The Corporate Reporting Review team will undertake thematic reviews in the following areas:

• Going concern and viability. The thematic review will focus on management’s assessments and disclosures in relation to going concern and viability.
• IAS 37 Provisions, Contingent Liabilities and Contingent Assets.  The review will pick up issues identified regarding compliance with the Standard identified in the FRC's Annual Review of Corporate Reporting.
• Streamlined Energy and Carbon Reporting (SECR) compliance.
• Alternative Performance Measures.  This will be a follow up to the FRC’s 2017 thematic review to assess the extent to which its expectations on use of Alternative Performance Measures have been embedded into reporting practices.
• Interim Reporting. The FRC will review compliance with the requirements of the Disclosure Guidance and Transparency Rules and IAS 34 to identify areas of better practices.

As part of the FRC’s programme of audit quality inspections, the Audit Quality Review (AQR) team will pay particular attention to the auditor's work on:

• COVID-19 impact including in relation to going concern, impairment of assets, inventory and group audits.
• Estimates.
• Fraud.
• Climate risk.

In selecting corporate reports and audits for review, tthe FRC will give priority to the travel, hospitality, leisure, retail, property and financial services sectors.

A press release is available on the FRC website.

FRED 77 proposes limited amendments to FRS 101 to provide certain disclosure exemptions in relation to IAS 16 Property, Plant and Equipment and for consistency with IAS 1 Presentation of Financial Statements.

It also proposes an amendment to FRS 101 to remove a reference to paragraphs 39 and 40 of IAS 1. These paragraphs were deleted by Annual Improvements to IFRSs 2009–2011 Cycle, and therefore were only applicable for accounting periods beginning before 1 January 2013.

The FRC is requesting comments on FRED 77 by 28 February 2021. Please click to access the press release and consultation paper on the FRC website.

The FRC has recently reviewed ISRE (UK) 2410 in the context of changes to auditing standards, particularly ISA (UK) 570 Going Concern. As a result, the FRC is proposing to revise parts of ISRE (UK) 2410 to ensure it remains fit for purpose in the current environment.  The FRC's specific objective in performing this limited revision to ISRE (UK) 2410 is to address a potential lack of clarity in relation to going concern when performing a review of interim financial information.

Comments are requested until 19 February 2021

A press release , Invitation to Comment and the Exposure Draft are available on the FRC website.

The FRC has identified that the most common finding in its quality reviews is that audit firms did not challenge the management of audited entities effectively on the significant judgements they had made in areas such as long-term contracts, goodwill impairment or the valuation of financial instruments.  For more than 80% of those audits which required more than limited improvement, the effectiveness of challenge was a key audit quality consideration. 

The review stresses that robust, focused and independent challenge is vital to a high-quality audit, particularly during current uncertain times, including the continued impact of COVID-19 and Brexit uncertainties and should be at the forefront of the minds of audit teams during December 2020 year-end audits.

The FRC analysis highlights those factors which have given rise to both favourable and unfavourable audit review findings, each firms root cause analysis and the matters reported in each firms public report on quality in July this year.  The FRC identifies processes and attributes which it considers are key features of effective challenge of management and states that developing the right mind set and professional behaviour is critical underpinned by a strong culture of audit scepticism and challenge.

A number of teams have already been able to demonstrate to the FRC enhanced challenge of management with respect to the audit of going concern as indicated in the FRC's recent review.  The FRC hopes that the lessons learned and experience gained from that review will allow firms to replicate effective challenge of management consistently on future audits.

In order to promote change in the area of effective management challenge, the FRC is planning initiatives in 2021.  In June 2021, the FRC will host a conference on the culture of challenge, entitled “Audit firm culture: Challenge. Trust. Transformation” involving academics, other regulators and experts on culture from a wide range of sectors to share experience, ideas and good practice. Building on the output from this conference, the FRC will undertake a thematic review on building a challenge culture in audit firms.

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

The FRC previously issued guidance in March with subsequent updates in May. The consolidated guidance is delivered as two separates papers – one for companies and one for auditors. Both recognise that there is still considerable uncertainty about the future at a time where a number of companies are preparing annual reports.

Guidance for companies

The paper addressed to companies 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 made, 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, events after the reporting date, exceptional or similar items, alternative performance measurements, leases, and interim reports.
• Other sources of guidance and publications issued by the FRC.

The FRC encourages companies to make use of the extensions to the deadlines for the publication of the annual report and accounts. It notes that the FCA recently confirmed that listed companies with a year end up to and including 31 April 2021 will still have six (rather than four) months to publish their annual report and accounts.

Guidance for auditors

The Bulletin provides guidance to auditors carrying out audit engagements that may be affected by COVID-19. The Bulletin indicates that some companies and auditors are continuing to face practical difficulties in preparing accounts and carrying out audits. It highlights that given possible restrictions on travel, meetings and access to company sites in some jurisdictions, audit firms may need to apply alternative audit procedures to gather sufficient, appropriate audit evidence.

The FRC remains concerned that the pandemic should not undermine the delivery of high quality audits. It highlights that audits should continue to comply fully with required standards and flags that additional time should be taken to complete audits, where necessary, even if this risks a delay in company reporting.

