March

February 2020 IASB meeting notes posted

02 Mar, 2020

The IASB met on 25–27 February 2020 to discuss six topics. We have posted our comprehensive Deloitte observer notes for all projects discussed during the meeting.

Amendments to IFRS 17 Insurance Contracts The Board continued its discussion of topics and decided:

  • Contractual service margin attributable to investment services (to finalise the amendments proposed, with some changes)
  • Level of aggregation—annual cohorts for insurance contracts with intergenerational sharing of risks between policyholders (to retain the requirement in IFRS 17).
  • Applicability of the risk mitigation option—non-derivative financial instruments at fair value through profit or loss (that the risk mitigation option be extended for insurance contracts with direct participation features in IFRS 17:B115)
  • Minor editorial and consequential amendments (to finalise them with minor changes).
  • Additional specific transition modifications and reliefs (to extend, amend and add modifications to the modified retrospective approach).
  • For other topics raised by respondents to the Exposure Draft Amendments to IFRS 17 the Board decided to amend the proposal only to resolve an inconsistency between that paragraphs and 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 completed its discussions of proposed amendments that respond to IBOR reform and decided to:

  • Limit the scope of the amendment and 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;
  • Propose temporary relief for hedging relationships that are amended to reflect modifications directly required by the reform;
  • Set out how the amendments are applied 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 will cease applying 24 (rather than 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 continued its discussions of potential revisions to the disclosure requirements in IFRS 13 and decided 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 presented 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 assess whether an accounting policy is material. No decisions were made.

Business Combinations under Common Control The Board approved all of the disclosure requirements recommended by the staff to accompany the acquisition and predecessor approaches for a BCUCC. The Board will publish the proposals in a DP, which the staff will prepare.

The staff gave an update on recent activities of the IFRS Interpretations Committee.

The Board decided not to finalise the proposed amendments to IFRIC 14 related to Availability of a Refund.

The Board will consider as part of the 2020 Agenda Consultation whether to include the subject as a potential project.

Please click to access the detailed notes taken by Deloitte observers for the entire meeting.

FRC issues a discussion paper on the use of technology and potential impact on audit quality

31 Mar, 2020

The Financial Reporting Council (FRC) has issued a discussion paper on ‘Technological Resources: Using technology to enhance audit quality’. Comments are requested 29 May.

Through issuing the discussion paper, which builds on the FRC’s recent thematic review, The use of technology in the audit of financial statements, the FRC is seeking to gain further insight into the use of technology and its potential impact on audit quality.

The discussion paper specifically seeks comments on:

  • Areas where technological resources are enhancing audit quality, and potential obstacles to further innovation (including those arising from regulation and standards);
  • The increasing use of artificial intelligence, machine learning and natural language processing within the audit process;
  • Data Standards and Extraction Issues;
  • Audit Documentation;
  • Data analytic exceptions; and
  • The growing use of third-party technology providers.

A press release and the discussion paper are available on the FRC website.

FRC issues guidance for auditors arising from the coronavirus pandemic

17 Mar, 2020

The Financial Reporting Council (FRC) has issued updated guidance for auditors which may be facing practical difficulties in carrying out audits as a result of the COVID-19 pandemic (coronavirus).

Uncertainty about the immediate outlook for many companies has increased sharply. This has consequences for companies proposing to report results in the coming months, and for their auditors. 

Some companies and auditors are also facing practical difficulties in preparing accounts and carrying out audits. Given restrictions on travel, meetings and access to company sites in some jurisdictions, the FRC indicates that audit firms may need to consider developing alternative audit procedures to gather sufficient, appropriate audit evidence.

The FRC highlights that the current situation should not undermine the delivery of high-quality audits and indicates that in current circumstances, additional time may be require to complete audits.  The FRC notes that it is important that this additional time is taken even if this results in reporting deadlines being reconsidered or company reporting being delayed.

The updated guidance highlights that auditors will need to consider the impact of coronavirus on: 

  • how they gather sufficient, appropriate audit evidence, recognising that the planned audit approach may need to change and alternative procedures developed;
  • how the group auditor proposes to review the work of component auditors;
  • the auditor's assessment of going concern and the prospects of an audited company;
  • the adequacy of disclosures made by management about the impact of COVID-19 on the company; and
  • the need for the auditor to reassess key aspects of their audit as a result of the fast-changing situation, which may require management to provide further evidence.

The updated guidance also indicates that auditors will need to engage with the entities they audit to ensure they set clear expectations as to the level of disclosure they expect to see in annual reports to communicate the impact and risk of COVID-19 on the company.  It emphasises the importance of communication with companies, especially their audit committee regarding reporting deadlines and support to carry out their work to a high standard. 

