EFRAG issued its final endorsement advice on 26 October after an accelerated process and has now completed its full due process by issuing and publishing a feedback statement on its comment letter. EFRAG's draft comment letter to the IASB was published on 23 April 2020 and final comment letter was published on 26 May 2020.

The feedback statement summarises the comments received by EFRAG on its draft comment letter and explains how those comments were considered by EFRAG during its technical discussions leading to the publication of EFRAG's final comment letter.

A press release and the feedback statement are available on the EFRAG website.

The proposed new standard is intended to replace IAS 1 Presentation of Financial Statements.

In its final comment letter, EFRAG:

• supports the IASB's proposals to present an operating, investing and financing category in the statement of profit or loss to improve comparability and reduce diversity in practice, but has reservations over some of the proposals in the ED;
• expresses the view that separate presentation of integral and non-integral associates and joint ventures could provide relevant information for users of financial statements. However EFRAG is concerned that the IASB’s proposed definition would involve significant judgement and makes a number of suggestions in this regard;
• supports the IASB's proposal to continue requiring entities to present an analysis of expenses using either by-function or by-nature method, based on whichever method provides the most useful information to the users of financial statements. However EFRAG recommends that the IASB further investigates the cost/benefit profile of its requirement to disclose on a by-nature basis in the notes when presenting by-function on the face of the financial statements, and, if appropriate, consider focusing on information that is most needed by users.
• welcomes the IASB's efforts to define unusual income and expenses and to require entities to disclose such items in the notes, but notes that the definition of unusual items seems to be rather narrow;
• questions the cost/benefit profile of the requirement to present the split of tax and non-controlling interest components for all the items when a performance measure is adjusted; and
• welcomes the IASB's efforts to provide guidance on Management Performance Measures (‘MPMs’) but considers that not only subtotals on the face of the statement of profit or loss but also other measures, such as indicators of financial position or ratios, should be included in the scope of this requirement. EFRAG also considers that the IASB should articulate better the link between MPMs and IFRS 8

For more information, see the press release and the comment letter on the EFRAG website.  EFRAG's feedback statement which summarises the comments received by EFRAG on its draft comment letter and explains how those comments were considered by EFRAG during its technical discussions leading to the publication of its final comment letter is available on the EFRAG website here.

The online event covered the following topics:

• Improving disclosure about business combinations;
• improvements to the goodwill impairment test; and
• a possible reintroduction of amortisation of goodwill.

During the discussion, participants from a range of backgrounds such as enforcement, auditing, academia, valuation and preparation of accounts, shared their views and concerns around the proposals contained in the Discussion Paper Business Combinations —  Disclosures, Goodwill and Impairment.

Please click to access the summary report on the EFRAG website.

The webinar introduced in more detail the Board’s preliminary views about improving disclosures about acquisitions.

For access to the recordings, please see the press release on the IASB website.

For the first phase of the project, the task force was split into several work streams to assess the current situation and report on it to the European Commission. The streams included focuses on special groups (e.g. financial institutions, SMEs) EU focuses (e.g. current reporting practices and momentum of reporting in the EU) and an international focus (which initiatives exist and can their work be leveraged).

While the EU-focused assessment includes "all current, developing and expected European initiatives", the international assessment, despite the 31 October cut-off date, makes no reference to newer initiatives such as the Trustees' consultation on establishing a global sustainability standard-setter, the WEF publication on an ESG framework and common metrics for reporting or the statement of intent of CDP, CDSB, GRI, IIRC, and SASB to work together towards a comprehensive corporate reporting system. A vague reference to these developments might be read into the statement that "Convergence and harmonisation efforts among some initiatives are taking place. These efforts include Memorandums of Understanding, Statements of Intent, Consultation processes and, from a technical standpoint, tables of translation from one initiative to another." However, the report dismisses these efforts in the very same paragraph and states: "Despite such efforts, the number of initiatives has continued to grow over the past years."

Please click to access the full progress report on the EFRAG website.