The Bulletin indicates that auditors need to consider the impact of COVID-19 on:

• the auditor’s risk assessment, and whether it needs to be revised;
• how the auditor gathers sufficient, appropriate audit evidence, recognising that the planned audit approach may need to change, and alternative procedures developed, particularly in group audit engagements. The auditor must be able to gather the necessary evidence to be able to report or consider modifying their audit opinion;
• how the group auditor proposes to review the work of component auditors to meet the requirements in standards, including considering whether alternative procedures can be used: for example, where travel is restricted;
• the auditor’s assessment of going concern and the prospects of an audited company, given that uncertainty about the global economy and the immediate outlook for many companies has increased;
• the adequacy of disclosures made by management about the impact on the company of COVID-19, so that users of the financial statements are properly informed, and the company’s prospects and how they might be affected are described, recognising the high degree of uncertainty; and
• the need for the auditor to reassess key aspects of their audit as a result of the fast-changing situation, recognising that this assessment will take place right up to the point of signing the auditor’s report, and may need the provision of further evidence and information by management. Where the current circumstances have had a significant impact on the delivery of the audit, the auditor will need to consider how to explain this in their report, for example, by reporting this as a key audit matter.

The Bulletin also indicates that auditors need to engage with entities they audit to ensure that:

• the auditor sets 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; and
• companies, and in particular their audit committees, understand it is vital that auditors have sufficient time and support to carry out their work to an appropriate standard, including reassessing work done to reflect changed circumstances – in some cases, this may need companies to reconsider their reporting deadlines. Where auditors are unable to obtain sufficient, appropriate audit evidence to support their audit, they will need to consider necessary modifications to their audit opinion.

The Bulletin provides a non-exhaustive list of factors which auditors should be considering when carrying out audit engagements in the current environment, along with guidance on how they might be addressed.

A press release, the guidance for companies and guidance for auditors is available on the FRC website.

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

The analysis incorporates discussion of the responses the FRC received as a direct result of its consultation, as well as discussion of other matters that have arisen throughout additional outreach and engagement with stakeholders.

Almost all those that responded agreed that the use of technology could significantly improve audit quality, when deployed at the right time in the audit process and, crucially, by those with the right training. Respondents also agreed that, whilst additional application material and guidance would be beneficial, the current assurance model and audit standards do not represent a significant impediment to the development and deployment of technology in audit.

Training and skillset were identified as many respondents’ primary concerns. A significant majority of respondents saw the recruitment of staff members with the right skillsets alongside the development of appropriate training for current staff (both trainees and experienced), as a priority.

Respondents also described significant challenges in accessing high-quality client data in a reliable and consistent format, meaning that the application of technological resources to improve audit quality can be practically challenging to deploy, requiring substantial work on the data itself before analysis can be conducted.

Where a consensus around a specific action that the FRC can take to address concerns has been identified, or where the FRC has determined that no action is currently necessary, this has been laid that out within the individual sections of the paper.

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

Update 24 August 2021 - the FRC has also published guidance for auditors for dealing with outliers when using Audit Data Analytics.  The guidance is available on the FRC website.

The FSB supports the recommended approach by the Trustees of the IFRS Foundation to initially focus on standards for climate-related financial disclosures, as an important initiative to promote globally consistent disclosures and avoiding fragmentation. The FSB strongly encourages the IFRS Foundation to build on the work of the TCFD, by using the TCFD’s recommendations as the basis for standards for climate-related financial disclosures.

The FSB notes that the TCFD recommendations set out a comprehensive framework that has been developed by, and is directly responsive to the needs of, users and preparers of financial filings across a range of financial and non-financial sectors around the world. They have attracted widespread support from users and preparers.

In its comment letter, the FSB also strongly encourages other national or regional authorities that are developing requirements or guidance for climate-related disclosures to consider using the TCFD recommendations as the basis. Such consistency in approach would help to avoid the risk of market fragmentation, both across jurisdictions, and between requirements and guidance being developed today and international standards that may be introduced in the future.

Please click to access the full comment letter on the FSB website.

In its comment letter, GRI agrees with the assessment of the IFRS Trustees that demand for reporting on sustainability is growing, and that a global solution has to reflect the needs of the companies preparing sustainability reports together with the information needs of their stakeholders, including investors, as well as the information needs of the jurisdictions they operate in.

GRI also notes that not only is a global solution needed, sustainability reporting should also become mandatory to truly contribute to better decision-making. The comment letter also states that financial reporting itself must be strengthened to reflect the financial implications of sustainability issues on the reporting entity. Enhanced financial reporting would then exist alongside sustainability reporting. Under such a regime, GRI believes, financial reporting will be able to leverage the information made available through sustainability reporting so as to fully reflect the financial implications of all impacts of corporate activities.

GRI also comments on the role of the IFRS Foundation:

The IFRS Foundation is in a position to support the further evolution of the existing public interest oversight mechanism to become inclusive of sustainability reporting, thereby allowing even more jurisdictions that have mandated a global solution for financial reporting to do the same for sustainability reporting.

Please click to access the full comment letter through the press release on the GRI website.

GRI also offers two webinars on its response to the consultation: On 17 December 2020, at 9:00 GMT and at 17:00 GMT (links are to registration pages).)

Mr Hoogervorst commented on the work done during the coronavirus pandemic which included the publishing of educational materials to support the application of IFRS 9, Financial Instruments, and IFRS 16, Leases and changes to the IASB’s work plan to give stakeholders more time on consultations.

Next, he reflected on the key developments of the past 10 years as the IASB Chair. These developments included the revised Conceptual Framework, primary financial statements project, issuance of major standards (IFRS 9, IFRS 15, IFRS 16 and IFRS 17), and progress in the adoption of IFRS Standards around the world. He then touched upon the IASB’s future plans that will include a focus on sustainability, goodwill, and the agenda consultation.

The full transcript of the speech is available on the IASB’s website.

This issue features:

• Spotlight — Reflecting on the financial reporting challenges stemming from COVID-19.
• In Profile — Florian Esterer, Head of Core Equities, Bank J Safra Sarasin and member of the Capital Markets Advisory Committee
• We need your views
• Stay up to date
• Resources for investors

The Investor Update newslet­ter is available on the IASB’s website.