2018

IFSB and AAOIFI sign Memorandum of Understanding

24 Oct, 2018

The two leading Islamic finance standard-setting bodies Islamic Financial Services Board (IFSB) and Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) have signed a Memorandum of Understanding to facilitate international cooperation between the two organisations.

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.

FRC publishes findings on the quality of corporate reporting in 2017/2018

24 Oct, 2018

The Financial Reporting Council (FRC) has published its Annual Review of Corporate Governance and Reporting 2017/2018, which provides the FRC's assessment of corporate reporting in the UK based on evidence from a variety of sources, including the work of the FRC's own Corporate Reporting Review (CRR) team. The report also includes information on the level of compliance with the provisions of the UK Corporate Governance Code (“the Code”) as well as the quality of explanations and reporting provided by companies in their governance statements and committee reports.

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.

European Union formally adopts IFRIC 23

24 Oct, 2018

The European Union has published a Commission Regulation endorsing IFRIC 23 'Uncertainty over Income Tax Treatments'.

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.

EFRAG impact assessment surveys on the IASB's FICE DP

24 Oct, 2018

The European Financial Reporting Advisory Group (EFRAG) seeks feedback from preparers and users of financial statements to assess the impact of the IASB’s Discussion Paper 'Financial Instruments with Characteristics of Equity' on distinction between debt and equity.

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.

IASB finalises amendments to IFRS 3 regarding the definition of a business

22 Oct, 2018

The IASB has issued 'Definition of a Business (Amendments to IFRS 3)' aimed at resolving the difficulties that arise when an entity determines whether it has acquired a business or a group of assets. 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.

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:

ESAs comment on IFRS 17 endorsement process in the EU

19 Oct, 2018

The European Supervisory Authorities (ESAs) have jointly written to the European Financial Reporting Advisory Group (EFRAG) to express concerns on the endorsement process for IFRS 17 'Insurance Contracts'.

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:

IFRS Foundation Trustees chair discusses new role and upcoming priorities

18 Oct, 2018

In a recent interview, the Chair of the IFRS Foundation Trustees Erkki Liikanen provided his thoughts on his new role, financial reporting in the global economy, and his priorities for the Trustees.

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.

FRC Lab report on on business model reporting and risk and viability reporting

18 Oct, 2018

A new report from the Financial Reporting Lab of the Financial Reporting Council (FRC) considers how reporting practice has changed since the Lab published its original reports on business model reporting and risk and viability reporting.

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.

Recordings from the October 2018 DPOC meeting

18 Oct, 2018

The Trustees of the IFRS Foundation are currently meeting in Johannesburg. On 16 October, the Due Process Oversight Committee (DPOC) of the Trustees held its meeting (the only part of the Trustees meeting held in public). Recordings from the meeting are now available.

The DPOC members discussed the following topics

  • Introduction and actions from DPOC meeting held on 5 June 2018
  • Technical activities: Key issues and update
  • Review of the post-implementation review of IFRS 13
  • Consultative groups — annual review and DPOC engagement
  • Reporting protocol — annual general report
  • Education material — review of due process
  • Due Process Handbook review
    • Proposals for improvements
      • Agenda decisions: Supporting consistent application
      • Adding projects to the Board’s work plan
      • Effects analysis
      • Taxonomy
      • Anonymous complaints about due process
    • Outline of timetable and next steps
  • Correspondence: update
  • Summary

The recordings are available on the IASB's website.

We comment on updated draft SORP for Limited Liability Partnerships

17 Oct, 2018

We have published our comment letter on the Consultative Committee of Accountancy Bodies' (CCAB's) Exposure Draft on an updated Limited Liability Partnerships (LLPs) Statement of Recommended Practice (SORP).

The Exposure Draft proposed updates to the LLP SORP which are required as a result of amendment to FRS 102 resulting from the first Triennial Review of the Standard in December 2017.

Overall we believe that the proposed revisions are appropriate.

Our full comments to all questions raised in the invitation to comment are contained within our comment letter.

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