASB has developed for the Board to apply in assessing whether a concern warrants considering an amendment, and identified concerns and implementation challenges. All papers for this session are available on the IASB website (please scroll down).

The discussion focused on agenda paper 2C for the meeting revealing the criteria the staff of the IASB has developed for the Board to apply in assessing whether a concern warrants considering an amendment:

1. the amendment would not result in significant loss of useful information relative to that which would be provided by IFRS 17 for users of financial statements and
2. the amendment would not unduly disrupt implementation processes that are already under way or risk undue delays in the effective date of a standard that is needed to address many inadequacies in the existing wide range of insurance accounting practices.

In the paper, the staff also noted that even if the Board agrees that any potential amendment to IFRS 17 meets the criteria, it does not mean that all amendments meeting these criteria are justified. The staff also stressed that any changes would affect the effective date.

The Board made the following comments:

• amendments need to be necessary, not just fulfil the criteria;
• what's missing in the criteria is that changes should not compromise the criteria of IFRS 17;
• the Board should deal with implementation issues only, not just anything that is connected with IFRS 17;
• changes should be narrow in scope and should be able to be dealt with efficiently;
• changes to IFRS 17, a final standard, would impact those who have already begun implementing it;
• pushback must be expected;
• 25 issues is many;
• picking up some issues but not all will make some people happy and some very unhappy;
• any changes would need to go through the full due process;
• establishing a TRG meant the IASB is open to hearing about problems and to deal with them;
• the IASB needs to consider interaction with IFRS 9;
• do the issues identified relate to material new information or are they issues the Board has considered before?;
• investors are waiting for the new standard, there needs to be a high hurdle for changing it;
• benefits of changes need to exceed the costs;
• are there items on the list for which the efforts or costs are underestimated?;
• could practical expedients help?;
• the IASB needs to avoid being pulled into something that seems to be unavoidable;
• costs and efforts of the whole package of changes must be considered;
• exceptions increase the complexity;
• it must be prevented that the IASB having this discussion in the first place will lead to entities downing their tools;
• how did the items get onto the list?;
• should new unexpected costs be a criterion?;
• a lot of work went into the standard;
• a lot of feedback was gathered;
• a lot of people are waiting for the standard to become effective.

Chairman Hans Hoogervorst concluded the discussion by stating that he had read the papers for the discussion with a heavy heart. He just hoped that the standard would get into place before the next financial crisis - as the markets were very nervous and there was much too much debt in the market. He therefore concluded that changes to IFRS 17 should be fine-tuning only and legitimised by decreasing costs. He also added that the whole package of issues should be looked at and that 25 issues were too many.

The Board voted unanimously for the criteria developed by the staff.

Another focus of the meeting was agenda paper 2D including some background information and providing for each identified concern or implementation challenge:

• an overview of the IFRS 17 requirements;
• a summary of the Board’s rationale for setting those requirements;
• an overview of the concern or implementation challenge expressed; and
• staff preliminary thoughts.

Only some of the individual concerns and challenges were discussed, none in detail, however, there was significant discussion around the issues related to the effective date of IFRS 17. It was noted by IASB Board individual members:

• that a lot of users are waiting for IFRS 17;
• that some preparers are calling for more time/don't want to be rushed/want to ensure a quality implementation;
• that it is important to keep track of the different reasons for calling for a deferral;
• that the effect of having no comparatives would need to be considered;
• that the interaction with IFRS 9 would need to be considered; and
• that a two-tier model (listed and unlisted companies) might help/ would take little pressure off the market.

The Board will be asked to consider at a future meeting whether any of the concerns and implementation challenges indicate a need for standard-setting to amend the requirements of IFRS 17.

The IASB itself has relaesed a short press release commenting on the session.

The AAOIFI is an Islamic international autonomous non-for-profit corporate body that prepares accounting, auditing, governance, ethics and Sharia'a standards for Islamic financial institutions and the industry. It was founded in 1991 and has so far issued a total of 100 standards.

The IFSB, which is based in Kuala Lumpur, started operations in March 2003. It serves as an international standard-setting body of regulatory and supervisory agencies that have vested interest in ensuring the soundness and stability of the Islamic financial services industry, which is defined broadly to include banking, capital market and insurance. Since its inception, the IFSB has issued 27 standards, guiding principles and a technical note for the Islamic financial services industry.

Areas of cooperation under the MoU between the IFSB and AAOIFI include:

• Development and revision of prudential, Sharia'a, accounting and governance standards on areas of mutual interest;
• Promotion of the implementation of prudential, Sharia'a, accounting and governance standards to facilitate the development of the Islamic financial services industry; and
• Enhancement of awareness through knowledge sharing and organisation of executive programmes, workshops, conferences, and seminars.