The updated guidance follows previous guidance issued by the FRC on disclosure of risks and other reporting consequences arising from the emergence and spread of Coronavirus. 

On 21 April 2020 the FRC also issued guidance on modified auditor's opinions and reports during the COVID-19 crisis which is available on the FRC website here.

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

FRC issues updated auditor reporting bulletins

02 Apr, 2020

The Financial Reporting Council (FRC) has issued updated bulletins as guidance for auditors preparing a range of reports to align with the revised Auditing Standards issued in December 2019.

The updated bulletins are:

  • Bulletin: Illustrative Statutory Auditor's Reports on United Kingdom private sector financial statements  – To assist auditors preparing statutory auditor’s reports for UK private sector financial statements. This bulletin replaces the FRC’s previous publication, Bulletin: Compendium of illustrative auditor’s reports on United Kingdom private sector financial statements. 
  • Bulletin: Auditor’s Reports on Revised Accounts – To assist auditors in preparing reports on a company’s revised accounts and reports. This bulletin replaces the extant version.
  • Bulletin: Miscellaneous Companies Act Reports – To assist auditors in preparing Companies Act 2006 reports that are required to be completed by a registered auditor. This bulletin replaces the extant version.

In addition to guidance relating to the auditing standards and relevant laws and regulations, these bulletins include illustrative reports that auditors may adapt and tailor to their specific reporting circumstances.

A press release and the updated bulletins are available on the FRC website. 

FRC launches consultation to adopt International Standard on Assurance Engagements (ISAE 3000)

25 Mar, 2020

The Financial Reporting Council (FRC) has launched a consultation on the proposed adoption in the UK of International Standards on Assurance Engagements (ISAE) 3000, 'Assurance Engagements Other Than Audits or Reviews of Historical Financial Information'.

ISAE 3000 was developed by the International Auditing and Assurance Standard Board (IAASB) and contains requirements and application and other explanatory material specific to reasonable and limited assurance attestation engagements, other than audits or reviews of historical financial information.

The FRC is proposing that compliance with ISAE (UK) 3000 will be mandatory only for such types of engagement the FRC specifies. These will ordinarily be particular engagements for which there is a requirement in law or regulation for an assurance report to be provided by an auditor or other assurance practitioner, or where a clear need has been identified to serve the public interest. Voluntary application to other assurance engagements will be permitted unless a subject matter specific standard relevant to the engagement has been issued by the FRC, in which circumstances that subject matter specific standard is required to be complied with.

A small number of edits to the international standard are proposed to reflect that in the UK assurance practitioners are subject to the FRC's Ethical Standard and the ethical pronouncements of their professional body, and that the FRC is not adopting the other, subject matter specific, ISAEs issued by the IAASB. Text related to the International Code of Ethics that remains relevant is being updated to take account of the conforming changes that the IAASB consulted on in 2019. No edits are proposed that would result in non-compliance with the IAASB's requirements in ISAE 3000.

Comments are requested until 22 May 2020.

A press release and the exposure draft can be found on the FRC website here.

FRC publishes its plan and budget for 2020/21

24 Mar, 2020

The Financial Reporting Council (FRC) has published its plan and budget for 2020/21.

The strategy has been developed in light of the recommendations made to the government by three independent reviews of the FRC. The FRC indicates that the 2020/2021 strategy sets out its initial response to those recommendations and that the strategy will be replaced in 2021 with a longer-term strategy once the government’s final positions to the recommendations made to it are finalised.

The FRC indicates that moving forward it will reorganise into four divisions consisting of:

  • Regulatory Standards and Codes;
  • Supervision;
  • Enforcement; and
  • Corporate services.

The plan and budget sets out the FRC’s strategic priorities in these four areas:

Regulatory Standards and Codes

  • Promote the Stewardship Code, support signatories to the Code and ensure significant take up. Assess early reporting of implementation.
  • Undertake an annual assessment of adherence with the Corporate Governance Code as well as the Wates Code for private companies.
  • Update the guidance for the UK Corporate Governance Code and/or related enhanced requirements on internal controls, risk management, going concern and resilience/viability.
  • Publish a thought leadership paper on the Future of Corporate Reporting.
  • Deliver FRC Lab projects on Technology and Future Horizons in reporting.
  • Update UK GAAP for recent international developments.
  • Launch a post-implementation review of the Technical Actuarial Standards and establish the necessary capacity to undertake regulatory duties over actuaries.
  • Support the Government’s green finance strategy to embed climate-related issues into corporate reporting and investment decision making.
  • Consider the merits and otherwise of endorsing a framework to measure the impact of companies on society and the environment
  • Assist the Government with creating new structures for setting accounting standards after leaving the EU, specifically the UK Endorsement Board.
  • Establish an audit market monitoring function and devise an appropriate strategy.

