Practice Note 14 (PN 14) The Audit of Housing Associations in the United Kingdom provides sector specific guidance on applying the FRC’s auditing standards to an audit of Housing Associations.

PN 14 was last revised in 2014 and since then there have been significant changes in the devolved regulatory regimes under which Housing Associations operate. In addition, changes in the operating environment for Housing Associations means that new business risks have arisen and those identified in the previous revision of PN14, while mostly still relevant, have changed in their relative significance.

These factors, along with a need to update material due to the issuing of revised ISAs (UK), and a need to ensure that FRC guidance remains current and fit for purpose, meant that revisions to PN14 were necessary.

Comments are requested by 5pm on Friday 29th January 2021.

A press release and the invitation to comment are available on the FRC website.

The report brings together the FRC’s overview across the audit market. It captures the key publically reported quality metrics and findings (as published for the major audit firms in July 2020) and highlights its developing plans and changes in its structure around supervision of audit firms.

The key messages are:

• Continued inconsistency in audit quality – The FRC highlights its concerns that audit firms are not delivering quality on a consistent basis indicating that “49 out of the 130 audits inspected (primarily covering audits with year-ends between July 2018 and June 2019), required either improvement or significant improvement”. The key findings are related to challenge of management in areas of complexity and forward-looking judgements such as goodwill impairment, audit of going concern, group auditor oversight and quality control over audit. The FRC also saw examples of good practice including a willingness to delay and modify audit reports where necessary, the effective use of specialists and some examples of strong challenge of management.
• Audit market health and resilience – the FRC continues to strive to achieve greater competition in the market, particularly for FTSE350 audits, and to monitor the resilience of audit firms including the impact of the pandemic.
• COVID-19 – the report looks at the impact that COVID-19 is having on audit. The FRC highlight that its audit quality findings are all on engagements performed before the pandemic and that there is an even greater challenge looking beyond that. It indicates that judgements especially around going concern, remote working and controls and fraud risk are those areas that COVID-19 has and will continue to have the most significant impact on. The FRC has previously published guidance to support the provision of high-quality financial information to markets and high-quality audit work including guidance for companies preparing financial statements and a bulletin for auditors covering factors to be considered when carrying out audits during the Covid-19 crisis.

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

The review found that the additional policies and procedures introduced by firms had been substantially applied in practice and auditors demonstrated an appropriate level of challenge to company boards and management about their key assumptions, stress testing and disclosures in the financial statements. The key findings identified good practice examples and where auditors needed to improve.

A summary of the key findings are as follows:

• There was an appropriate level of consultation, which improved the extent of challenge by the auditors. There was good evidence of discussions held where consultations had taken place as well as challenges and requests made to the audit team and the conclusions reached.
• The economic scenario-related assumptions were tailored to the specific risks of the entity. There was evidence that market relevant data was obtained to assist in assessing management’s forecast scenarios.
• Reverse stress and scenario testing assisted in the assessment of whether there was a material uncertainty. These techniques are particularly useful in assisting with the assessment of whether there is a material uncertainty, given the increased uncertainty in a situation such as Covid-19. While a reverse stress test provides a “break” scenario, management and the auditors may also need to consider what a severe, but plausible, scenario is.
• The length of the going concern assessment period was not always clear in cases where it went beyond a year. Where management has assessed going concern over a period that is longer than a year from the date of approval of the financial statements, the auditors should ensure that their audit procedures cover that same period and that the disclosures in the financial statements and the auditor’s report clearly state the period of the going concern assessment.
• The consideration of the disclosures for material uncertainties was generally appropriate. There was evidence of good disclosures which were tailored specifically to the circumstances, and clearly explained the scenarios and assumptions that management had used in their going concern assessment and the nature of the material uncertainties, where relevant.
• There was an inconsistent approach to testing the integrity of the going concern forecast models.  Given the complexity of some forecast models, it may be beneficial to use data analytical procedures to test the integrity of the cash flow models. In particular, the use of specific tools to check the mathematical and mechanical accuracy of the models can highlight matters such as circular references, formulaic anomalies and hidden cells/input fields.
• Enhanced work papers assisted in evidencing the key aspects of the going concern assessment.  In the audits reviewed, the required work programs and work papers were used.
• There was often good use of specialists. Internal specialists, such as transactions advisory, business recovery and economists, can contribute to the quality of the auditor’s going concern assessment, through their expertise in assessing the cash-flow forecast assumptions, including the ability to raise further funds.