Please click to access the press release published on the IFSB website.

The report is structured around the FRC’s overall review of corporate reporting and in particular focuses on those areas which fall within the remit of the FRC’s reviews; the financial statements and the strategic report.

Annual review of Corporate Reporting

Financial statements

Overall the FRC indicates that “while there are strengths in corporate reporting there is clearly room for improvement in some areas”. The most significant findings of the FRC relating to financial statements include:

• Judgements and estimates companies make in the preparation of their accounts requires major 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:
  • Judgements
    • Companies were challenged where disclosure of significant judgements did not explain the significant judgements made or the basis for conclusion.
    • Some companies disclosed that judgements had been made in circumstances where the accounting was straightforward and no judgements had been required to be made at all.
    • For some companies it appeared that significant judgements had been made but that the required disclosures of IAS 1 Presentation of Financial Statements had not been given.
• Estimation uncertainty.  The FRC continues to see poor disclosure of the sensitivity of assets and liabilities to the assumptions and estimates on which they are based. The FRC indicates that “clear disclosure is needed…to help investors understand the effect and timing of any possible changes to management estimates”.
• a rise in what the FRC sees as “basic” errors and non-compliance in areas of reporting including misclassification of cash flows in the cash flow statement and errors in the calculation of basic earnings per share. The FRC expresses its disappointment that some accounting requirements have been “overlooked” especially as “the accounting standards set out a clear requirement for direction” for those specific areas. The FRC highlights that such errors should have been picked up in company’s review processes prior to the accounts being made public. It notes “while boards and audit committees focus on material matters affecting the company’s performance and the reporting of significant events and transactions, they must also put effective procedures in place to ensure that the basic rules and requirements embedded in reporting standards, and which investors are entitled to assume have been complied with, are observes”.
• Income taxes. The FRC indicates that “this year there were relatively more issues identified” relating to income tax than in previous years. The challenges principally related to the reconciliation of the effective tax rate and the basis for the recognition of deferred tax assets for losses. Specifically:
  • The FRC frequently raised questions where significant reconciling items were not explained in the effective tax rate reconciliation.
  • Challenges were made where the basis for recognising a deferred tax asset for losses was not adequately explained.
  • Companies were also questioned where it was unclear whether tax relating to share-based payments had been appropriately allocated between equity and the income statement.
• Revenue. The FRC challenged companies where the accounting policies did not provide a clear explanation of how revenue is recognised for each revenue stream. It also frequently raised questions of companies where it was not clear how the company had assessed whether it acts as principal or agent in transactions with customers. The FRC has performed a thematic review on the disclosures on the impact of IFRS 15 Revenue from Contracts with Customers within the June interim reports of a sample of companies. The purpose of the review was to identify any weaknesses in interim disclosures which can then be communicated to companies when considering the completeness of their IFRS 15 disclosures in their year-end accounts. The results of the thematic review which will be published in November 2018, indicate that whilst there were a number of good examples of transitional disclosures, there were also a number of weaknesses identified including generic disclosures about performance obligations or no disclosure at all.
• Supplier financing 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.  Our news item on the FRC's reminders to Boards of companies in the construction and business support services sectors of their reporting obligations is available here. 
• Effect of IFRS 16 Leases. The FRC conducted a ‘light touch’ thematic review of the disclosures relating to IFRS 16. The aim was to set out the FRC’s expectations in respect of December 2018 disclosures. Findings indicated that:
  • Whilst there were examples of good disclosure, most companies have work to do in order to provide meaningful information in the 2018 year end reports and accounts.
  • Most of the disclosures provided were boiler-plate and not specific.

The FRC indicates that it expects companies to “significantly improve the quality of their disclosures at year end by providing company specific detail about the standard”. This will include qualitative and quantitative information, clarification of the exemptions they intend applying and the policy choices they have made.

• Thematic reviews. As well as the thematic review of IFRS 15 (as above), the FRC, at the same time, will also be publishing the results of its thematic review on the quality of the disclosures on the impact of IFRS 9 Financial Instruments within the June interim reports of a sample of companies. The report, published today, includes preliminary findings from those reviews which the FRC highlights that preparers and their advisors should take note of to inform future reporting under these two new standards. Additionally, in November the results of a thematic review targeting various aspects of smaller listed and AIM-quoted companies’ reports and accounts will be published. Whilst the FRC has identified good examples of disclosures relating to such companies it indicates that there is still scope for improvement.

Strategic reports

The FRC’s specific challenges to companies in this area were principally on:

• the description and disclosures relating to APMs; and
• whether the strategic report was sufficiently balances and comprehensive.