Supervision

  • Taking a risk-based approach, increase the scope and number of Audit Quality Reviews (from 130 in 2019/20 to between 145-165 in 2020/21) and Corporate Reporting Reviews (from 215 in 2019/20 to between 240 and 260 in 2020/21) undertaken.
  • Improve transparency by publishing more information about these individual reviews as well as thematic reviews on key cross-market issues e.g. climate reporting, the use of technology by audit firms and audit quality indicators. 
  • Build and deepen its supervision of the major audit firms, including governance, structure, audit quality management, culture and resilience and report views on each firm accordingly.
  • Expand oversight of the professional bodies and make significant progress on moving decision-making about auditor registration to the FRC in line with the Kingman Review recommendation
  • Develop and publish the FRC’s views on what constitutes good external audit.

Enforcement

  • Deliver robust, fair and transparent regulatory outcomes.
  • Continue to improve the timeliness of its work and ensure more enforcement cases deliver their primary reports to related parties within two years
  • Report on regulatory outcomes and progress through the Annual Enforcement Review and public messaging.
  • Conclude its Carillion related factual investigations and decide upon any enforcement action required.

Corporate services

  • Deliver within budget.
  • Improve management information and publish externally on an agreed regular basis.
  • Improve staff morale and wellbeing.
  • Deliver an integrated communications and stakeholder management strategy to ensure it gets the insights it needs to develop policies, maximise the impact of its work and regularly and clearly communicate with its stakeholders.
  • Assess organisational capability gaps and close them.
  • Monitor risks to achieving its objectives and put controls in place to mitigate where possible.

The plan and budget also covers the actions the FRC will take in relation to its reform, changes to its governance and also resourcing.

The FRC also sets out its budget for 2020/21 for expenditure and funding. Expenditure is being increased in the areas of audit regulation, monitoring the quality of corporate reporting and enforcement.

The press release and Plan and Budget 2020/21 are available from the FRC website.

FRC, FCA and PRA issue Covid-19 guidance for companies and auditors

26 Mar, 2020

The Financial Conduct Authority (FCA), Financial Reporting Council (FRC) and Prudential Regulation Authority (PRA) have published a joint statement relating to the impact of Covid-19 on financial reporting.

The statement recognises that investors and other stakeholders rely on financial reporting – backed by high-quality auditing and recognises that companies and their auditors currently face unprecedented challenges in preparing and auditing financial information.

In response to the current situation with Covid-19, the FCA, FRC and PRA have announced a series of actions:

  • A statement by the FCA allowing listed companies an extra 2 months to publish their audited annual financial reports.
  • Guidance from the FRC for companies preparing financial statements in the current uncertain environment. This is complemented by guidance from the PRA regarding the approach that should be taken by banks, building societies and PRA-designated investment firms in assessing expected loss provisions under IFRS 9 Financial Instruments.
  • Guidance from the FRC for audit firms seeking to overcome challenges in obtaining audit evidence.

The statement also recognises that in these extraordinary circumstances, previous market practices relating to the timing and content of financial information and the audit work that is done must change. These changes are likely to include:

  • Modified audit opinions where auditors have been unable to gather the necessary audit evidence to complete the audit in full: for example, by limiting the scope of the audit opinion.
  • Given the uncertainty about the immediate outlook for many companies, more audited financial statements that include disclosures that management is aware of material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern.
  • Changes to timetables for publication of financial information that had been set before the full implications of Covid-19 were clear.

Reporting timetable for listed companies

The FCA’s statement provides temporary relief for listed companies granting them an extra two months to publish their financial statements.

The FCA had also issued a statement on 21 March 2020, requesting companies observe a moratorium of at least 2 weeks on the issuance of preliminary announcements and signing of audit reports until 5 April 2020.

Further measures to allow companies and auditors to focus on the delivery of information to investors and the capital markets include guidance from Companies House permitting a delay to the filing of accounts by companies for up to three months and also a relaxation of a number of deadlines for regulatory reporting.

Guidance for preparers of financial statements

The FRC’s guidance is intended to highlight some key areas of focus for boards in maintaining strong corporate governance and provide high-level guidance on some of the most pervasive issues that should be considered when preparing annual reports and other corporate reporting.