The FRC’s review follows updated guidance issued to companies and auditors in March, an FRC Lab report on going concern, risk and uncertainty and a report on the financial reporting effects of COVID-19.

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

The FRC reviewed 15 audits across the seven largest audit firms covering both the financial statement opinion and the Value for Money arrangements conclusion work. The FRC paid particular attention to the valuation of property (including investment property), multi-employer pension deficits, occurrence and completeness of expenditure, first year audit procedures, the impairment of receivables and the fraud risk assessment and response thereto.

The FRC indicates that the results of its inspections were “concerning” with just 40% (down from 64% in 2018/19) of the audits requiring no more than limited improvement. It comments that “overall, some firms are still not consistently achieving the necessary level of audit quality and therefore need to make further progress”. Most of the findings leading to reviews requiring more than limited improvements were identified in the areas of property valuation (including investment property), sufficiency of audit procedures over the occurrence and completeness of expenditure, the response to fraud risks, the impairment of receivables, valuation of pension assets and the effectiveness of the Engagement Quality Control Review.

With regards to Value for Money conclusion work, the FRC observed that “the quality of VfM conclusion work across all firms remains high”. All 15 reviews were assessed as either good or requiring limited improvements and, unlike the prior year, no reviews were graded as requiring improvement.

A press release and the full report is available on the FRC website.

The thematic review reflects the important role that boards, companies, auditors, professional associations and investors play in considering and responding to climate-related issues and provides findings on how each of them is responding to climate-related challenges. It highlights the FRC’s views on current market practice, outlines its reporting expectations, and indicates where it will focus its attention on to ensure that there is an appropriate response to climate change. A summary report is supported by more detailed reports for each of the groups.

The FRC asked a number of questions asked to the respective groups:

• Boards - How are boards taking account of climate-related challenges?
• Companies - How are companies developing their reporting on climate-related challenges?
• Auditors - How are auditors taking account of climate-related challenges?
• Professional associations - How are professional bodies and audit regulators taking account of climate change in their regulatory responsibilities?
• Investors - What do investors want to see?

The thematic reviews key outcomes show that:

• Although it is the board’s responsibility to consider climate-related issues, there is little evidence that business models and company strategy are influenced by integrating climate considerations into governance frameworks. Investors continue to want companies to outline how the board considers and assesses climate change. The FRC indicates that this consideration is even less amongst smaller cap companies.
• There is an increasing number of companies who are providing narrative reporting on climate-related issues. However, while minimum legal requirements are often being met, companies are not meeting the additional demands of users who are calling for additional disclosure to inform their decision making and who are themselves responding to a changing regulatory environment.
• Whilst some companies have set strategic goals such as 'net zero’, it is often unclear from their reporting how progress towards these goals will be achieved, monitored or assured.  The review also indicates that it is often unclear as to whether a 'net zero' objective is central, peripheral or aspirational in the context of a company's strategy.  Whilst companies might acknowledge the government's commitments to 'net zero' in aspirational terms, often in the Chair's statement, the FRC found that it is often difficult to understand how that intention is clearly linked to the company's strategy and objectives.
• Consideration and disclosure of climate change in the financial statements lags behind narrative reporting. The FRC review identified areas of potential non-compliance with the requirements of International Financial Reporting Standards (IFRS).
• The quality of support, training and resources provided to the audit practice varies considerably across firms. The FRC indicates that firms need to do more to ensure that their internal quality monitoring has appropriate regard for climate change considerations.
• From the audits reviewed there were indications that auditors need to improve their consideration of climate-related risks when planning and executing their audits.
• UK professional bodies, and audit regulators in the Crown Dependencies, are responding to climate change, but approaches differ in terms of substance and granularity regarding references to climate-related reporting and the impacts of climate change.
• Investors support the Task Force on Climate-related Financial Disclosures (TCFD) framework, but also expect to see disclosures regarding the financial implications of climate change.

