In its decision on the effective date of IFRS 17, the IASB followed the staff's line of argument that the Board plans to consider whether to explore amendments to IFRS 17 and that any uncertainty about those amendments could disrupt the progress of implementing IFRS 17. Together with the significant change that IFRS 17 will cause, this constitutes exceptional circumstances that justify the deferral. 14 Board members voted for deferring the effective date of IFRS 17.

The deferral of the fixed expiry date for the temporary exemption to IFRS 9 was a more contentious issue as the deferral would mean that some entities would not apply IFRS 9 up to four years after all other entities. However, the IASB concluded that without the deferral there would be two sets of major accounting changes in a short period of time resulting in significant cost and effort for preparers of financial statements. Avoidance of this had been the Board's original reason for providing the temporary exemption. 13 Board members voted for deferring the expiry date of the exemption.

The IASB has issued a press release noting the intended deferral.

The first paper Non-GAAP Earnings and the Earnings Quality Trade-off used a large sample of earnings press releases by Australian firms and compared multiple attributes of non-GAAP earnings measures with their closest GAAP equivalent. The results, which other participants found to be "not surprising", were that, on average, non-GAAP earnings are more persistent, smoother, more value-relevant, and have higher predictive power than their closest GAAP equivalent. The tendency was also noted that they tend to be more positive than GAAP numbers. The question of what this research might contribute to the IASB's efforts quickly turned into the question of whether non-GAAP measures really are such a problem (opinions were divided) and whether it is at all possible to suppress them to a certain degree (by requiring more line items/subtotals/a defined management performance measure). Takeaways from the discussion seemed to be that there is no stopping of non-GAAP measures because even if all non-GAAP measures were declared GAAP, new non-GAAP measures would immediately be defined by companies. However, it was also acknowledge that there was simply not just one number that would satisfy all needs.

The second paper Disclosure Overload? An Empirical Analysis of IFRS Disclosure Requirements examined the disclosure overload problem by testing whether the disclosure reduction recommendations of the Excess Baggage Report issued by professional accounting bodies from Scotland and New Zealand in 2011 are associated with companies’ disclosure incentives and are value relevant for a sample of Australian listed companies. The discussion following the presentation seemed to be rather critical of the paper although it was acknowledged that it was important that the paper shows that there is substantial non-compliance with IFRS disclosure requirements in Australia. However, discussants continued to return to the point that while it is interesting to see that there is non-compliance it is more important to find out why. Also, the relevance of 2011 research checked against 2012 data in the year 2018 was questioned. The opinion was voiced that the disclosure overload problem has more or less gone away by itself thanks to technological development. The IASB is now focusing on the quality of disclosure, no longer on the amount of it.

The third paper Equity Financial Assets: A Tool for Earnings Management – A Case Study of Youngor Group was actually a case study illustrating how earnings were managed by a Chinese company by re-classifying its available-for-sale (AFS) assets as long-term equity investments to decrease the volatility of the company’s apparent profits. The paper claimed that China's adoption of IFRS converged standards in 2007 did not improve transparency about fair value. Among the reasons cited by the paper and by the discussants were an immature capital market, the cost of preparation, difficulties in level 3 estimates, generally unreliable numbers, cultural and legal differences (the term "Western standards" was used), and the "special treatment system" in China. Other participants added, however, that the same earnings management had been possible and had been done in other jurisdictions before IFRS 9 replaced IAS 39. Therefore, some of the earnings management might go away with an IFRS 9 equivalent that is being introduced in three stages in China and with the Chinese market maturing.