In relation to APMs the FRC encourages all companies to comply with the European Security and Market Authority’s (ESMA’s) Guidelines on Alternative Performance Measures. It indicates that common areas of challenge are in relation to:

• undue prominence given to APMs, such as alternative measures of profit, over the equivalent IFRS measures;
• unclear, cursory or boiler-plate explanations, or a simple statement that adjusted measures are superior to the equivalent IFRS measures;
• items excluded from ‘underlying’ profit when their inclusion would appear to be warranted as part of normal trading;
• unclear reconciliations to relevant IFRS numbers – including ratios such as return on capital and cash conversion;
• inappropriate labelling of ‘recurring’ items as ‘non-recurring’;
• costs of multi-year restructuring programmes that are charged in successive years without reporting on overall progress; and
• adjustments that appear inconsistent with the stated accounting policy.

Other key areas of FRC focus include:

• Business reviews - the FRC challenges companies where the Strategic report is insufficiently balanced and comprehensive to meet the Companies Act requirements or where the disclosures or principal risks and uncertainties are missing or incomplete.
• Risks associated with Brexit - the FRC indicates that the development of focused disclosures in this area has been “patchy”.
• Materiality – the FRC will challenge strategic reports that do not include a discussion of all material aspects of a company’s reported performance such as foreign exchange movements or a material reduction in the cash generated in the period.
• Key performance indicators – the FRC expects management to identify and report on the most relevant metrics they use to monitor their performance, clearly explaining their purpose and the basis on which they are calculated.
• Dividends and distributable reserves - the FRC indicates that the availability of dividend resources within companies and their strategy regarding the payment of dividends continues to be an area of interest to investors.  It highlights that reporting on the interaction between the requirement to have regard to wider stakeholders (under s172) and dividend policy and payment is not yet common practice and that it would expect this to be an area where reporting develops.

Compliance with the provisions of the UK Corporate Governance Code/quality of explanations

The report indicates that:

• Compliance with all but one or two of the Code provisions by FTSE 350 companies is high at 95%. It also highlights that Code provision B1.2 has the lowest levels of compliance.
• Companies remain reluctant to explain non-compliance with Code Provisions and are not providing sufficient detail to allow shareholders (and other interested parties) to understand the company’s decision to depart from a provision.

Additionally the report covers information on the development of reporting by those companies using UK GAAP and the FRC’s views on significant future developments.

Alongside the Annual Review the FRC has also published a letter to Audit Committee Chairs and Finance Directors in advance of the 2018/19 reporting season on key areas that need to be considered in the preparation of forthcoming annual reports and accounts. Those key areas are drawn from, and are consistent with, the findings included in the FRC’s Annual Review of Corporate Governance and Reporting.

A slide deck of technical findings (see link below) from the Conduct Committee's Financial Reporting Review function during the year has also been published, which gives more detail on the areas challenged by the Panel.

The press release, full report and Technical findings 2017/18 can be obtained from the FRC website.  Our Need to know publication on judgements and estimates disclosures is available here.  Our Governance in brief publication is here.

IFRIC 23 was developed by the IFRS Interpretations Committee to clarify the accounting for uncertainties in income taxes. The interpretation is to be applied to the determination of taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates, when there is uncertainty over income tax treatments under IAS 12.

The European Union effective date is the same as the IASB's (1 January 2019).

The Commission Regulation amending Regulation (EC) No 1126/2008 adopting certain international accounting standards in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council was published in the Official Journal of the European Union on 24 October 2018.

As a result of the EU's adoption, the EFRAG has updated its endorsement status report.

There are two seperate surveys: The users' survey will take approximately 30 minutes and the prepares' survey between 30-45 minutes to complete. EFRAG invites participants to complete the appropriate survey by 30 November 2018. Please click to access the surveys through the press release on the EFRAG website.

Background

The post-implementation review of IFRS 3 Business Combinations revealed that entities have difficulties when determining whether they have acquired a business or a group of assets. As the accounting requirements for goodwill, acquisition costs and deferred tax differ on the acquisition of a business and on the acquisition of a group of assets, the IASB decided to issue narrow scope amendments aimed at resolving the difficulties that arise when an entity is determining whether it has acquired a business or a group of assets.

In June 2016, the IASB published ED/2016/1 Definition of a Business and Accounting for Previously Held Interests (Proposed amendments to IFRS 3 and IFRS 11), combining two of its implementation projects at that time. The proposed amendments regarding the accounting for previously held interests were finalised as part of the annual improvements 2015-2017 on 12 December 2017. The proposed amendments regarding the definition of a business are being finalised today.

