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2021

IASB proposes narrow-scope amendment to IFRS 17

28 Jul 2021

The International Accounting Standards Board (IASB) has published the exposure draft 'Initial Application of IFRS 17 and IFRS 9 — Comparative Information (Proposed amendment to IFRS 17)' that would enable companies to improve the usefulness of the comparative information presented on initial application of IFRS 17 and IFRS 9. The deadline for submitting comments is 27 September 2021.

 

Background

Many insurance companies have not yet applied IFRS 9 Financial Instruments and will first apply it at the same time they apply IFRS 17 Insurance Contracts. However, the two standards have different requirements for the comparative information that will be presented on initial application. IFRS 17 requires companies to present one restated comparative period. IFRS 9 permits but does not require restatement of comparative periods, and prohibits companies from applying IFRS 9 to financial assets derecognised in the comparative period.

Some insurers have since raised concerns about the usefulness of the information that would be presented for financial assets in the comparative period on initial application of IFRS 17. They are of the view that such information would be misleading because it would include accounting mismatches that would essentially arise from the continued application of IAS 39 (i.e. would not represent economic mismatches), which would be very difficult to explain. These insurers asked the Board to allow them to present significantly improved information about financial instruments that would result from applying the classification requirements of IFRS 9 at the transition date of IFRS 17.

 

Key proposal

The main proposal in ED/2021/8 Initial Application of IFRS 17 and IFRS 9 — Comparative Information (Proposed amendment to IFRS 17) is a proposed narrow-scope amendment to the transition requirements of IFRS 17 for entities that first apply IFRS 17 and IFRS 9 at the same time. The amendment regards financial assets for which comparative information is presented on initial application of IFRS 17 and IFRS 9, but where this information has not been restated for IFRS 9. Under the proposed amendment, an entity would be permitted to present comparative information about a financial asset as if the classification and measurement requirements of IFRS 9 had been applied to that financial asset before. There are no proposed changes to the transition requirements in IFRS 9.

The deadline for submitting comments on these proposals is 27 September 2021.

 

Effective date

The exposure draft proposes that an entity that elects to apply the amendment shall apply them when it applies IFRS 17.

 

Additional information

The following additional information is available on the IASB website and on IAS Plus:

 

FRC publishes annual report 2020/21

28 Jul 2021

The Financial Reporting Council (FRC) has published its 2020/21 annual report (“the annual report”).

The annual report outlines the FRC’s financial position and highlights achievements and challenges in 2020/21, including those related to the pandemic. It also sets out progress made over the year and the next steps in delivering a programme of transformation towards the robust, independent and resilient regulator. The FRC explained how it supported stakeholders by providing COVID-19 guidance for companies and auditors. It also contributed in developing international standards, including climate and ESG reporting.  

During 2021/22 the FRC's strategic priorities will include:

  • building teams and procedures for PIE auditor registration and operation separation;
  • preparing supervisory regimes in areas for additional supervisory responsibilities will fall on the FRC in 2022 or beyond;
  • developing and implementing a new funding model for ARGA; and
  • engaging with stakeholders on the principles and the details of ARGA’s funding.

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

FRC publishes annual audit quality inspection result 2020/21

28 Jul 2021

The Financial Reporting Council (FRC) has published individual audit quality inspection reports for the major audit firms.

The results highlight that 29% of 103 audits reviewed requiring “improvements” or “significant improvements”. 71% of audits were assessed to be of a “good standard” or requiring only “limited improvement”.

The FRC acknowledged that quality across the individual firms was more mixed than in 2019/20 and has published measures that individual firms will be required to implement in response to individual inspection findings.

The FRC also flagged recurring findings in relation to the audit of revenue, impairment of assets and group audit oversight. There were mixed findings in relation to the effective challenge of management of audited entities, with same examples of good practice but not on a consistent basis.

The press release and links to individual reports are available on the FRC website.