The fourth paper Accounting for Intangibles: Can Capitalization of R&D Reduce Real Effects and Improve Investment Efficiency?, which was later followed by a panel discussion on the same topic, investigated the potential for accounting rules to mitigate under-investment by requiring the capitalisation of some research and development costs or might such a capitalisation lead to over-investment? Panel members noted that as regards research and development costs, consistency and transparency was more important than the question of expensing vs. capitalisation. However, the investor representative noted, if asked directly, investors would probably prefer expensing. It was also noted that most industries move in unison on the question of whether and what to capitalise. The takeaway from the panel and the paper seemed to be that there is already a framework in place that if properly used and enforced can provide useful information. Participants even went as far as to say that there was no immediate pressing need for the IASB to take a project on intangibles onto its agenda.

The fifth paper Extractive Industries Reporting: A Research Review, again followed by a panel discussion, reviewed international diversity of accounting practices and the challenges facing information users and standard-setting processes and lobbying behaviour to explain why the IASB (and other standard-setters) have so far not succeeded in developing a rigorous standard for extractive activities and ESG factors. It was especially noted that the important aspect of reserves is only dealt with by disclosure although reserve estimates are required to be used in applying other standards. The paper argued that the IASB needs to take a comprehensive approach that also considers current values. The panel was less sure even though it admitted that there was diversity in practice. Nevertheless, panel members stressed the importance of disclosures and also voluntary disclosures. Mining companies needed to be in strong communication with their investors: "The better you disclose, the more the market will reward you." The panel and audience could also not quite conclude that an industry specific standard is needed for extractive activities although there was consensus that IFRS 6 is not satisfactory and consistency and comparability is needed.

The last paper Independently-certified Industry-specific Disclosures to the Capital Market: The JORC Code in the Australian Mining Industry investigate the compliance with the Australian JORC Code for the mining industry, the quality of the disclosure and its impact on the Australian capital market. The paper was very comprehensive, looking at two research questions and a large amount of data from multiple firms with various analyses. While the relevance of the research and its encouraging results (standard-setting can have a positive impact) were noted it was therefore suggested to split the paper actually into two papers. The relevance for standard-setting was then drilled into by asking after the impact of the standard-setting and the reasons for it, after disclosure vs. recognition and measurement, after the presentation inside or outside the financial statements and the user responses. Concluding, the Chair of the Australian standard-setter encouraged all academics in the audience: "Be brave!" She stressed that standard-setters are eager to be in dialogue with the research community and would always welcome the communication of research results when the findings were clear (also clear about definitions, methodologies, and limitations) and also included clear recommendations.

All links to the papers above are to the IASB website. Final versions of the papers will be included in a special edition of ABACUS early next year.

The IASB has issued a short press release on the Research Forum.

The Charity Commission for England and Wales (‘Charity Commission’) and the Office of the Scottish Charity Regulator (OSCR) have published a further ‘Update Bulletin 2’ which amends the Charities SORP (FRS 102) as a result of changes to UK Accounting Standards.

SORPs issued by the Charity Commission and OSCR apply to charities preparing accounts under UK GAAP to present a ‘true and fair view’ and are intended to supplement accounting standards and other legal and regulatory requirements to reflect transactions or circumstances that are unique within the charities sector.

The Update Bulletin 2 amends the Charities SORP (FRS 102), that was issued in July 2014, in the following key areas:

• Clarifying amendments – such amendments have been made to ensure that the Charities SORP (FRS 102) is consistent with existing requirements of FRS 102:
  • Module 3: Accounting standards, policies, concepts and principles, including adjustment of estimates and errors: clarifying the existing requirement to provide comparative information.
  • Module 5: Recognition of income, including legacies, grants and contract income: clarifying when payments by subsidiaries to their charitable parents that qualify for gift aid should be accrued in the individual accounts of the parent charity.
  • Module 10: Balance Sheet: removing the undue cost or effort exemption for depreciating assets comprising of two or more major components which have substantially different useful economic lives.
  • Module 13: Events after the end of the reporting period: clarifying when payments by subsidiaries to their charitable parents that qualify for gift aid are adjusting events occurring after the end of the reporting period.
• Significant amendments (Section 4) - as a result of the Triennial review of FRS 102:
  • Accounting and Reporting by Charities: The Statement of Recommended Practice (SORP) - Scope and Application module: inserting the date from when the amendments in this Update Bulletin are effective;
  • Module 10: Balance Sheet:
    • permitting charities that rent investment property to another group entity to measure the investment property either at cost (less depreciation and impairment) or at fair value;
    • removing the undue cost or effort exemption for the investment property component of mixed use property to require measurement at fair value;
    • removing the disclosure of stocks recognised as an expense;
  • Module 14: Statement of cash flows: requiring charities to prepare a reconciliation of net debt as a note to the statement of cash flows;
  • Module 27: Charity mergers: including the transfer of activities to a subsidiary undertaking as an example of a charity reconstruction that should be accounted for as a merger; and
  • Appendix 1: Glossary: inserting a definition of the term service potential.

