The review detail the findings from reviews of 960 audit files across a wide range of firms. The ICAEW indicates that the majority of the files reviewed “achieved the standards expected, with good practice in many areas”. However, it does express concern that 18% of audits required improvements and 8% needed significant improvement.

The report is split in two parts. It explains:

• how firms can improve the quality of their audit work based on the findings of the ICAEW’s Quality Assurance reviews during 2019;
• the changes ICAEW require firms to make including the introduction of root cause analysis; and
• the importance of audit quality, the future of audit and ICAEW’s approach to monitoring.

The report details that improvements can be made regarding: 

• Auditor scepticism, robust management challenge and sufficient audit documentation in three key areas that rely on significant judgement:
  • Going concern
  • Long-term construction contracts
  • Property valuations
• Documentation/evidence on the audit file supporting responses in audit work programmes and checklists and work performed. Additionally documentation of consideration of estimates, judgements and uncertainties.

Whilst the findings from the report note that audits need to improve in certain areas, overall, the 2019 results found a slight reduction in the most serious cases referred to the independent Audit Registration Committee (ARC) for it to consider taking action.

As well as identifying key areas for improvement the report also highlights examples of good practice. The report identifies regular external cold file reviews, and the effective use of root cause analysis as key tools for driving improvement

A press release and link to the full report is available on the ICAEW website here.

Following Sir John Kingman’s recommendations, the FRC Board has reviewed its sub-board governance structure and decision making in relation to enforcement investigations and intends a number of governance changes to take effect on 1 January 2021.

The key drivers behind the resulting governance structure changes are to enhance the effectiveness, speed and responsiveness of the organisation; shift the organisation to an ‘Executive Led’ approach; reduce layers of management and Committee review and create clearer accountability; enhance transparency; align the governance structure with a new FRC business model and management structure; and refocus Board time to effectively challenge and hold the Executive to account.

The governance changes approved by the Board are to take effect from 1 January 2021. Changes include:

• Five Committees of the Board to support the Board. These will be:
  • Supervision Committee (new);
  • Conduct Committee;
  • Regulatory Standards and Codes Committee;
  • Audit and Risk Committee; and
  • People Commiteee.
• Removal of the sub-committee structure to be replaced with a broad Advisory Panel that the Executive and Board Committees can call upon for specialist advice and input on a targeted basis.
• Senior Advisors to be appointed for a set number of days a month to sit as standing advisors to the three regulatory Board Committees (Regulatory Standards and Codes, Conduct and Supervision) and be available to advise the executive.

As the governance structure changes require minor consequential amendments to a number of the FRC’s regulatory procedures, these are being put to consultation. Comments are requested until 30 November 2020.

A press release and the consultation are available on the FRC website.

TheThe new UK Stewardship Code took effect for reporting years beginning on or after 1 January 2020.  The new Code sets higher expectations for investor stewardship policy and practice and focuses on how effective stewardship delivers sustainable value for beneficiaries, the economy and society.  The Code now comprises 12 ‘apply and explain’ Principles for asset owners and asset managers, with reporting expectations relevant to their role. In addition, there are six, separate ‘apply and explain’ Principles for service providers with reporting expectations.

In order to support prospective signatories in meeting the higher expectations set by the Code, the FRC has published its 'Review of Early Reporting'.  The review analysed 21 responsible investment, active ownership and stewardship reports and looked at how well prospective signatories are addressing the higher standards set.  The review reiterates the expectations of effective stewardship, highlights what has been reported well, using examples to demonstrate a range of effective approaches, and highlights areas where reporting needs to improve.

The report consists of two parts;

• Part 1: In this part the FRC has expands on its expectations of reporting which apply to all the Principles and reporting expectations.  This part also discusses the FRC's observations on the structure and the use of evidence to support stated approaches.
• Part 2: In this part the FRC comments on the quality of reporting and its expectations for specific Principles. This part highlights good examples of reporting where they have been seen.