Changes

The amendments in Definition of a Business (Amendments to IFRS 3) are changes to Appendix A Defined terms, the application guidance, and the illustrative examples of IFRS 3 only. They:

• clarify that to be considered a business, an acquired set of activities and assets must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs;
• narrow the definitions of a business and of outputs by focusing on goods and services provided to customers and by removing the reference to an ability to reduce costs;
• add guidance and illustrative examples to help entities assess whether a substantive process has been acquired;
• remove the assessment of whether market participants are capable of replacing any missing inputs or processes and continuing to produce outputs; and
• add an optional concentration test that permits a simplified assessment of whether an acquired set of activities and assets is not a business.

Interaction with the FASB

The amendments note that IFRS 3 is the result of a joint project between the IASB and the FASB and the business combinations requirements under IFRSs and US GAAP are substantially converged. However, even though the FASB (that had received similar feedback) and the IASB have worked together to respond to problems with the definition of a business, the IASB amendments to the application guidance of IFRS 3 are different from the amendments issued by the FASB in 2017. Nevertheless, the IASB expects that the amendments in conjunction with the FASB amendments will lead to more consistency in applying the definition of a business between entities applying IFRSs and entities applying US GAAP.

Effective date and transition requirements

The amendments are effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 January 2020 and to asset acquisitions that occur on or after the beginning of that period. Earlier application is permitted.

Additional information

Please click for:

• IASB press release (link to IASB website)
• Need to know newsletter
• Our UK Accounting Plus project page on IFRS 3 — Definition of a business
• Updated EFRAG endorsement status report

In September 2018, EFRAG agreed on a letter to the IASB regarding IFRS 17 to bring concerns of European constituents regarding the standard to the IASB's attention. While EFRAG is waiting for the IASB to consider these (and other) concerns, the endorsement process for IFRS 17 is temporarily put on hold. The IASB will discuss IFRS 17 concerns and implementation challenges at its meeting next week but no decisions are expected as yet.

The ESAs note the delay in the endorsement process with concern. Their letter states:

While, at this stage, we do not express any detailed technical views on IFRS 17, we reiterate the need to continue to progress and to finalise the analysis of IFRS 17 in a timely manner against the background of the effective date of IFRS 17 of 1 January 2021.

Similarly, in a speech given in Madrid today, the Chair of the European Securities and Markets Authority (ESMA), which is one of the ESAs, also commented on IFRS 17. He said:

[W]hile we are still analysing its technical details, one thing that can already be affirmed with certainty is that IFRS 17 will improve comparability and transparency of financial information on insurance contracts when compared to the current situation. [...] Therefore, while it is important to exercise caution in assessing the changes introduced by IFRS 17, I think it is necessary to avoid any further delays in reaching a common set of accounting standards for insurance contracts. [...W]e are quite concerned by the delay that we are observing in the endorsement process of IFRS 17 in the EU.

And while the European Insurance and Occupational Pensions Authority (EIOPA), also one of the ESAs, does not explicitly refer to the endorsement process, it notes in its analysis of the benefits of IFRS 17 that has just now also become available:

EIOPA found that the expectedly increased transparency and comparability of insurers' financial statements through IFRS 17, providing better insights into insurers' business models, have the potential to strengthen financial stability in the European Economic Area (EEA). Therefore, EIOPA regards the implementation of IFRS 17 as beneficial for the European public good. [...] The introduction of IFRS 17 is a long overdue and positive shift of paradigm compared to IFRS 17's predecessor IFRS 4 Insurance Contracts.

Please click to access the the quoted documents:

• Letter to EFRAG (ESAs website)
• Speech by the ESMA Chair (ESMA website)
• EIOPA anaylsis of IFRS 17 (EIOPA website)

Mr Liikanen noted that financial reporting works best when standards and practices across jurisdictions are the same to maintain consistency and that the use of IFRS Standards have helped achieve this. In addition, he stated that his priorities for the Trustees are to look at core functions and strategies.

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

The report finds that whilst there have been some good developments, investors continue to emphasise the need for reporting to be more consistent and clearly linked throughout a company’s annual report. Investors value disclosures that tie business model, strategy, risk and viability together to enable them to assess progress against strategy and management of risks.

The new report Business model reporting; Risk and viability reporting – Where are we now? It includes practical examples from companies that have implemented the recommendations in the earlier reports from 2016 and 2017, which can also be accessed through the press release.

For additional insight and examples around business model reporting and risk and viability reporting including how companies are reporting against the 2016 and 2017 Lab reports please refer to Deloitte's Annual Report Insights 2018 publication.