Additionally a number of editorial amendments have been made which are set out in section 5 of the Update Bulletin 2. The amendments to Section 4 (significant amendments) and Section 5 (editorial and less significant amendments) are effective for accounting periods beginning on or after 1 January 2019. Early application is permitted provided all amendments in both sections are applied at the same time.

As these changes are included within an Update Bulletin to the Charities SORP (FRS 102) rather than reissuing the Charities SORP (FRS 102), charities following the Charities SORP (FRS 102) will have to refer Update Bulletin 1 (issued in February 2016), Update Bulletin 2 and the Charities SORP (FRS 102) when preparing their accounts and reports.

Click for:

• Update Bulletin 2 (link to Charities Commission SORP micro-site)
• Our previous UK Accounting Plus news item on the issue of Update Bulletin 1
• Our previous UK Accounting Plus news item on changes to FRS 102 as a result of the Triennial review

The Corporate Reporting Dialogue was launched in June 2014 as a way to achieve dialogue and alignment between some of the key standard-setters and framework developers around the world. It includes the Carbon Disclosure Project (CDP), the Climate Disclosure Standards Board (CDSB), the Financial Accounting Standards Board (FASB, observer), the International Accounting Standards Board (IASB), the Global Reporting Initiative (GRI), the International Organization for Standardization (ISO), the Sustainability Accounting Standards Board (SASB), and is convened by the International Integrated Reporting Council (IIRC).

CRD participants hold regular meetings to share their views and provide further cooperation. They have already released a common map of the reporting landscape (May 2015) and a materiality statement (March 2016). Under the new project, participants will work on aligning their standards with the recommendations published by the Task Force on Climate-related Financial Disclosure (TCFD) in June 2017. They will map their respective sustainability standards and frameworks to identify the commonalities and differences between them, jointly refining and continuously improving overlapping disclosures and data points to achieve better alignment, taking into account the different focuses, audiences and governance procedures.

Importantly, participants will also identify how non-financial metrics relate to financial outcomes and how this can be integrated in mainstream reports. This work will be undertaken with the overview of financial standard-setters with the ultimate aim of integrating financial and non-financial reporting.

Please click for the participants' joint press release on the IIRC website.

What makes the standards unique in the marketplace is their focus on industry specificity and financial materiality. By addressing the subset of sustainability factors most likely to have financially material impacts on the typical company in an industry, SASB’s industry-specific standards help investors and companies make more informed decisions. They are global in nature and contain concepts that are important for investors and businesses around the world.

The release marks a six-year effort by the SASB. Over the course of those six years, the SASB released several sets of provisional standards for different industries, which have already been used by companies around the world. The SASB standards can be used alongside other sustainability frameworks and are well-aligned with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and are complementary to the Global Reporting Initiative (GRI).

Please click to access the SASB press release. The SASB standards can be downloaded here.

Performance metrics – Principles and practice includes examples of how companies can apply the principles outlined in the Lab’s earlier project report Performance metrics - an investor perspective published in June 2018. That report found that investors wanted performance metrics to be aligned to strategy, transparent, in context, reliable and consistent.

Please click to access the guidance on the FRC website.

