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2020

FRC to review how companies and auditors assess and report on the impact of climate change

21 Feb 2020

The Financial Reporting Council (FRC) has announced a major review of how companies and auditors assess and report on the impact of climate change.

The FRC will review the extent to which UK companies and auditors are responding to the impact of climate change on their business to ensure reporting requirements are being met.

The review will consider how the quality of information can be improved to support informed decision-making by investors and other stakeholders. The FRC will monitor how companies and their advisers fulfil their responsibilities, and encourage better practice, by:  

  • reviewing a sample of company reports and accounts across industries to assess the quality of their compliance with reporting requirements in relation to climate change;
  • assessing a sample of audits to review how auditors are ensuring the impact of climate risk has been appropriately reflected in company reports and accounts, including the key areas of judgement and related disclosures;
  • assessing the resources available within audit firms to support audit teams in evaluating the impact of climate change on audited entities; 
  • evaluating the quality of disclosures under the new UK Corporate Governance Code regarding risk, emerging risk and long-term factors affecting their viability;
  • evaluating whether the Financial Reporting Lab’s recommendation for companies to report in line with the Task Force on Climate-related Financial Disclosures framework has been adopted, highlighting developing good practice.

Click here for the press release on the FRC website.

Agenda for the March 2020 GPF meeting

21 Feb 2020

Representatives from the International Accounting Standards Board (IASB) will meet with the Global Preparers Forum (GPF) in London on 5 March 2020. The agenda for the meeting has been released.

The full agenda for the meeting is summarised below:

Thursday, 5 March 2020 (10:10-16:20)

  • Primary financial statements — Overview over the ED and preliminary views of the members
  • IASB update
  • Goodwill and impairment — Overview of the Board’s preliminary views that will be included in the discussion paper and GPF members’ views on the feedback process for the project and areas of focus during the comment and outreach period
  • Disclosure initiative: Targeted standards-level review of disclosures in IAS 19 and IFRS 13 — next steps in the project

Agenda papers for this meeting are available on the IASB's website.

EC publishes consultation on the revision of the NFRD

20 Feb 2020

Following the launch of the initiative 'Revision of the Non-Financial Reporting Directive', the European Commission (EC) has now opened the consultation itself for public comment.

As reported earlier, Executive Vice President Valdis Dombrovskis of the EC announced in January 2020 that later this year he would present a renewed sustainable finance strategy, which would include a revision of the Non-Financial Reporting Directive (NFRD). The initiative to update the NFRD was launched earlier this month. Today, the EC launched the consultation itself by publishing a consultation document. 

In the introduction to the consultation, the EC makes the following statement:

  1. There is inadequate publicly available information on non-financial issues as:
    • a) reported non-financial information is not sufficiently comparable or reliable;
    • b) companies do not report all non-financial information that users think is necessary, and many companies report information that users do not think is relevant;
    • c) some companies do not report such information; and
    • d) it is hard to find non-financial information even when it is reported.
  2. Companies incur unnecessary and avoidable costs related to reporting non-financial information.

The consultation document itself contains 45 questions in eight categories:

    1. Quality and scope of non-financial information to be disclosed
    2. Standardisation
    3. Application of the principle of materiality
    4. Assurance
    5. Digitisation
    6. Structure and location of non-financial information
    7. Personal scope (which companies should disclose)
    8. Simplification and reduction of administrative burdens for companies

"Standardisation" contains questions about whether there should be common standards for EU companies, what the relation between financial information and non-financial information should be and which bodies/groups should be involved in setting these standards (if that should be the case).

The consultation document is available on the EC website (login required). Feedback is requested by 14 May 2020.

IIRC calls for feedback in the context of the planned revision of its Framework

20 Feb 2020

The International Integrated Reporting Council (IIRC) has launched a revision of the International <IR> Framework and is calling for market feedback on specific themes that will inform the nature and direction of the revision.

The IIRC has identified key themes around which it invites feedback, outlined in three topic papers on a) business model considerations, b) responsibility for an integrated report, and c) charting a path forward. The first two topic papers relate to the current <IR> Framework revision process. The third topic paper forges ahead with themes shaping the future of corporate reporting, including extended assurance and the role of technology. Feedback on this paper will inform the IIRC’s longer-term strategy.