With respect to corporate governance the key messages to board are to:

  • develop and implement mitigating actions and processes to ensure that they continue to operate an effective control environment, addressing key reporting and other controls on which they have placed reliance historically but which may not prove effective in the current circumstances;
  • consider how they will secure reliable and relevant information, on a continuing basis, in order to manage the future operations, including the flow of financial information from significant subsidiary, joint venture and associate entities; and
  • pay attention to capital maintenance, ensuring that sufficient reserves are available when the dividend is paid, not just proposed; and sufficient resources remain to continue to meet the company’s needs.

The guidance is intended to focus the minds of boards on those areas of reporting that are of most interest to investors and to encourage them to provide clarity on the use of key forward-looking judgements. The guidance covers:

  • the need for narrative reporting to provide forward-looking information that is specific to the entity and which provides insights into the board’s assessment of business viability and the methods and assumptions underlying that assessment;
  • going concern and any associated material uncertainties, the basis of any significant judgements and the matters to consider when confirming the preparation of the financial statements on a going concern basis;
  • the increased importance of providing information on significant judgements applied in the preparation of the financial statements, sources of estimation uncertainty and other assumptions made; and
  • judgement required in determining the appropriate reporting response to events after the reporting date and the extent to which qualitative or quantitative disclosures may be appropriate.

More detailed guidance is provided on the following specific areas:

  • Corporate governance
  • Management information
  • Risk management and internal controls systems
  • Dividends and capital maintenance
  • Corporate reporting
  • Strategic Report and Viability Statement
  • Financial statements – going concern and material uncertainties, significant judgements and estimation uncertainty and events after the reporting date.

Guidance for auditors

The FRC’s bulletin for auditors provides guidance for auditors in relation to the impact of Covid-19 on audit engagements. The Bulletin contains a non-exhaustive list of factors auditors should be considering when carrying out audit engagements in the current circumstances, along with guidance on how they might be addressed. On 9 April the FRC updated its bulletin for auditors to include guidance on gathering evidence through remote means.

The key messages are:

  • the need for more time, for both auditors and as importantly Boards/companies and management in preparing additional analysis;
  • there is a likelihood of increased numbers of opinions with material uncertainties in relation to going concern;
  • to issue an opinion not subject to disclaimer or a scope limitation always requires sufficient appropriate audit evidence; and
  • a reminder that there are particular reporting obligations on auditors in certain circumstances.

On 14 April the FRC issued an updated Covid-19 statement reconfirming and clarifying the above. The short statement can be accessed on the FRC website here.

Click for (all links to FRC website):

IASB issues podcast on latest Board developments (March 2020)

24 Mar, 2020

The IASB has released a podcast, featuring IASB Vice-Chair Sue Lloyd, to discuss the deliberations at the March IASB meeting.

The podcast features dis­cus­sions related to:

  • IFRS 17 and the extension of its effective date.
  • Management commentary.
  • Rate-regulated activities.

In addition, Vice-Chair Lloyd comments on the Discussion Paper Business Combinations — Disclosures, Goodwill and Impairment.

The podcast can be accessed through the press release on the IASB website. More in­for­ma­tion on the topics discussed is available through our com­pre­hen­sive notes taken by Deloitte observers at the March IASB meeting.

IASB issues podcast on latest Board developments (February 2020)

03 Mar, 2020

The IASB has released a podcast, featuring IASB Chair Hans Hoogervorst and Vice-Chair Sue Lloyd as well as Mark Byatt from the IFRS Foundation, to discuss the deliberations at the February IASB meeting.

The podcast features dis­cus­sions related to:

  • Disclosure initiative;
  • Business combinations under common control;
  • IBOR (phase 2);
  • Amendments to IFRS 17.

The podcast can be accessed through the press release on the IASB website. More in­for­ma­tion on the topics discussed is available through our com­pre­hen­sive notes taken by Deloitte observers at the February IASB meeting.

IASB publishes discussion paper on goodwill and impairment

19 Mar, 2020

The International Accounting Standards Board (IASB) has published a comprehensive discussion paper DP/2020/1 'Business Combinations — Disclosures, Goodwill and Impairment'. The IASB's related project aims at improving the information companies provide to investors, at a reasonable cost, about the businesses those companies buy and would help to hold management to account for its decisions to acquire those businesses. In this context, the IASB is investigating possible improvements to IFRS 3 'Business Combinations' and IAS 36 'Impairment of Assets'. The comment period on the discussion paper was extended until 31 December 2020.