The review identified that there were good examples and case studies evidencing stewardship activity.  However few reports consistently demonstrated the application of all of the Principles or addressed all of the reporting expectations.  The FRC indicates that "for all the Principles, reporting needs to improve by reflecting on effectiveness of approach, demonstrating continuous improvement and disclosing outcomes".  It also highlights that "statements should be supported with specific evidence from the reporting period, and the rationale rather than just a general statement of approach".

The press release and Review of Early Reporting are available on the FRC website. 

On 8 October, the FRC published a recording of the Webinar: Stewardship Code Early Reporting Review held on 30 September 2020. Click here to view the webinar.

on he new UK Stewardship Code took effect for reporting years beginning on or after 1 January 2020. In order to support prospective signatories in meeting the higher expectations set by the Code, the FRC will publish a 'Review of Early Reporting'. The Review will detail the expectations for reporting, identify effective examples and highlight where reporting needs to improve. new UK Stewardship Code took effect for reporting years beginning on or after 1 January 2020. In order to support prospective signatories in meeting the higher expectations set by the Code, the FRC will publish a 'Review of Early Reporting'. The Review will detail the expectations for reporting, identify effective examples and highlight where reporting needs to improve. 

Deloitte Touche Tohmatsu Limited’s (DTTL’s) Global CEO, Chairman and CFO are signatories to the statement of support for the Task Force on Climate-related Financial Disclosures (TCFD) and DTTL was actively involved in its work through our colleague Eric Dugelay, a member of the TCFD.

Climate change is an undiversifiable risk, which requires an immediate and urgent response. It is essential for businesses to integrate consideration of climate-related risks into their existing operations. Corporate reporting in line with TCFD recommendations can play an important role in achieving that outcome.

TCFD is market-driven and investor-focused, and is recognised as an appropriate framework by the International Organization of Securities Commissions (IOSCO) globally and by the European Securities and Markets Authority (ESMA) in the EU. It is an important contribution to developing global sustainability-reporting standards for climate-related information. In recent weeks we have seen significant steps made by IOSCO and the IFRS Foundation. Furthermore, leading international sustainability standard setters and frameworks have published a statement of intent to work towards a comprehensive corporate reporting system and issued an open letter to call on IOSCO to take a leadership position in creating the standard-setting architecture that would deliver a global climate reporting standard that incorporates TCFD recommendations. This global direction of travel should be taken into account in the development of any UK climate-related disclosure requirements. Therefore we believe that the introduction of a rule regarding TCFD should be considered a short-term measure which aims to encourage those businesses in scope to embed climate-related considerations into their operations and prepare for mandatory compliance with a reporting standard in coming years.

For this reason, we recommend that the rule does not ‘hard wire’ specific elements of TCFD into the rule, as these could be updated as TCFD moves to a global standard. Instead we suggest that it should reference application of the TCFD recommendations in the round. Experience of existing Listing Rules relating to the UK Corporate Governance Code shows that the time lag to consult on an FCA rule change every time the Code changes can discourage early adoption by issuers.

Regarding the rule itself, we believe all companies should be thinking about climate. We recognise that many companies are a good way along the journey in doing so but a significant number are not. We consider that a “comply or explain” approach may not have the effect of driving adoption of the recommendations; as it stands, a company may comply with the draft rule by repeatedly explaining non-compliance. Also, as TCFD is a set of recommendations rather than a reporting standard, it may prove challenging to determine what compliance might look like in some respects. It may be more valuable to require reporters to explain how they have had regard to TCFD; to what extent they have adopted and made disclosures according to the recommendations of TCFD; and, where necessary, the plans they have to adopt further recommendations in future years. This will not only allow investors to hold directors to account now, but also in future if insufficient progress is made.

Given the need for urgent action to stand any chance of meeting the Government’s target to be carbon neutral by 2050, we think issuers should be reporting progress now. Therefore, despite the extension of the consultation period, we believe that the new rule should take effect for periods commencing on or after 1 January 2021; we suggest that the Technical Note relating to current requirements also encourage early adoption of the new rule.