Concurrent with the issuance of the thematic review, the FRC has issued a statement on Non-Financial Reporting Frameworks. In it the FRC pledges its support for global standards for non-financial reporting, welcoming the recent consultation issued by the IFRS Foundation Trustees. It comments:

In order to meet the ambition of UK stakeholders to improve the quantity and quality of climate-related and wider environmental, social and governance reporting, we believe some of the existing frameworks can act as steps in supporting the market to move more quickly to meet the information needs of investors and other capital providers. The FRC therefore encourages UK public interest entities voluntarily to report against the Task Force on Climate-related Financial Disclosures’ (TCFD) 11 recommended disclosures and, with reference to their sector, using the Sustainability Accounting Standards Board (SASB) metrics. We encourage companies to reporting on these areas within their next reporting cycle, where possible, and disclosure should be considered in the context of the existing strategic reporting framework in the UK.  

In order to assist companies to achieve reporting under TCFD and SASB that meets the needs of investors the FRC has set out some of its future work including:

• An increased focus on climate change considerations in its ongoing Corporate Reporting Review and Audit Quality Review monitoring work, where relevant.
• Undertaking a review of reporting under the Streamlined Energy and Carbon Reporting regulations in 2021.
• Assessing professional associations’ approaches to climate change, including in their regulatory and curriculum-setting functions.
• Incorporating monitoring of climate-related reporting in its annual UK Stewardship Code and UK Corporate Governance Code monitoring and consideration of whether climate-related amendments are appropriate within future revisions of these Codes, the Guidance on the Strategic Report and associated guidance.
• Highlighting areas of the financial statements of UK GAAP reporters where climate change could be a consideration.
• Investigating developing investor expectations and better practice reporting under TCFD and SASB, plus engaging internationally on the developing approach to reporting frameworks and standards.
• Undertaking a project considering the requirements of audit, emerging role of assurance, and responsibilities of audit committees in this area.

Whilst encouraging reporting under TCFD and SASB would be seen as a step in the right direction, the FRC highlights that it is not just investors that are the only stakeholder with an interest in climate-related reporting. It draws attention to its recently issued ‘Future of Corporate Reporting’ Discussion Paper which proposes to develop a future reporting model that meets the needs of a wider set of stakeholders.

A webinar will be held on 25 November will be held to mark the publication of the thematic review.

The following are available on the FRC website:

• Press release – thematic review with links to the summary report and more detailed reports
• Press release – statement on Non-Financial Reporting Frameworks
• FRC podcast on the thematic review
• Additional FRC podcast
• FRC podcast on climate change and audit

The year-end advice letter covers the following key areas:

2020 year-end reporting environment

COVID-19 and its impact on corporate reporting

The effects of COVID-19 present challenges to businesses of providing clear and transparent information that focuses on issues most relevant to users. To assist preparers in reporting in a COVID-19 environment, the letter draws the reader’s attention to the FRC guides published during the year in relation to Covid-19:

• The Joint statement issued by the FRC, FCA and PRA and subsequent updates.
• The FRC’s thematic review on the financial reporting effects of COVID-19.
• The FRC’s Lab reports on ‘Going Concern, Risk and Viability’ and ‘Resources, action, the future’, issued in June which highlight the information that investors indicate they find most critical to understand the impact of COVID-19 on a company.
• The FRC’s updates to the June Lab reports, issued in October.