 

Background

The IASB's project on goodwill and impairment results from the post-implementation review of IFRS 3 Business Combinations.

The feedback on the post-implementation review had revealed that impairment of goodwill is not always recognised in a timely fashion and that disclosures required by IFRSs do not provide enough information to understand whether the acquired business is performing as was expected at the time of the acquisition. There were also comments that the impairment test required for goodwill under IAS 36 Impairment of Assets is costly and complex. Some respondents also suggested reintroducing amortisation of good will.

In February 2015, to address the concerns mentioned and investigate possible improvements to IFRS 3 Business Combinations and IAS 36, the IASB added to its research agenda the following areas of focus, which later evolved into the goodwill and impairment project:

  • improving the impairment test in IAS 36;
  • subsequent accounting for goodwill (including the relative merits of an impairment-only approach and an amortisation and impairment approach); and
  • identification and measurement of intangible assets acquired in a business combination.

The discussions leading to the discussion paper published today were taken up in September 2015.

 

Summary of preliminary views

The discussion paper DP/2020/1 Business Combinations — Disclosures, Goodwill and Impairment presents preliminary views on the following topics:

Improving disclosures about acquisitions. The IASB believes that companies should be required to disclose the strategic rationale for an acquisition, the objectives for the acquisition, and the metrics for monitoring achievement of objectives. This should be disclosed at the acquisition date. After the acquisition date the performance against the objectives should be disclosed. Companies would disclose information management uses internally to monitor acquisitions, therefore, they would not need to create information solely for external reporting purposes. Disclosure would be required for as long as the performance is monitored by management. If the company ceases to monitor the performance or if the metrics for monitoring the performance are changed, the reason for doing so would be disclosed. The Board also believes that it should develop additional proposals that would require companies to disclose the amount, or range, of synergies expected from the acquisition, to disclose the amount of defined benefit pension liabilities and debt of the acquiree, and to disclose both actual and pro-forma revenue, operating profit and cash flows from operating activities.

Improving accounting for goodwill — Can the impairment test be made more effective? The Board believes that significantly improving the effectiveness of the test at a reasonable cost is not feasible. It also points out that shielding cannot be eliminated because goodwill has to be tested for impairment with other assets. The discussion paper also notes that an impairments test cannot always signal how an acquisition is performing, but that does not mean that the test has failed. When performed well, the test can be expected to achieve its objective of ensuring that the carrying amount of the cash-generating unit as a whole is not higher than its combined recoverable amount. The disclosure ideas discussed above could help provide investors with the information about the performance of acquisition they need. Finally, the discussion paper notes that if estimates of cash flows are too optimistic, this is best addressed by auditors and regulators, not by changing IFRSs.

Improving accounting for goodwill — Should amortisation of goodwill be reintroduced? Having concluded that the impairment test cannot be significantly improved at a reasonable cost, the Board considered whether to reintroduce amortisation of goodwill (an impairment test would still be required). The discussion paper notes that Board members have different views on this topic, but by (narrow) majority came to the preliminary view that the Board should retain the impairment only approach because there is no compelling evidence that amortisation would significantly improve financial reporting. The impairment test is believed to provide more useful information than an arbitrary amortisation charge and is more effective at holding management to account for acquisition decisions. The Board believes that it would not be appropriate to reintroduce amortisation solely because of concerns that the impairment test is not being applied rigorously or simply to reduce goodwill carrying amounts. In this context, the Board also came to the preliminary conclusion that it should develop a proposal to require companies to present on their balance sheets total equity before goodwill.

Improving accounting for goodwill — Simplifying the impairment test. The Board is of the preliminary view that it should provide relief from the mandatory annual quantitative impairment test. A quantitative impairment test would be required only if there is an indication of impairment. The Board believes that the reduction in robustness of the test would be marginal because it is unlikely that material impairment losses occur with no indicator. Similarly, the Board is of the opinion that the benefit of performing the test when there is no indicator is marginal. The Board also intends to improve the calculation of value in use. This would be achieved by removing the restriction in IAS 36 that prohibits companies from including uncommitted restructuring and asset enhancement cash flows and by allowing companies to use post-tax inputs and post-tax discount rates in calculating value in use.

Other topics. The discussion paper also sets out the Board's preliminary view that it should continue to require identifiable intangible assets to be recognised separately from goodwill. The Board believes that there is no compelling evidence that the requirements in IAS 38 should be amended. Considering whether to align the accounting treatments for acquired and internally generated intangible assets would be beyond the scope of the project.

The comment period on the discussion paper was extended until 31 December 2020.

 

Additional information

 

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