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

• Financial in­stru­ments with char­ac­ter­is­tics of equity (1–18): The ASAF members discusses views and feedback on the Dis­cus­sion Paper Financial In­stru­ments with Char­ac­ter­is­tics of Equity issued in June 2018.
• IFRS 3 Business Combinations reference to the Conceptual Framework (19–27): ASAF members discussed problems that could arise if an existing reference in IFRS 3 to the Framework for the Preparation and Presentation of Financial Statements were replaced with a reference to the 2018 Conceptual Framework.
• Extended external reporting (28–36): ASAF members gave feedback on the New Zealand’s External Reporting Board’s research on preparers of corporate reports and users of EER information.
• Accounting policies and accounting estimates (37–50): ASAF members provided their views on the definition of accounting estimate and accounting policy and were updated on feedback received from the IFRS Interpretations Committee.
• Rate-regulated activities (51–58): ASAF members provided their views on disclosure objectives and requirements for defined rate regulation.
• Extractive activities (59–64): The ASAF members provided information on what significant changes since the issuance of the 2010 Discussion Paper Extractive Activities.
• Project updates and agenda planning (65–70): ASAF members discussed the proposed agenda for the December 2018 ASAF meeting, disclosure initiative, and goodwill and impairment.

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

The Wednesday sessions start with the Board considering whether to defer the effective date of IFRS 17 Insurance Contracts (and the the related temporary exemption to IFRS 9 Financial Instruments) by a year. 

In the Primary Financial Statements discussion, the staff are recommending that EBITDA not be a required sub-total and that if an entity does use that term the measure must be calculated as “profit or loss minus all interest income and plus all interest expense, income tax, and depreciation and amortisation.”  They also recommend that the Board develop non-mandatory illustrative examples to accompany a revised IAS 1 Presentation of Financial Statements, remove the requirement in IAS 1:82(b) to present “finance costs” in the statement(s) of financial performance and clarify how the minimum line items are presented.

The Board will discuss three implementation issues. The staff are recommending changes to the proposed amendments to IAS 16 Property, Plant and Equipment in relation to accounting for the proceeds from selling any items produced while testing an asset. The staff are now recommending that the proceeds not be recognised as income, but continue to be deducted from the cost of the asset. The staff are recommending that the Board not start a project on accounting for cryptocurrencies or ICOs. Instead, they think the Board should monitor developments in these areas and ask the IFRS Interpretations Committee to consider issuing an Agenda Decision on the accounting for cryptocurrency holdings. Lastly, the staff are recommending that the Exposure Draft proposing amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets in relation to costs of fulfilling a contract also propose that early application be permitted.

The staff describe how they expect to manage the Management Commentary project using three work streams. The staff also set out the recommended objective of management commentary.

The Thursday sessions start with recommendations on how the Board should finalise proposed amendments to IAS 1 in relation to Classification of Liabilities as Current or Non-current.

The Board will consider a recommendation to update a reference to the Conceptual Framework in IFRS 3 Business Combinations

The proposed model for Rate-regulated Activities supplements the information provided by applying current IFRS Standards. The staff have assessed how the proposed model interacts with those other Standards. The papers also include recommendations about what information should be presented about rate-regulated activities.

More in­for­ma­tion

Our pre-meet­ing summaries are available on our November meeting note page and will be sup­ple­mented with our popular meeting notes after the meeting.

The FRC undertook a targeted review of 40 smaller listed and AIM quoted companies’ disclosures focusing specifically on Alternative Performance Measures (APM’s) and strategic reports, pension disclosures, accounting policies, including critical judgements and estimates, cash flow statements and tax disclosures. The sample included 22 listed companies outside the FTSE 350 and 18 AIM quoted companies with year-ends ranging from 31 December 2017 to 31 March 2018.

The most frequently improved disclosures related to APMs and judgements and estimates. The FRC were also “pleased” to see that some companies were prompted to enhance their strategic report to provide commentary on all significant matters, including tax, pensions and cash flows.