EFRAG is looking for new TEG members

27 Jul 2021

The European Financial Reporting Advisory Group (EFRAG) is inviting applications for its Technical Expert Group (TEG).

Seven of the sixteen members of EFRAG TEG will reach the end of their current term of appointment on 31 March 2022 and one of the country liaison members will reach the end of the current term on 31 October 2021. Not all of the members are eligible for reappointment.

EFRAG welcomes all applications but in particular seeks candidates with a banking specialist or user background.

For more information, please see the press release on the EFRAG website.

IASB proposes new reduced disclosure IFRS

26 Jul 2021

The International Accounting Standards Board (IASB) has published the exposure draft 'Subsidiaries without Public Accountability: Disclosures' that would permit eligible subsidiaries that are small and medium-sized entities (SMEs) to apply IFRSs but with reduced disclosure requirements. The deadline for submitting comments is 31 January 2022.

Background

As part of the feedback on the 2015 Agenda consultation, some respondents had noted that subsidiaries that are SMEs report to their parent, for consolidation purposes, numbers that apply the recognition and measurement requirements of IFRSs. Using the IFRS for SMEs is not attractive to them as it would mean that they would have to maintain two sets of accounting information. Instead, they would welcome less onerous disclosure requirements as that would reduce costs without removing information needed by the users of their financial statements. They, therefore, suggested that the Board consider developing a reduced disclosure IFRS.

The Board acknowledged these concerns and decided to pursue a project that would analyse adaptations required to the disclosure requirements of the IFRS for SMEs and possibly develop a reduced disclosure IFRS that would allow eligible subsidiaries to apply, in principle, the recognition and measurement requirements of full IFRSs and the disclosure requirements of the IFRS for SMEs with minimal tailoring of those disclosure requirements. A draft of this possible new standard has been published today.

 

Key proposals

The proposals in ED/2021/7 Subsidiaries without Public Accountability: Disclosures aim at entities that

  • (a) do not have public accountability; and
  • (b) are subsidiaries of an ultimate or intermediate parent that produces consolidated financial statements available for public use that comply with IFRSs.

The application of the new proposed IFRS would be optional for subsidiaries that are eligible to apply it (i.e., those that fulfil the preceding two conditions).

Proposed new disclosure requirements

The proposed new standard contains about 200 paragraphs of disclosure requirements listed by standard. For developing these, the Board started with the disclosure requirements in the IFRS for SMEs and tailored those where they differed from those in full IFRSs by adding disclosure requirements for topics or accounting policy options that are addressed in full IFRSs but omitted from the IFRS for SMEs and by deleting disclosure requirements relating to accounting policies available in the IFRS for SMEs but not in full IFRSs.

There are exception to this approach explained in the Basis for in Conclusions of the new standard. They especially relate to:

  • disclosure objectives;
  • investment entities;
  • changes in liabilities from financing activities,
  • exploration for and evaluation of mineral resources; and
  • defined benefit obligations.

An appendix to the proposed new standard lists the disclosure requirements in full IFRSs that would be replaced by the disclosure requirements in the exposure draft.

The proposed new standard does not contain reduced disclosure requirements for IFRS 17 Insurance Contracts. The Board argues that while it found that some entities applying IFRS 17 would be entitled to apply the new standard, IFRS 17 introduces a model for accounting for insurance contracts that is supported by its disclosure requirements. If there were possible reductions, these would be limited in extent. Also, in the early years of applying IFRS 17, the interests of users of the financial statements may be best served by full IFRS 17 disclosures. Hence, a subsidiary that applies the proposed new standard and applies IFRS 17 is required to apply the full disclosure requirements of IFRS 17.

The exposure draft does include reduced disclosure requirements that apply to a subsidiary that is preparing its first IFRS financial statements and has elected to apply the new proposed standard. The exposure draft expressly asks respondents whether they agree with including reduced disclosure requirements for IFRS 1 First-time Adoption of International Financial Reporting Standards in the draft standard rather than leaving the disclosure requirements in IFRS 1 untouched.