The ESEF initiative includes requirements for publication and filing of machine readable financial statements and the electronic tagging of basic financial statements and notes to these financial statements. It will enhance the accessibility of issuers’ financial data and will make easier the process of evaluating corporate performance by investors across industry sectors and different jurisdictions.

The Policy Statement confirms the FCA’s decision to push back by one year ESEF requirements originally scheduled for financial years starting on or after 1 January 2020. This means:

• The requirement for all issuers to publish and file their annual financial reports in XHTML web browser format, replacing the current PDF format, will be pushed back to financial years starting on or after 1 January 2021, for publication from 1 January 2022.
• The requirement for issuers who prepare consolidated annual financial statements in accordance with International Financial Reporting Standards (IFRS) to tag basic financial information will be pushed back to financial years starting on or after 1 January 2021, for publication from 1 January 2022.
• However, the requirement for issuers who prepare IFRS consolidated annual financial statements to tag notes to the financial statements will apply to financial years starting on or after 1 January 2022, for publication from 1 January 2023.

Issuers will, however, still be able to publish and file their financial reports in ESEF voluntarily for financial years starting on or after 1 January 2020, from January 2021 if they choose to do so.  The FCA has published guidance for the preparation of annual reports in European single electronic format which is available on the FCA website here.  The Department for Business, Energy and Industrial Strategy (BEIS) has updated its policy paper on ESEF to set out its view on the role of auditors.  This is available on the BEIS webiste.

With regards to publication of financial statements by listed companies, the FCA previously announced relaxation deadlines in March (for annual reports – extension from 4 to 6 months) and May (for interim reporters – extension from 3 months to 4 months). The FCA indicated that the temporary extensions would be kept under review and, at a suitable time, would announce how the policy would be removed in a fair, orderly and transparent way.

Due to the ongoing disruption caused by COVID-19, the FCA has indicated that these reliefs will, at a minimum, continue to be available to listed companies with financial periods ending before April 2021.  This includes measures related to both annual and half-yearly financial statements.

The full Policy Statement is available on the FCA website.

The FCA’ review, conducted in early 2020, looked at listed companies’ compliance with certain FCA rules relating to corporate governance. The FCA reviewed annual reports across several years for issuers across different listing segments and categories. The review highlights a number of areas for improvement including:

• That when stating how they have complied the Principles of the Code under Listing Rule (LR) 9, Premium listed issuers should ensure that that disclosure is sufficient to enable shareholders to evaluate how the Principles have been applied rather than just stating that they have been applied. Premium listed issuers are also encouraged to consider including specific details of how the company has applied the Principles in that accounting period with the use of examples and cross references where appropriate.
• Making use of cross references to other parts of the annual report and/or examples to evidence good corporate governance. The FCA found that for the premium listed population sampled, some of the disclosures appeared boilerplate and did not change year on year.
• The quality of Board Diversity Reporting.

Additionally the FCA observed that:

• Some closed-ended investment funds which had executive directors may have been erroneously using the exemption in LR 15.6.6R.
• A number of standard listed issuers either provided little or no information to meet the disclosure requirements of DTR 7.2.5R and DTR 7.2.7R.
• Standard listed issuers who state that they have applied the Provisions of the Code ‘as far as is relevant’ without providing any further detail do not appear to meet the requirements set out in DTR 7.2.3R (1).

The FCA has indicated that going forward it will work with the Financial Reporting Council (FRC) to consider areas for improvement. It will also use the results of its review to inform decisions about the deployment of future surveillance and monitoring efforts.

The full report is available on the FCA website.