The FRC highlights that a thematic review on cash flow and liquidity, due to be published shortly, and which provides guidance on the disclosure of liquidity risk, going concern and viability, may also provide a useful reference.

The letter highlights that the FRC expects preparers:

• To consider the principles contained in IAS 1 Presentation of Financial Statements and provide disclosures that allow users to understand the impact of events and conditions on a company’s position and financial performance. These should, where possible, quantify the impact of COVID-19 on a company’s performance, position and prospects.
• To increase disclosure of relevant sensitivities or ranges of possible outcomes where judgements are made on significant estimation uncertainties.
• To quantify the historical effect of COVID-19 in narrative reporting in the strategic report. However companies are ‘strongly encouraged’ not to make arbitrary splits of items between COVID-19 and non-COVID-19 financial statement captions as such allocations are likely to be highly subjective and therefore unreliable. Companies are also expected to apply their existing accounting policies for exceptional and other similar items consistently to COVID-19-related income and expenditure.
• To clearly articulate the impact of COVID-19 on their business and strategies and how the changes are compatible with future forecasting assumptions used in other areas of the financial statements such as going concern, viability, impairment testing and recognition of deferred tax assets. Specifically the FRC expects any significant judgements made in determining whether or not there is a material uncertainty in relation to going concern to be disclosed and explained.
• To describe and explain any other significant judgements and estimates made especially with regards impairment reviews. Disclosures are expected to describe the approach used to determine key impairment assumptions and explain significant year-on-year changes, including any changes due to COVID-19.

In light of the light of the impacts of COVID-19, the FRC has encouraged boards to carefully consider whether they should lengthen their reporting timetables for 2021, making use of the extensions to reporting deadlines.

Impact of Brexit

The FRC expects company reports to explain company-specific risks and uncertainties arising as a result of Brexit. This should include the impacts on different parts of the business and any effects on the financial statements including major sources of estimation uncertainty, amounts at risk and ranges of potential outcomes.

Insights and observations from the FRC’s monitoring work

The FRC makes reference to its latest Annual Review of Corporate Reporting which provides the FRC's assessment of corporate reporting in the UK based on evidence from a variety of sources, including the work of the FRC's own Corporate Reporting Review (CRR) team. The report sets out the FRC’s expectations of areas of corporate reporting that require improvement and what it expects companies to focus on in the coming reporting season. The key areas of focus, included in the letter, have been drawn from, and are consistent with, the findings included in the FRC’s Annual Review of Corporate Governance and Reporting.

Specifically the FRC highlights frequent challenges around disclosure of judgements and estimates, impairment of non-financial assets and working capital finance arrangements such as reverse factoring. Preparers should consider these findings during the year-end reporting process.

Insights and observations from thematic reviews

The letter summarises key points identified from thematic reviews carried out during the year. Specifically it focuses the reader’s attention on:

• Climate change – the FRC indicates that “users expect companies to provide full information about the future impact of climate change on the business and how the company’s activities affect the environment”. Its climate change thematic review provides key findings and FRC expectations.
• IFRS 15 Revenue from Contracts with Customers and IFRS 16 Leases - Recently the FRC published the results of two thematic reviews covering the current reporting on IFRS 15 and IFRS 16. The reviews identified a number of areas where companies need to improve their reporting.
• Cash flow and liquidity – the FRC’s forthcoming thematic review which looks at how companies reported cash flows and liquidity risk sets out the following expectations in this area:
  • Companies should provide a clear explanation of the matters considered in assessing going concern, viability and liquidity.
  • Company disclosure should include the methods, assumptions and judgements made in assessing going concern and viability.
  • There should be consistency in the amounts and descriptions of items in the cash flow statement, and other areas of the annual report, including: the strategic report, other primary statements, disclosures of changes in financing liabilities and other notes.
  • Company disclosures should include accounting policies and judgements in relation to the cash flow statement, particularly for large, one-off transactions.
  • Companies are expected to address what the FRC calls as ‘basic errors’ in the preparation of their cash flow statements by performing robust pre-issuance reviews of the cash flow statement.