The deadline for submitting comments on these proposals is 31 January 2022.

 

Effective date

The exposure draft proposes that an entity may elect to apply the new standard for reporting periods beginning on or after a certain date (approximately 18–24 months after publication) with earlier application permitted. An entity would apply the new standard in the current period but not in the immediately preceding period, however, the entity would provide comparative information for the preceding period for all amounts reported in the current period’s financial statements.

 

Additional information

The following additional information is available on the IASB website and on IAS Plus:

 

Updated IASB work plan — Analysis (July 2021)

24 Jul 2021

Following the IASB's July 2021 meetings (including a joint meeting with the FASB), we have analysed the IASB work plan to see what changes have resulted from the meetings and other developments since the work plan was last revised in May 2021.

Below is an analysis of all changes made to the work plan since our last analysis on 28 June 2021.

Standard-setting projects

  • Disclosure Initiative — Subsidiaries that are SMEs An exposure draft is now expected on 26 July 2021 (previously July 2021)
  • The comment letter period on Disclosure requirements in IFRS Standards — A Pilot Approach has been extended to 12 January 2022 (previously 21 October 2021)

Maintenance projects

  • Initial Aapplication of IFRS 17 and IFRS 9 — Comparative Information (Amendments to IFRS 17) — An exposure draft is still expected in July 2021, which would mean "next week"
  • IAS 21 — Lack of exchangeability — An exposure draft is now expected Q4 2021 (previously H2 2021)

Research projects

  • Business Ccombinations under common control — Discussion paper feedback will now be discussed in Q4 2021 (previously H2 2021)
  • Extractive activities — A decision on the project direction is now expected in September 2021 (previously July 2021)
  • Goodwill and impairment A decision on the project direction is now expected in September 2021 (previously Q3 2021)
  • Post-implementation review of IFRS 10-12 A feedback statement in H2 2022 is the new expected project milestone (previously discussion of request for information feedback to be discussed in July 2021)
  • Post-implementation review of IFRS 9 A request for information is now expected in September 2021 (previously Q3 2021)

Other projects

  • After the comment period on IFRS Taxonomy 2021 Proposed Update 1 — Disclosure of Accounting Policies and Definition of Accounting Estimates has ended, the IASB will now discuss the feedback received in Q4 2021
  • Feedback on the proposed amendments to the IFRS Foundation Constitution regarding setting up a potential ISSB The discussion of feedback is now expected in October 2021 (previously H2 2021)
  • Agenda consultation 2020 The discussion of feedback is now expected in Q4 2021 (previously H2 2021)

The above is a faithful comparison of the IASB work plan at 28 June 2021 and 24 July 2021. For access to the current IASB work plan at any time, please click here.

UKEB draft comment letter on the exposure draft on lack of exchangeability

23 Jul 2021

The UK Endorsement Board (UKEB) has issued a draft comment letter on the International Accounting Standard Board's (IASB's) Exposure Draft ED/2021/4 ‘Lack of Exchangeability’ (proposed amendments to IAS 21).

In the draft comment letter, the UKEB supports the proposals in the IASB's Exposure Draft as they provide guidance on an area not covered by the existing standard.  The UKEB therefore believes that the proposals should reduce diversity in practice, leading to consistency and comparability of financial statements.  In its draft comment letter the UKEB also proposes some minor changes to the wording of the amendments. 

Comments on the UKEB's draft comment letter are requested by 20 August 2021.  The draft comment letter and separate invitation to comment are available on the UKEB website.

FRC publishes a report on board diversity and effectiveness in FTSE350 companies

23 Jul 2021

The Financial Reporting council (FRC), in conjunction with London Business School, Leadership Institute and SQW has published the results of research which looked at board diversity and effectiveness in FT350 Companies.