In the long term, we believe reporting of climate related information in line with TCFD recommendations or subsequent climate reporting standards should be required for all large economic enterprises – including both users and providers of financial capital. A rule for commercial premium-listed issuers is a good start; further rules for other issuers, larger private companies (perhaps those for whom a Statement of Corporate Governance Arrangements is required), and for major investors should follow. We encourage the FCA to work with the Prudential Regulation Authority (PRA), the Pensions Regulator (tPR), the Department for Business, Energy and Industrial Strategy (BEIS) and other UK regulators to ensure a consistent and joined-up approach to the introduction of climate-related reporting requirements across the various types of entity within the regulators’ respective remits.

Finally, we support the provision of guidance to issuers about how the current regulatory regime applies to climate change-related risks and encourage the FCA to finalise and publish the Technical Note as soon as possible so that it is available for December 2020 year-end reporting.

Click to view the full comment letter including our responses to the specific questions raised in the CP.

The presentation focused on two aspects around going concern assumptions.

The New Zealand External Reporting Board (XRB) has recently released new reporting requirements regarding going concern disclosures as the COVID-19 pandemic has shown again the diversity in practice over the information to be provided in circumstances when the financial statements are prepared on a going concern basis, but management are aware of events or conditions that may cast significant doubt on this judgement. The XRB came to the conclusion that it had to act fast in the context of COVID-19, in view of the fact that many New Zealand companies have a 31 March year-end, and as there was a perceived disconnect between the requirements in accounting and in auditing standards.

As New Zealand has adopted full IFRSs, the new requirements have to be followed in addition to the IFRS requirements. To the extent not already disclosed in accordance with IFRS requirements, where an entity prepares its financial statements on a going concern basis, and management is aware of events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern, it shall disclose information about the significant judgements and assumptions made as part of its assessment of whether the going concern assumption is appropriate. Furthermore, when management is aware, in making its assessment, of material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern, it shall disclose:

• (a) that there are one or more material uncertainties related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern;
• (b) information about the principal events or conditions giving rise to those material uncertainties;
• (c) information about management’s plans to mitigate the effect of those events or conditions; and
• (d) that, as a result of those material uncertainties, it may be unable to realise its assets and discharge its liabilities in the normal course of business.

The XRB representative noted that while New Zealand felt the need to act quickly, they would prefer the IASB undertook a project on going concern. This wish was seconded by other IFASS participants, also by representatives from jurisdictions where local standard-setting had been considered but not undertaken.

Another case for international standard-setting was then brought forward by the Australian Accounting Standards Board (AASB). The AASB representative argued that the current requirements where an entity is no longer a going concern (disclose the fact, adjust the basis of preparation, disclose why the entity is not a going concern) do not specify how the basis of preparation should be adjusted or what the revised basis should be. He noted that clear guidance is needed as there is a lack of comparability between companies where the going concern assumption is no longer appropriate and as some entities that are no longer a going concern continue to lodge financial statements stating compliance with IFRSs. He noted that preparers would benefit from there being clear guidance, users would have access to more comparable information, and auditors would have a clear basis of accounting to provide an opinion against.

Again, the suggestion to have a fundamental review of the requirements related to the going concern basis of accounting where the going concern assumption is no longer appropriate and disclosures and to carry out research to evaluate the need for standard-setting activity was supported by IFASS members.

The agenda is summarised below:

Agenda papers for this meeting will be made available on the IASB website.

The survey is intended be completed by insurers that prepare accounts using IFRS and that are incorporated in the UK. Insurers that are part of a group headed by UK - incorporated entity are requested to respond to the survey from the perspective of the consolidated group. Stand-alone insurance entities and insurance entities that are part of group headed by an entity incorporated outside the UK should respond to the survey from the perspective of the UK incorporated entity (or UK sub- group where applicable).

The survey is open until 29 October 2020. 

Further information and the survey are available on the FRC website.

In addition to updating all existing taxonomies (except for the Irish Extensions which remain as per the 2019 version), the FRC has published a new taxonomy called the UKSEF which can be used for UK reporting purposes to Companies house and HMRC.  It is a UK version of the ESEF Taxonomy and overseas entities wishing to file with Companies House need to use the UKSEF to file, since it contains the extra tags needed to file in the UK.