Each topic paper separately invites market feedback via an online survey. Responses are requested by 20 March 2020. Please see the following additional information on the IIRC website:

Proposed amendments to the Framework will receive 90-day public exposure via a consultation draft, launching in May 2020. The revised Framework is due for release at the end of 2020.

Research into the local implementation of the EU Directive on disclosure of non-financial and diversity information

20 Feb 2020

Accountancy Europe has published 'Towards reliable non-financial information across Europe'.

The publication sets out how European countries have transposed the Directive on disclosure of non-financial and diversity information into national law and the impact on the role of the statutory auditor and independent assurance services provider. It also looks into the voluntary assurance practice beyond legal requirements across Europe.

Please click to access the publication on the Accountancy Europe website.

IFRS Foundation Trustees' stakeholder event with focus on non-financial reporting

19 Feb 2020

At the joint stakeholder event hosted by the IFRS Foundation and the European Financial Reporting Advisory Group (EFRAG) during the meeting of the Trustees in Brussels on 18 February, participants discussed 'Financial reporting: remaining relevant in a changing environment'.

The keynote address was delivered by Executive Vice President of the European Commission Valdis Dombrovskis. He noted that the European Commission (EC), at the beginning of a new five-year mandate, hat two major tasks to focus on - the fight against climate change and digital transformation. In his speech on non-financial reporting, Mr Dombrovskis connected both topics. He explained that today a much broader range of information is needed from companies and that in order for corporate reporting to remain relevant in this changing world, it needs to evolve. Mr Dombrovskis referred to the recently launched initiative to review the Non-Financial Reporting Directive and mentioned that the EC will ask EFRAG to begin work on non-financial reporting standards soon. However, he stressed, that while the EU is taking the lead on this, it "cannot go alone". Rather, Mr Dombrovskis explained, the EU initiative will be a platform that will allow and need others to contribute to developing these standards - he referred expressly to the IASB and other standard-setters and organisations "from around the world". Turning to digitalisation, Mr Dombrovskis commented that common standards are not only needed to achieve comparability in non-financial reporting, they would also provide a good basis for harnessing digital developments to help make fragmented and scattered information accessible and machine readable. His thoughts included broadening the new European Single Electronic Format (ESEF) to non-financial reporting and he noted that the digital financial strategy the EC is currently developing would extend to both financial and non-financial reporting.

Following the keynote address, the Chairman of the IFRS Foundation Trustees Erkki Liikanen moderated a panel discussion with MEPs Sven Giegold and Sirpa Pietikäinen, both members of the Committee on Economic and Monetary Affairs (ECON) of the European Parliament. Again, non-financial reporting was at the heart of the discussion. Ms Pietikäinen pointed to the 200 plus frameworks and sets of standards for sustainability reporting that currently exist. She asked the audience to imagine such a situation for financial reporting and stressed that non-financial reporting must be harmonised and must be made mandatory to achieve comparability. Ms Pietikäinen expressed the belief that this must be done globally. She suggested that there is no better place to have such a global standard-setter than under the auspices of the IFRS Foundation. Asked what the IFRS Foundation and the IASB should think or worry about regarding climate change and financial reporting, Mr Giegold explained that the climate crisis is a similar crisis to the financial crisis. Before the financial crisis, financial statements did not give a true and fair view of the risks companies were exposed to. Similarly, financial statements now would not faithfully portray the risks companies are exposed to as regards the climate change. He pointed out that ESG risks have a huge economic impact. He acknowledged the IASB's efforts around the management commentary, however, he called it the "blah blah" and asked the IASB to become active and develop rules that would allow to reflect ESG risks and their economic impact in the financial statements themselves.

A transcript of Mr Dombrovskis speech is available on the EC website.

Pre-meeting summaries for the February IASB meeting

18 Feb 2020

The IASB will meet in London on 25–27 February 2020 to discuss six topics. We have posted our pre-meeting summaries for the meeting that allow you to follow the IASB’s decision making more closely. For each topic to be discussed, we summarise the agenda papers made available by the IASB staff and point out the main issues to be discussed by the IASB and the staff recommendations.

