Season's greetings

24 Dec, 2019

We wish all our readers a peaceful holiday and all the best for the New Year.

We look forward to seeing you again after the holidays and to continue to be your preferred accounting website in 2020.

Accountancy Europe releases paper on interconnected standard-setting for corporate reporting

24 Dec, 2019

Accountancy Europe has published a paper describing and calling for a global solution to interconnected standard-setting that can meet the need for reliable, consistent information in non-financial reporting that is interconnected with financial reporting.

The introduction to the paper notes:

Global risks and opportunities mean that financial information alone cannot give a full picture of a company’s performance. Climate change, environmental degradation, social unrest and internally generated intangibles are addressed by non-financial information (NFI) reporting. However, the hundreds of NFI reporting initiatives available are leading to confusion and the potential for greenwashing. For an effective response to these global issues and stakeholder demands, NFI reporting needs to be harmonised and interconnected with financial reporting.

Therefore, the paper introduces nine criteria to assess approaches to interconnected standard-setting for corporate reporting. The criteria are:

  • urgency,
  • global or local solution,
  • oversight,
  • due process of standard-setting,
  • responding to stakeholder interests,
  • framework and metrics,
  • materiality lens,
  • legal embedding, and
  • role of technology.

These criteria are then applied to four approaches, being (1) an international non-financial reporting standards board within the IFRS structures, (2) regional consolidation, (3) separate governance structure for financial and NFI reporting; and (4) global corporate reporting structure.

Accountancy Europe concludes that the fourth approach offers the best solution with an enhanced monitoring body, a corporate reporting foundation that builds on the current IFRS Foundation Trustees and would be responsible for financial reporting and non-financial reporting oversight and two standard-setting boards (the IASB and a new international non-financial reporting standards board) that would be connected by a common framework for connected reporting.

Comments on the paper are invited by 31 March 2020. Please click to access the paper on the Accountancy Europe website.

IVSC continues article series on goodwill amortisation

24 Dec, 2019

The International Valuation Standards Council (IVSC) has published the second article in a series looking into whether principles underlying business valuations are compatible with the concept of goodwill amortisation. The series aims at encouraging public discussion by exploring certain fundamental questions in this area to inform financial statement preparers, reviewers, and users, and aid the capital market.

The second article What is the information value of the current impairment framework? can be accessed on the IVSC website.

The first article Is Goodwill a Wasting Asset? was published in September 2019.

ESMA reports on EU issuers’ use of APMs

24 Dec, 2019

In June 2015, the European Securities and Markets Authority (ESMA) published its final Guidelines on Alternative Performance Measures (APMs) for listed issuers that became effective in July 2016. ESMA has now published a report that builds on a desktop review of 2018 annual financial reports to assess issuers’ compliance with the guidelines.

The assessment of issuers’ compliance with the guidelines shows that there is significant room for improvement as only a minority of issuers comply with all principles. The report also highlights that the use of APMs is widespread in all sectors and within all regulated documents. Significant diversity exists in the number and type of APMs used, as well as in their labels and definitions. ESMA notes that ratios and subtotals included inside financial statements may also fall within the definition of an APM and thus should comply with the guidelines.

ESMA will continue to monitor the application of the guidelines and take appropriate actions in case of infringements. ESMA will also submit the report to the IASB as part of its contribution to the IASB’s exposure draft consultation on General Presentation and Disclosures.

Please click to access the report on the ESMA website.

IASB publishes editorial corrections

23 Dec, 2019

The IASB has published its third batch of editorial corrections in 2019.

The new set of editorial corrections affect the Red Book and the annotated Red Book 2019 as well as the Blue Book and the annotated Blue Book 2019 regarding IFRIC 12 Service Concession Arrangements and the glossary. The only stand-alone standard affected is IFRS 13 Fair Value Measurement.

Editorial corrections do not change the meaning or application of pronouncements, but instead correct inadvertent errors. The editorial corrections can be viewed on the editorial corrections page of the IASB's website.

HM Treasury issues new financial reporting manual (FReM) and IFRS 16 application guidance

20 Dec, 2019

HM Treasury has issued a revised version of the government financial reporting manual (FReM) 2020-21, together with application guidance on IFRS 16.

The Government Financial Reporting Manual (FReM) is the technical accounting guide to the preparation of financial statements. It complements guidance on the handling of public funds published separately by the relevant authorities in England and Wales (HM Treasury and the Welsh Government respectively), Scotland (the Scottish Government) and Northern Ireland (the Executive Committee of the Northern Ireland Assembly). The FReM is prepared following consultation with the Financial Reporting Advisory Board (FRAB) and is issued by the relevant authorities.

The 2020-21 edition of the FReM has a revised structure and is now separated into four sections:

  • Part A: Principles, purpose and best practice
  • Part B: The form and content of government annual reports and accounts
  • Part C: Application of accounting standards to government annual reports and accounts
  • Part D: Further guidance for government annual reports and accounts

Other changes include:

  • a new chapter addressing best practice in narrative reporting;
  • clearer guidance on the performance report;
  • introduction of 'comply or explain' requirements in certain areas including the structure of the organisation, risks faced, unit cost data and relevant trend data; and
  • new requirements in respect of IFRS 16 Leases, alongside specific application guidance on IFRS 16

The latest version of the FReM and application guidance are available on the HM Treasury website.

FRAB minutes for September 2019 meeting released

20 Dec, 2019

The minutes of the Financial Reporting Advisory Board’s (FRAB’s) meeting of 6 September 2019 have been made available on the HM Treasury website.

The role of the FRAB is “to ensure that government financial reporting meets the best possible standards of financial reporting by following Generally Accepted Accounting Practice (GAAP) as far as possible”. The FRAB includes representatives from the accountancy profession in the private and public sectors, academia and government bodies. The board meets regularly to consider proposed changes to policy and practice.