The report highlights that there has been a 'step change' in the diversity of boards of FTSE companies primarily driven by the Hampton Alexander review and more recently the Parker review.  The report seeks to address three questions:

  • How have board effectiveness and dynamics been impacted by the increased gender and ethnic diversity of board membership?
  • What attributes, skills and experience do today’s board members expect to be needed in the diverse boardrooms of the future?
  • How can nomination committees be helped to take a more objective
    and diversity-friendly approach to board recruitment?

Data was assembled from multiple, publicly available sources to create a large data set looking at gender and ethnic diversity and its effects over the medium and long term – between 2001 and 2019 – on EBITDA margins, stock returns and shareholder dissent.  In the second phase of the research, a representative sample of 25 boards was asked to complete an assessment of the culture and dynamics in their board, as well as respond to a series of open-ended questions.

The research highlights that it is the responsibility of the board to drive inclusion.  It also highlights that in order to maximise the benefits of diversity, the board should recognise that change takes time and that diversity without inclusion is unlikely to encourage new talent to the board.  Additionally the research identifies that diversity, over time, improves the performance of boards and the businesses they lead.

The research found that:

  • higher levels of gender diversity of FTSE350 boards positively correlate with better future financial performance (as measured by EDITDA margin).
  • FTSE350 boards with well-managed gender diversity contribute to higher stock returns and are less likely to experience shareholder dissent.
  • Diversity affects boardroom dynamics and that the percentage of women is highly correlated with an emphasis on boardroom relationships and collaboration.  The research found that the hallmarks of boards with more women included:
    • significantly greater decentralisation in how they operate where committees have strong delegated powers;
    • increased likelihood of reaching consensus before important decisions are taken, rather than undertaking decisions that a substantial part of the board opposes (e.g. by voting);
    • stronger belief and action on ensuring fair outside search when recruiting directors because standards should apply to everyone equally; and
    • reduced overconfidence about the board’s problem-solving skills.
  • the skills needed in the diverse boardrooms of the future included adaptability and resilience, strategic thinking, stakeholder engagement, interpersonal skills and embracing diversity.
  • there are a number of actions that the Nomination Committees can take to encourage diversity.  These include ensuring that the Nomination Committee is itself diverse and has a clear mandate to work with search firms that access talent from wide and diverse pools

The report concludes that whilst many board members are committed to diversity and many have made effort to change, there is still a 'very long way to go to fully access the takent and reflect the population of the UK'. 

The press release and the research report are available from the FRC website.

IASB to extend comment period for its proposed amendments to IFRS 13 and IAS 19 and draft guidance for developing and drafting disclosures

21 Jul 2021

During its 21 July 2021 meeting, the IASB Board members have decided to extend the comment period for its Exposure Draft (ED), ‘Disclosure Requirements in IFRS Standards — A Pilot Approach’ to 12 January 2022.

The ED contains proposed guidance for when the IASB is developing and drafting disclosure requirements for future IFRS Standards as well as proposed amendments to IFRS 13 'Fair Value Measurement' and IAS 19 'Employee Benefits' that result from applying the proposed guidance to those standards.

For more information, see the press release on the IASB’s website.

FRC Lab publishes report on reporting on stakeholders, decisions and Section 172 statements

21 Jul 2021

The Financial Reporting Lab of the Financial Reporting Council (FRC) has published its latest report on reporting on stakeholders, decisions and Section 172 statements.

The report highlights the increasing calls for better information on how companies are having regard for their stakeholders and how key decisions have taken their perspectives into account.  It emphasises that investors are ultimately focused on how a company is progressing towards fulfilling its purpose and achieving long-term success noting that information on stakeholders and on decisions can help with that understanding.  With consideration of stakeholders and consequences of decisions being part of the Section 172 duty, the report indicates that the Section 172 statement can be a helpful bridge between the two types of information.  The report sets out what investors are looking for in reporting on these areas and how companies can improve their reporting to better meet their needs.  The report is divided into three sections:

Information on stakeholders 

In the first section, the report highlights that investors view information on a company’s key stakeholders as critical to understanding the company and its prospects. It outlines how investors want to see information on stakeholders’ relevance to the business model and strategy, the strength of stakeholder relationships, risks and opportunities, and performance and metrics. 