Narrative reporting and corporate governance matters

Section 172 statement and reporting on workforce engagement

The FRC indicate that many companies are failing to explain how their directors discharged their section 172 duty and in particular the responsibility to have regard to the consequences of decisions in the long term. Additionally whilst companies are reporting on the methods of engagement with stakeholders they are not reflecting how the feedback affected decision making. Some companies are treating the statement as one of compliance.

The letter draws attention to the recent s172 review by the Financial Reporting Lab of the Financial Reporting Council (FRC) which provides a set of tips intended to help companies consider what content to include in a Section 172 statement, how to present it and how to facilitate the process of preparing the statement.

The letter also highlights the FRC’s expectations around reporting on workforce engagement and indicates that reporting should improve in that area. The FRC draws attention to its Lab report on workforce reporting in January 2020 to assist in this area.

Other areas covered

Other areas covered in the letter include:

• Chair tenure
• Future endorsement of IFRS Standards in the UK
• The requirement to consider new IFRS Standards including Interest Rate Benchmark Reform and amendments to IFRS 16 for COVID-19-Related rent concessions.

The press release and full letter are available on the FRC website.  Our related Governance in brief publication is here.

The publication notes that companies can no longer afford to ignore what climate change means for their business as climate change is material and investors need visibility about the effects in company accounts. The group is therefore, not calling for sustainability disclosures or reports but for reflecting climate change effects in IFRS accounting. In an article published in November 2019, IASB Board member Nick Anderson had already explained how IFRS requirements can be used to report on climate and other emerging risks.

Investor Expectations for Paris-aligned Accounts sets out investor expectations in five clear steps companies can take in preparing ‘Paris aligned’ company accounts:

• An affirmation that climate risks are incorporated into the accounts;
• Adjustments to critical assumptions and estimates;
• Sensitivity analyses and their results linked to variations in judgements or estimates;
• Dividend resilience and implications for dividend paying capacity of Paris-alignment; and
• Confirmation of consistency between narrative reporting on climate risks and the accounting assumptions.

The publication also outlines specific investor expectations for auditors to call out where accounts are ignoring material climate risks; making it clear they should say when accounts are not ‘Paris-aligned’.

Where these expectations are not met, three courses of investor action are identified: engagement (engage with boards and audit committees to press for Paris-aligned accounting), vote (vote against reappointments where performance is inadequate) and divestment (sell shares in companies that fail to provide reliable 'Paris-aligned' accounts).

Please click to download Investor Expectations for Paris-aligned Accounts from the IIGCC website.

The purpose of the session was to obtain feedback from academics on the proposals in the March 2020 DP and to discuss relevant academic evidence.

Please click for more information and access to the recording (2 hours) on the IASB website.

The event will explore the following key topics from the IASB’s discussion paper:

• Improving disclosures about acquisitions.
• Accounting for goodwill.
• Presenting total equity less goodwill as a subtotal in the balance sheet.
• Accounting for intangibles in business combinations.

The IASB staff will present an overview of the proposals and there will be an opportunity to submit questions to a panel before and during the event.

Further details and how to register are available on the FRC website.

The Forum will be held in conjunction with the journal Accounting and Finance. The call for papers inviting submissions that can provide evidence to inform the standard-setting activities of the IASB notes the following areas of particular interest:

• Better communication in financial reporting
  • Primary financial statements
  • Management commentary
  • Disclosure initiative – Targeted standards-level review of disclosures
  • Taxonomy
• Research projects
  • Extractive activities
  • Equity accounting
  • Goodwill and impairment
  • Business combinations under common control
• Application
  • Post-implementation reviews of IFRS 9, IFRS 15 and IFRS 16
  • Comprehensive review of the IFRS for SMEs
• Any other topics on the IASB work plan or research pipeline

Please click for more information on the IASB website.