There are many changes which can be complex to identify and apply. The letter addressed to the accounting sector splits out the changes applying to:

• UK incorporated companies or groups; and
• EEA incorporated companies and groups

UK incorporated companies or groups

Key changes to the corporate reporting regime are as follows:

• For periods beginning on or after 1 January 2021, all UK incorporated companies that are currently required to use EU-adopted IFRS will need to apply UK-adopted international accounting standards (UK-adopted IFRS). On 1 January 2021, UK-adopted IFRS and EU-adopted IFRS will be identical. Companies with 31 December 2020 year-ends should use EU-adopted IFRS for that year and apply UK-adopted IFRS for the following year.  There are some transitional provisions for companies with financial years straddling 31 December 2020 and for those companies whose year-end is before 31 December 2020 but which are not required to (and do not) file accounts until after the end of the transition period.  The FRC has provided guidance in this regard which will be particularly relevant for companies subject to Chapter 4 of the FCA’s Disclosure Guidance and Transparency Rules.
• From 1 January 2021, UK incorporated companies or groups with securities admitted to trading on an EEA regulated market and UK incorporated groups that issue debt from a subsidiary incorporated in the EEA will need to comply with local regulatory provisions. Companies should check what reporting requirements apply with the relevant EEA competent authority. If UK-adopted IFRS is granted equivalence to EU-adopted IFRS by the EU, accounts prepared using UK-adopted IFRS will be acceptable for use by companies admitted to trading on an EEA regulated market.
• For periods beginning on or after 1 January 2021, the exemption from audit for subsidiaries granted by parent guarantee (under s479A-C of the Companies Act 2006) will only be available where the guarantee is given by a UK parent undertaking; it may no longer be given by an EEA parent. This change also affects dormant subsidiaries which make use of the exemption by guarantee from preparing and filing accounts. The ICAEW has published TECH 06/20BL which addresses changes to the audit exemption.

The letter also cover changes relating to:

• Use of the Companies Act exemptions from preparing group accounts: for periods commencing on or after 1 January 2021, companies wishing to claim exemption from preparing group accounts on the basis that they are included in a non-UK consolidation further up will need to use section 401 of the Companies Act 2006. To do so, the group accounts in which they are included must be equivalent to those required by UK law.
• Preparation of non-financial information statements: in-scope UK subsidiaries with EEA parents will need to prepare a separate non-financial information statement rather than relying on the parent’s non-financial information statement for periods beginning on or after 1 January 2021.
• New rules regarding extension of accounting reference dates for UK subsidiaries of EEA parents.

 EEA incorporated companies or groups

Key changes include:

• EEA companies with transferable securities admitted to trading on a regulated market in the UK who use Member State GAAP (i.e. the national GAAP of a Member State) will need to prepare accounts in accordance with UK law for periods beginning on or after 1 January 2021.
• An intermediate EEA parent company owned by a UK parent may need to produce consolidated group accounts for their EEA sub-group as well as individual accounts. Companies should check with the relevant EEA state to understand whether they can continue on relying on being exempt from the preparation of group accounts by virtue of being included within the consolidated financial statements of the UK parent.

The FRC is expected to issue updates to FRS 100-105 later this year or early in 2021 to reflect changes in the law as a result of the UK’s withdrawal from the EU.

BEIS has also issued a separate audit letter with information for auditors and audit firms regarding arrangements from 1 January 2021.  The FRC and BEIS will be hosting a webinar on 3 December.

A press release and the letters are available on the BEIS website. Our related Need to know publication is available here.

The report presents the findings from the review and sets out the FRC’s expectations for the future application of the Code and reporting. It indicates that the overall level of reporting is disappointing and not what the FRC expects.

In the foreword Sir Jon Thompson, CEO of the FRC, makes the following point:

Much of what we have analysed is formulaic. Too often the objective of reporting appears to be to claim strict compliance with the Code concentrating on achieving box-ticking compliance, at the expense of effective governance and reporting. This approach is a disservice to the interests of shareholders and wider stakeholders, and ultimately is not in the public interest; it undermines trust.  Worryingly, while some companies have sought to claim full compliance, we found on closer inspection that this was not the case.

Sir Jon makes clear that as the FRC transitions to becoming a new regulator, it expects to receive further powers to engage with companies about the quality of their governance reporting. The intention is to do this constructively; by working together with companies to develop the quality of reporting so that it achieves the highest standard for which the UK is known. However, the FRC will call out poor behaviour, where appropriate.  This is in addition to the Financial Conduct Authority (FCA) which recently announced that, going forward, it will be considering governance disclosures to inform decisions about the deployment of future surveillance and monitoring efforts.