Key changes to the 2021 suite include: 

• Enablement of revised accounts due to disruption caused by COVID-19.
• Covid Issues: additional income-related tags to cover the Coronavirus Jobs Retention Scheme (CJRS) and other Covid-related grants have been added.
• Off Payroll Working: additional tags have been added to cover revenue from off payroll working and off payroll working expenses. These new tags have been added for all entry-points (FRS 101, FRS 102, UK IFRS and Charities).
• Pay Ratio Regulations: The Statutory Instrument The Companies (Miscellaneous Reporting) Regulations 2018 sets out requirements for the reporting of pay ratio information in the Directors’ Remuneration Report. All entry-points have been amended to cover these requirements.
• SECR Reporting:  The SECR Taxonomy introduced in 2019 supersedes the greenhouse gas emissions reporting items present in the Directors’ Report. These tags have been removed (not deprecated, to avoid confusion with the SECR reporting requirements).

In addition, SECR reporting is an additional requirement for (large) companies who may choose to report using UK SEF. Consequently, the SECR taxonomy has been incorporated into the UKSEF taxonomy extension for the convenience of filers. This will avoid the complication of additional combined entry-points.

The 2021 suite represent the most up to date version of the FRC Taxonomies and as such should be used to comply with HMRC requirements to fully tag.  The suite has been designed with full tagging in mind.  Accounts should be fully tagged, except for consolidated UKSEF data where regulations permit minimum tagging. Filers to Companies House should use the most-up to date version where possible.  It is expected that both HMRC and Companies House will have enabled this suite by April 2021. .

The press release and updated taxonomies are available on the FRC website.

The five standard setters found that even among their group of five there were different perspectives on the accounting for intangibles - some seeing the difference between book value and market value of a company as a problem, some seeing the difference between book value and market value as a problem that can be solved by disclosures, some seeing no problem in the difference between book value and market value. The purpose of the presentation was to provide a balanced discussion of the alternative perspectives to support community-wide consideration of the issues and stimulate relevant academic research.

FASB Board member Christine Botosan presented the view of those that believe there is a problem, which needs resolving by additional recognition of intangibles. Her arguments included:

• Failure to recognise important intangible items understates book value of equity and financial performance;
• failure to recognise important intangible items reduces the relevance of financial statements;
• recognition of some amount is better than no recognition:
  • Measurement challenges should not preclude recognition; and
  • verifiability concerns should not preclude recognition.

Ms Botosan also commented on measurement bases and their application to intangible assets. She differentiated between "in-exchange" assets that are used on a standalone basis and readily convertible to cash and "in-use" assets that are used in combination and not readily convertible to cash. Ms Botosan noted that most intangible items are "in-use" an that the relevant measurement basis should be historical cost or replacement cost. However, these costs are difficult to determine. Similarly, determining the fair value of intangible assets is difficult as intangible assets tend to be unique.

Kelly Khalilieh, Director of Accounting Standards at AcSB Canada, presented the view of those that believe there is no problem or not a problem that cannot be solved by additional disclosures. She noted that research shows that financial information is not declining in relevance and that it is not the objective of financial statements to show the market value of a company. Ms Khalilieh explored the benefits  of mandatory and voluntary disclosures. She noted that mandatory disclosures could be subject to audit and would be comparable and consistent. Voluntary disclosures would provide greater flexibility and would allow for more tailored disclosures. On possible disclosures she noted the following:

• Disaggregated information on expenditures of intellectual capital (“future-orientated intangibles”),
• an additional classification for “intangible activities” in the cash flow statement;
• a statement of intangible assets or intellectual capital flows; and
• an explanation in the notes of expenditures on intangible items.

Outside of financial statements she suggested to link intangible activities to the discussion of the organisational strategy and objectives and to supplement it with human capital metrics.

The paper of the five standard setters is currently under review at an academic accounting journal.

The podcast discusses:

• Management Commentary;
• Rate-regulated Activities;
• Business Combinations under Common Control;
• Extractive Activities; and
• Maintenance and consistent application.

The podcast (12 minutes) can be accessed through the press release on the IASB website.

The detailed notes taken by Deloitte observers at the meeting are available here.