Further identified improvements included:

APMs and strategic report

• Companies providing more balanced disclosure between APMs and IFRS measures than seen in previous years. Improvements included adding IFRS information to the APMs in the highlights section and more companies ensuring that any commentary in the strategic report that focused on APMs was immediately followed by commentary on corresponding IFRS measures.
• Companies highlighting the limitations of APMs, better explaining individual adjustments and providing previously omitted reconciliations of APMs to corresponding IFRS measures.

Tax disclosures

• Companies providing more informative disclosures in relation to tax provision estimation uncertainties and tax reconciliations characterised by clear explanations of the matters requiring estimation and the sources of uncertainty affecting them with the relevant amounts quantified. Better reconciliations included specific descriptions of reconciling items which distinguished between items with recurring and on-off impacts on the effective tax rate.

Pension disclosures

• Good examples of disclosures on pension risks which explained the nature of each risk and how any changes would impact the scheme assets and/or scheme obligations.
• Some companies also providing additional disclosures not strictly mandated by IAS 19 Employee Benefits. These included details of amounts owed to deferred, active and retired members, valuations on a funding basis and amounts of future deficit repair contributions.

Accounting Policies including critical judgements and estimates

• Companies improving the explanations of the nature of the judgements made and relevant impacts.
• Companies also providing tailored explanations for more complex accounting and company-specific treatments.

Cash flow statements

• Most companies appeared to have correctly classified cash flows arising from operating, investing or financing activities. However apparent inconsistencies were noted as indicated below.
• Two-thirds of companies disclosed the amounts of undrawn credit.

Notwithstanding the above improvements, the thematic review highlights that “there is still clear scope for further improvement in reporting by smaller companies”. The thematic review identified areas for disclosure improvement spanning all companies within the sample. Key findings and the FRC’s expectations, which companies of all sizes to are expected to follow when preparing their next annual report and accounts are highlighted below.

Further thematic reviews on impairment of non-financial assets, the effect of IFRS 16 Leases in companies’ 2019 interim accounts and the effects of the decision to leave the EU on companies’ disclosures have also been announced by the FRC to be undertaken in 2019/20. This is in addition to follow up thematic reviews on companies’ disclosures around IFRS 9 and IFRS 15 announced on 5 November.

Click for:

• Press release (link to FRC website)
• Full thematic review – Reporting by smaller listed and AIM quoted companies (link to FRC website)
• Thematic review – Impairment of non-financial assets (link to FRC website)
• Thematic review – IFRS 16 Leases (link to FRC website)
• Our previous UK Accounting Plus news item on the FRC’s thematic reviews of IFRS 9 and 15

The reviews will be undertaken in 2019/20 and are in addition to follow up thematic reviews on companies’ disclosures around IFRS 9 and IFRS 15 announced on 5 November.

Impairment of non-financial assets

The FRC will conduct a thematic review of companies’ disclosures relating to the impairment of non-financial assets to encourage more transparent reporting of:

• the events and circumstances that led to the recognition or reversal of an impairment loss, and
• the basis on which the directors concluded that the carrying amounts of non-financial assets are recoverable.

Disclosures relating to the implementation of IFRS 16 within 2019 interim accounts

The FRC will monitor companies’ disclosures of the impact of the new financial reporting standard IFRS 16 Leases in interim accounts issued in 2019. The FRC has already conducted a ‘light touch’ thematic review of the disclosures relating to IFRS 16. 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.

The FRC indicates that it expects companies to include detailed quantitative disclosure of the expected effect of transition to IFRS 16 in their December 2018 year-end accounts. Where quantitative information is not possible the FRC expects additional qualitative information to be provided to enable users to understand the magnitude of the expected impact.

Further details of the thematic reviews can be found on the FRC website:

• Thematic review – Impairment of non-financial assets (link to FRC website)
• Thematic review – IFRS 16 Leases (link to FRC website)