As a result of the review, the FRC expects improved reporting in the following ways:

Governance standards:

• Companies should maintain the high standards of the Code by taking the good practice demonstrated within it, applying it to the company and reporting on the approach by use of clear and meaningful explanations.

Leadership

• Companies to have a well-defined purpose and to clearly show the progress towards achieving it.
• Better assessment and monitoring of culture, including consideration of methods and metrics used.
• Demonstrating commitment to diversity and inclusion through actions, such as improved succession planning, recruitment from diverse talent pools and responsiveness to board evaluation outcomes.

Stakeholder engagement

• Companies should report on how the company has engaged with its key stakeholders, the steps it has taken to understand the views of stakeholders. In particular, there should be discussion of the issues raised, topics considered, and feedback received during engagement with shareholders and employees.
• It should be clear how the board oversees stakeholder decisions, including how, and on what basis, stakeholder information is passed to the board, as well as on how the board has reached key decisions and the likely impact of those decisions.
• Reporting should make clear the impact of engagement with stakeholders, including shareholders, on decision-making, strategy and long-term success. The FRC would like companies to provide more detail on their approach to measuring the performance of their engagement strategies.

Remuneration

• Clearly show the impact of engagement with shareholders on remuneration policy and outcomes.
• Clearly show the impact of the engagement within the workforce in relation to executive remuneration policy.

In conclusion the report provides the following message for boards to consider:

The strongest and most insightful reporting came from companies that described not only the initiatives that were introduced and processes that were followed, but also discussed their outcomes and what impact they had on the business. From risk review, through board evaluation to stakeholder engagement, measuring and reporting on impact means moving away from the boilerplate statements towards meaningful reporting. Giving more emphasis to the impact, while not disregarding thorough process, will also help companies better assess the effectiveness of their governance and generate better company performance and outcomes for shareholders and stakeholders.

A press release and the full report are available on the FRC website.  An FRC podcast is available here.

The FRC continues to identify errors in cash flow statements. The objective of its thematic review was to explore in more detail issues related to the preparation of the cash flow statement identified in its routine work as well as to consider some of the themes from the FRC Lab’s project: Disclosures on the sources and uses of cash. The thematic review provides insights into how the quality of cash flow statements can be improved.

The thematic review looked at companies from a range of sectors and industries, including general retailers, retail property, and tourism and leisure. The review covered companies reporting both before and after the UK lockdown from March. In total 30 companies were reviewed.

Cash flow statement

Whilst majority of the companies presented their cash flow statements in line with the requirements of IAS 7, the FRC did identify areas where requirements did not appear to have been met. It will continue challenge companies where there are:

• Material inconsistencies between items in the cash flow statement and the notes.
• Missing or incorrectly classified cash flows.
• Inconsistencies between financing cash flows and the reconciliation of changes in liabilities arising from financing activities in the notes.

The FRC also notes that disclosures of accounting policies and judgements in relation to the cash flow statement could be improved by most companies.

Liquidity risk

The FRC’s review provides recent examples of good reporting and supplements the July thematic review of the financial reporting effects of COVID-19 and the Financial Reporting Lab’s reports on Going Concern, Risk and Viability’ and Resources, action, the future published in June.

The FRC found that whilst those companies that had published their accounts before the UK lockdown in March only provided boiler plate disclosures of liquidity risk and related issues, there was a significant improvement in going concern, viability and liquidity disclosures for those published since April; a finding consistent with the July thematic review. This was most notable for smaller listed companies. These companies provided key liquidity information such as availability of cash, undrawn borrowing facilities and compliance with covenants.

Whilst there was improvement in reporting, the FRC does indicate that better disclosures should be made of covenant testing and assumptions and judgements around going concern and viability.

A press release and the full thematic review are available on the FRC website.