Amendments to IFRS 17 Insurance Contracts:The Board will continue its discussion of topics for which it had decided to consider the feedback from respondents further, specifically:

  • Contractual service margin attributable to investment services (finalise the amendments proposed, with some changes)
  • Level of aggregation—annual cohorts for insurance contracts with intergenerational sharing of risks between policyholders (recommend retaining the requirement in IFRS 17).
  • Applicability of the risk mitigation option—non-derivative financial instruments at fair value through profit or loss (recommend the that the risk mitigation option be extended for insurance contracts with direct participation features in IFRS 17:B115)
  • Minor editorial and consequential amendments (recommend the Board finalise them with minor changes).
  • Additional specific transition modifications and reliefs (recommend extending, amending and adding modifications to the modified retrospective approach).
  • For other topics raised by respondents to the Exposure Draft Amendments to IFRS 17 the staff recommend an amendment only to resolve an inconsistency between IFRS 17:B65(m) and IFRS 17:B66(f) and not for any of the other matters raised.

IBOR Reform and the Effects on Financial Reporting: The Board will complete its discussions of proposed amendments that respond to IBOR reform. The staff are recommending that the ED:

  • Limit the scope of the amendment to clarify that a change in the basis on which the contractual cash flows are determined that alters what was originally anticipated constitutes a modification of a financial instrument in accordance with IFRS 9 to changes made in the context of IBOR reform;
  • Propose temporary relief for hedging relationships that are amended to reflect modifications directly required by the reform;
  • Set out how the amendments are apply when transition to an alternative benchmark rate occurs for classification and measurement of financial instruments; hedge accounting; lease accounting; and disclosures. The separately identifiable requirement for risk components should cease applying 12 months after the date that the alternative benchmark rate was designated as a risk component for hedge accounting purposes. These amendments should be mandatory and not voluntary.
  • Have an effective date of annual periods beginning on or after 1 January 2021 with earlier application permitted, and be applied retrospectively.

The ED is expected to be published in April, with a comment period of 45 days.

Disclosure Initiative—Targeted Standards-level Review of Disclosures: The Board will continue its discussions of potential revisions to the disclosure requirements in IFRS 13 and recommend that the disclosure requirements in IFRS 13 be amended to:

  • refer to significant drivers of change in the objective;
  • require an entity to disclose a reconciliation from opening to closing balances of recurring fair value measurements categorised within Level 3 of the fair value hierarchy;
  • state that an explanation by an entity of significant drivers of change in fair value measurements other than those classified in Level 3 of the fair value hierarchy might be necessary for it to meet the disclosure objective.

Disclosure Initiative—Accounting Policies: The staff will present a summary of the feedback received on the proposal to amend IAS 1 (or its proposed replacement, see https://www.iasplus.com/en/projects/major/pfs) to require the disclosure of ‘material’ rather than ‘significant’ accounting policies and to add guidance on how to whether an accounting policy is material.

Business Combinations under Common Control: The staff set out the disclosures requirements that they recommend should accompany the acquisition and predecessor approaches for a BCUCC. The staff also recommend that the Board publish a DP as the next step.

The staff will give an updates on recent activities of the IFRS Interpretations Committee and recommend that the Board not finalise the proposed amendments to IFRIC 14 related to Availability of a Refund. 

More information

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

FRC issues advice to companies and auditors on coronavirus risk disclosures

18 Feb 2020

The Financial Reporting Council (FRC) has today published guidance for companies on disclosure of risks and other reporting consequences arising from the emergence and spread of Coronavirus (COVID-19).

The guidance will be particularly relevant for companies either operating in, dependent on supply chains in, or having close trading relations with China.  In addition, the overall economic uncertainty in the region could indirectly affect entities that do not have direct exposure to COVID-19 in the region.

The FRC encourages companies to consider what disclosures they might need to include in their year-end accounts relating to these events.  Specifically companies should consider whether to refer to the possible impact of COVID-19 on their business in their reporting of principal risks and uncertainties. Where mitigating actions can be taken, these should be reported alongside the description of the risk itself.   