Key topics discussed during the September meeting included:

  • consideration of the consultation on the draft Financial Reporting Manual (FReM) 2020/2021, resulting in some minor changes and approval of publication of the consultation;
  • an update on work ongoing on the post-implementation review of IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers; and
  • an update from HM Treasury on the thematic review of the Statement of Parliamentary Supply.

The minutes and other supporting documents for the September meeting are available on the HM Treasury website here.

Third podcast in new series on IFRS Interpretations Committee developments

20 Dec, 2019

In July 2019, a new series of quarterly podcasts was launched on the work of the IFRS Interpretations Committee.

The third podcast (16 minutes) focuses on IFRS Interpretations Committee activities and developments between October and December 2019. Among the topics covered are one final agenda decision to do with lease term and useful life of leasehold improvements, two tentative agenda decisions — one relating to deferred taxes and the other to player transfer payments, as well as the status of several narrow-scope amendments that are currently in the process of being finalised.

Please click to access the podcast through the press release on the IASB website.

IASB Chairman speaks on how high-quality accounting standards can help resist the incentives for short-termism

20 Dec, 2019

In a speech at the 9th Symposium on Accounting Research hosted by the French standard-setter ANC, IASB Chairman Hans Hoogervorst talked about the importance of high-quality accounting standards in supporting long-term investment.

Mr Hoogervorst's speech followed two tracks. First he showed how the IASB's projets on primary financial statements and on wider corporate reporting will help companies to better explain their long-term performance to investors. He then turned to the accounting treatment of equity investments.

In the exposure draft of a new standard on general presentation and disclosures in financial statements the IASB published earlier this week, the IAS proposes defining operating profit, which will enhance comparability and become a powerful instrument for companies to explain their long-term performance to investors. The exposure draft also proposes a note in which companies will have to identify elements of income and expense which are ‘unusual’ in the sense they have limited predictive value. The IASB believes that the proposals will help investors gain insight into the persistence of earnings and will also help companies better explain their long-term strategy.

The IASB also believes that the work around updating the Management Commentary Practice Statement is important in helping companies tell their long-term story to investors. Elements that may be essential to a company’s long-term strategy often escape the financial statements, such as its business model, its intangible resources, the business environment it operates in, and more forward-looking information. Especially on information on intangibles and sustainability, which are becoming critical a company’s long-term viability, the current practice statement says little.

Mr Hoogervorst then turned to short-term volatility vs. the long-term perspective. He explained that looking at the long term does not imply that that short-term economic phenomena can be ignored:

If short-term volatility in the financial statements reflects real economic volatility, it should not be discarded or ironed out in an artificial way. [...] Companies or investors that take a long-term view, must be able to withstand the inevitable short-term fickleness of the marketplace. 

Mr Hoogervorst noted that in IFRS 9 the IASB abolished the available-for-sale (AFS) category for equity investments and fair value through profit or loss became the default requirement for equity investments. He stated that ever since, some stakeholders have suggested this accounting treatment is a disincentive for long-term investment in equity instruments as it could lead to more short-term volatility in the income statement. And he noted that he could perfectly well understand these comments as "the AFS category for equity investments in IAS 39 [...] provided a perfect instrument for companies to smooth their income statement over time".

Mr Hoogervorst actually provided an example of an actual company that tended to release larger quantities of AFS reserves when its net earnings before AFS were under pressure. This form accounting was perfectly in accordance with the requirements of IAS 39, yet it did not fully reflect the performance of the company: The deteriorating performance of the company was less clearly visible to investors. Therefore, Mr Hoogervorst stated, he strongly believed in accounting standards that minimise the scope for earnings management. Nevertheless, stated the belief that AFS will probably be one of the hot topics in the post-implementation review of IFRS 9, which will be able to draw on the experience of companies around the world that have already adopted IFRS 9.

Mr Hoogervorst concluded his speech by stating that: "Long-term goals should also be subject to the scrutiny of shorter-term performance measures. Otherwise, how would you know that you are on track?"

Please click to access the full transcript of Mr Hoogervorst's speech on the IASB website.


FRC publishes an updated practice aid to assist audit committees in evaluating audit quality

19 Dec, 2019

The Financial Reporting Council (FRC) has published an updated practice aid to assist audit committees in evaluating audit quality in their assessment of the effectiveness of the external audit process.

The practice aid updates an earlier version to take into account developments since such as revisions to the UK Corporate Governance Code, the requirement for all Public Interest Entities (PIEs) to conduct a tender at least every 10 years and rotate auditors after at least 20 years, and increasing focus generally on audit quality and the role of the audit committee. It also takes account of commentary from audit committees suggesting how the Practice Aid could be more practical in focus and more clearly presented.

New sections have been added on audit tendering and transparency of audit committee reporting. Responding to comments from audit committees, some of the background material has been consolidated and shortened and the illustrative considerations for audit committees have been updated, made more practical in their focus, and more clearly presented in separate appendices.

The FRC encourages audit committees to use the Practice Aid to help develop their own approach to their evaluation of audit quality, tailored to the circumstances of their company. Audit committees are encouraged to see their evaluation as integrated with other aspects of their role related to ensuring the quality of the financial statements – obtaining evidence of the quality of the auditor’s judgments made throughout the audit, in identifying audit risks, determining materiality and planning their work accordingly, as well as in assessing issues.

While the Practice Aid is designed for audit committees of Premium Listed companies it may assist audit committees of other entities, particularly those adopting the Corporate Governance Code voluntarily.

A press release and the full practice aid are available on the FRC website.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.