In particular, investors want companies to set out clearly:

  • who are the stakeholders relevant to a company’s success and how they influence the operation of the business model and delivery of strategy.  This would include information on:
    • who the key stakeholders are;
    • why they are important including how the strategy and business model depend on them, how they have been considered strategically and what value is created through the stakeholder relationship; and 
    • what is important to the company's stakeholders.
  • how the company builds and maintains strong relationships with its stakeholders and understands their interests, needs and concerns to enable it to pursue long-term success.  This would include information on:
    • the actions the company is taking to build and maintain strong relationships with its key stakeholders;
    • the board's role in engagement as well as information the board receives about stakeholders and engagement; and
    • the feedback received and the outcomes of engagement.
  • what could affect the company’s relationships with its stakeholders and how these relationships could affect the company’s pursuit of success.  This would include information on:
    • market factors and trends or regulatory changes that have affected or could affect the company’s key stakeholders;
    • the risks that could affect key stakeholders and the company’s relationship with them, as well as the risks that the stakeholder relationships give rise to;
    • the mitigating actions taken to address these risks; and
    • the opportunities arising from key stakeholders which the company is considering strategically.
  • what is measured, monitored and managed in relation to stakeholders, to understand the strength of a company’s relationships with its stakeholders and how they are contributing to the company’s success.  This would include information on:
    • metrics used by managment and the board to monitor and assess stakeholder relationships;
    • prior-years’ comparatives, targets and industry benchmarks to allow trend analysis; and
    • explanations of what affected the performance, whether a trend is likely to continue, and related actions to address performance issues.

Information on decisions

In the second section, the report highlights that investors want to know what the strategic decisions were during the period, how such decisions were made, including how stakeholders were considered in reaching them, the difficulties encountered, and the outcomes of these decisions.

In particular, investors want companies to set out clearly the significant decisions taken during the year and how they link to the company’s purpose and strategic priorities, and for each significant decision:

  • how the board or management reached the decision, including information used to back it up and any long-term considerations;
  • how stakeholders were considered in reaching the decision, including consideration of feedback and engagement activities, and the impacts of the decision on different stakeholders;
  • the difficulties or challenges in making the decision, including how different stakeholder needs or concerns are balanced, and any short-term negative consequences which are offset by long-term benefits; and
  • the expected and/or actual outcomes of the decision, including how they are reflected in current performance and metrics, and the long-term implications on the company.

Section 172 statements

The third section addresses better practice Section 172 statements.  It highlights that the statements are not just about stakeholder engagement, but should reflect all aspects of the Section 172 duty to allow a better understanding of how a company is progressing in its pursuit of its purpose and long-term success. 

Investors indicate that more useful Section 172 statements:

  • do not only focus on stakeholder engagement, but consider the other aspects of Section 172;
  • discuss principal decisions (linking to the long-term success of the company) and how stakeholders and other factors were considered in making those decisions;
  • bridge information on stakeholders and decisions by considering them in a two-way approach, and incorporate both in the statement even if by cross-referencing;
  • can be a standalone source of information which is still concise if cross-referencing is used well; and
  • fit into a connected narrative linking to business model, strategy and how business is done (through consideration of governance and culture), demonstrating how the company is progressing in its pursuit of its purpose and long-term success.

Each section includes examples of current reporting practice to illustrate possible helpful ways of addressing some the aspects highlighted by investors.  The report builds on the tips on Section 172 statements report published in October 2020.  

The Financial Reporting Lab has also published a summary of the questions for companies to consider in determining what information to report on stakeholders and decisions which meets investors’ needs.  A podcast is also available which discusses the importance of linking information on stakeholders and decisions to strategy and the long-term success of the company.

The press release, report, and a podcast are available on the FRC website. 

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