In addition to reporting the effects of COVID-19 in the principal risks and uncertainties section of the annual report, the FRC also highlights that the carrying value of assets and liabilities might also be affected with a need to perform additional impairment tests and to assess whether leases have become onerous.

With respect to post balance sheet events, for reporters with December 2019 year-ends, the FRC indicates that these events would likely be non-adjusting.  However for companies with later reporting dates, the FRC highlights that year-end balances might be affected. 

The FRC highlights that required disclosures will likely change as more information about COVID-19 emerges. As a result companies will need to continually monitor developments and ensure that they are providing up-to-date and meaningful disclosure when preparing year-end reports.   

A press release and the guidance is available on the FRC website. 

Annual ECON exchange of views with Hans Hoogervorst and Erkki Liikanen

18 Feb 2020

At the annual exchange of views this morning between the Committee on Economic and Monetary Affairs (ECON) of the European Parliament and representatives of the IASB and the IFRS Foundation, IASB Chairman Hans Hoogervorst and Erkki Liikanen, Chairman of the IFRS Foundation Trustees, stood ready to answer questions of the Parliamentarians. IFRS 17 'Insurance Contracts' and wider corporate reporting dominated the exchange.

On IFRS 17, Mr Hoogervorst first stressed that IFRSs are the global accounting language with one big exception where the economy still uses a wide variety of mostly outdated standards and historical cost, so that insurers discount their pension liabilities at historical interest rates that in no way reflect the negative interest rates of today. He stressed that the International Monetary Fund calls for the new standard urgently as does the Financial Stability Board. Mr Hoogervorst also pointed out that the IASB listens very closely to outside comments and expertise - much of it from the EU and the European Financial Advisory Group (EFRAG). Of the ten proposed amendments to IFRS 17 the IASB is currently considering, six were brought forward by EFRAG and five of those have been dealt with.

The other big topic Mr Hoogervorst spoke about was the IASB's role in wider corporate reporting. He noted that not all non-financial information can be captured easily in financial statements as it is difficult to measure and recognise, and yet he also acknowledged that this information can be important to investors. As last year, Mr Hoogervorst pointed to the IASB's project to update the management commentary practice statement and noted that management commentary provided the space for information that does not naturally fit into the financial statements but can have a financial effect nonetheless. He stated that the IASB's role is not to set sustainability reporting standards as there are already many standard-setters ("too many") active in the field, but to provide a framework through the management commentary that would give preparers the opportunity to connect financial and non-financial information.

There were more Parliamentarians at this meeting than in the previous years and IFRS 17 and wider corporate reporting were exactly the topics they commented on. On IFRS 17, one Parliamentarian wanted to know that if this was so important why did not the US apply the standard. Mr Hoogervorst explained about the US decision in 2011 to stop convergence with IFRSs, but he also noted that IFRSs are accepted as accounting standards (for foreign private issuers) in the US, and IFRS adoption continues to be spreading around the world. On IFRS 17, he especially noted Korea, who will "courageously" adopt IFRS 17 and use it coupled with strict regulation as an opportunity to recapitalise its insurance market. He also stressed that he wished that the EU would speed up its IFRS 17 adoption process, because, he said, the standard can help deal with some of the present problems, especially in the context of negative interest rates.

The questions around wider corporate reporting were mostly linked to the European Commission's "Green Deal". There were questions regarding more quantitative not only qualitative information, more forward-looking information, and the expression of frustration that the IASB was not doing enough quickly enough. Mr Hoogervorst once more explained that the IASB's expertise was not in sustainability standard-setting, even though it was happy enough to provide a platform through the updated management commentary practice statement, which will include guidelines how sustainability information can be included in the management commentary and will provide space for such information, but it will not contain any standards for doing so. He acknowledged that not everything was "hunky-dory" in sustainability reporting, especially the huge fragmentation in that space was discouraging. Mr Hoogervorst allowed himself the hope that at some point the many players in the filed would merge into one global standard-setter. However, he warned of two aspects in the field one would need to be aware of. One would be that current sustainability standards face in two different directions: information on risks and opportunities for companies and thus investors (this would include all the non-financial information that can become financial information in the long run) and information on risks for society at large. And the other would be that sustainability information while it is much needed is much less precise than financial information and it is much more political.

A recording of the exchange of views is available on the European Parliament website.

Alliance for Corporate Transparency launches research report on sustainability reporting

18 Feb 2020

At a launch event on 17 February 2020 in Brussels, the Alliance for Corporate Transparency presented a report that analysed the information that companies disclosed on their environmental and societal risks and impacts following the requirements introduced by the EU Non-Financial Reporting Directive. The launch embedded the research into discussions around 'The State of Corporate Sustainability Reporting in the EU'.

The study assessed how 1000 European companies disclose sustainability and other non-financial information. Key findings of the study were:

  1. Less than 22% of the companies surveyed report climate-related key performance indicators in summarised statements, the rest of them publish them scattered around in different locations or not at all;
  2. only 20%-25% of companies describe risks specifically even though identifying them as relevant to the company in the first place;
  3. the TCFD criteria are not applied;
  4. outcomes are only reported in 4% of cases despite that fact that risks are identified and in some cases activities described;
  5. supply chain transparency is low with supply chain transparency in the apparel sector being the highest but still not exceeding 14%;
  6. only 6% of companies provide economic figures on sustainability activities;
  7. disclosures are immaterial.

There is not a major difference between different European regions, with the exception that companies from former Eastern Europe lag behind.

Generally, disclosures are not specific enough to enable understanding of a company’s position and future developments. Reports focus on presenting general policies and commitments, but not concrete targets, outcomes of policies with respect to these targets, and specific information on risks and impacts.

The following additional information is available on the Alliance for Corporate Transparency website:

The embedding launch event offered two opening speeches by MEPs, a panel discussion and two fire-side chat sessions on the direction for the reform of the Non-Financial Reporting Directive and an explanation of the plans of the European Commission regarding the Non-Financial Reporting Directive. Panel members included representatives from WWF, the analysts side, the industry, GRI, CDP, and CDSB. The European Commission was represented by Alain Deckers, Head of the Unit on corporate reporting, audit and credit rating agencies. All parts of the launch event offered the audience opportunities to raise questions or comments. The main messages that emerged from the panels and the audience were:

  • While quite a lot of companies provide information, very few provide useful information.
  • Analysts don't want more information, they want relevant information.
  • Materiality is of essence.
  • There is a great tendency towards boiler plate information.
  • The lack of useful information is not only due to a lack of clearness in the reporting requirements, but also due to how these are applied, how the reports are drawn up, and how much demand/pressure there is from the user side.
  • Reporting on individual matters very often improves, once "something has happened".
  • Information lacks connectivity.
  • Information needs to be comparable, yet companies must be allowed to report on what is relevant for them.
  • Information should be forward looking and identify not only risks but opportunities.
  • Sustainability reporting can learn from financial reporting, where there already are a well-established architecture, an international standard-setter, and international standards.
  • There should be more connection between financial information and non-financial information.
  • Disclosure alone, even if mandatory, does not suffice to achieve a change in company behaviour.
  • It is a mistake to try to use reporting legislation to manage a moral obligation.

In his concluding remarks, Mr Deckers noted that the results presented in the research form a great evidence base for the upcoming review of the EU Non-Financial Reporting Directive. He clearly distinguished between "review" and "revision", although he noted that politics and markets have moved on since the Directive was first released. Mr Deckers stated that sustainability must be "at the heart of" company reporting, but he also conceded that it is only part of the picture and cannot solve all the problems. He also pointed at the tension between principles-based and rule-based requirements that is well known from financial reporting and that would form part of the debate on sustainability reporting. As regards the way forward, Mr Deckers pointed at the recently launched initiative to review the Non-Financial Reporting Directive, the three-month corresponding consultation that would open very soon ("later this week"), and an expected proposal for legislation at the end of 2020. He also mentioned that preparatory work for standard-setting would begin in parallel, in order to be able to move quickly.

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