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July

IASB issues podcast on latest Board developments (July 2021)

30 Jul 2021

The IASB has released a podcast featuring IASB Chair Andreas Barckow and IASB Vice-Chair Sue Lloyd discussing deliberations at the July 2021 IASB meeting.

Highlights of the podcast include discussions on:

  • the post-implementation review of IFRS 9, IFRS 10, IFRS 11, and IFRS 12; 
  • decisions taken regarding changes to the Board’s preliminary views in the primary financial statements project;
  • redeliberations in the goodwill and impairment project 
  • thoughts from new Chair Andreas Barckow. 

The podcast can be accessed through the press release on the IASB website.

Please click to view the detailed notes taken by Deloitte observers for the IASB meeting.

We comment on the IASB's proposal on regulatory assets and regulatory liabilities

30 Jul 2021

We have responded to the IASB’s proposal on regulatory assets and regulatory liabilities.

We support the project to develop requirements for regulatory assets and liabilities and generally agree with the proposals. However, we have concerns about the proposed accounting for timing differences between the recognition of the regulatory base and the application of IFRS Standards. In addition, we suggest that removing the proposed requirement to recognise regulatory assets and liabilities when there are timing differences between the regulatory base and the IFRS Standards compliant base would fundamentally improve the remaining proposals related to the financial reporting by regulated entities.

Please click to access the full comment letter.

GPPC issues paper related to the auditor’s response to the risks of material misstatements arising from estimates made in applying IFRS 17

30 Jul 2021

The Global Public Policy Committee (GPPC) have issued a paper designed to provide guidance primarily to those charged with governance on their oversight role of the external auditors and in assessing the effectiveness of the external auditor’s response.

The paper, The Auditor’s Response to the Risks of Material Misstatement arising from estimates made in applying IFRS 17 Insurance Contracts, focuses on the auditor’s approach to auditing estimates and associated judgements made in the application of IFRS 17, taking into account the requirements set forth by the relevant International Standards on Auditing (ISA’s).

In February 2020 two papers have already been issued by the GPPC related to implementation considerations for IFRS 17.

FCA consults on proposals to boost disclosure of diversity on listed company boards and executive committees

30 Jul 2021

The Financial Conduct Authority (FCA) has published a consultation on proposals to improve transparency for investors on the diversity of listed company boards and their executive management teams.

The FCA is consulting on changes to its Listing Rules (LR) to require, as an ongoing listing obligation, UK and overseas issuers with equity shares, or certificates representing equity shares, admitted to the premium or standard segment of the FCA's Official List, to publish annually in their annual financial report: 

  • a ‘comply or explain statement’ on whether they have achieved certain targets for gender and ethnic minority representation on their boards; and 
  • data on the composition of the board and most senior level of executive management in terms of gender and ethnicity.

The FCA is proposing to exclude open-ended investment companies, and ‘shell companies’ as defined in LR5.6.5AR from the companies in scope of the proposal.  It is also not proposing to apply the proposals to issuers of debt securities, securitised derivatives or miscellaneous securities at this stage.  The FCA propose to change LR 9.8.6R and LR 14.3 by adding in a new requirement (LR 9.8.6R(9) and LR 14.3.27R(1)) that in scope companies include a statement in their annual financial report setting out whether the listed company has met the following targets on board diversity, as at a specific date within the accounting period selected by the listed company (referred to as the ‘reference date’): 

  • At least 40% of the board are women (including those self-identifying as women).
  • At least one of the senior board positions (Chair, Chief Executive Officer (CEO), Senior Independent Director (SID) or Chief Financial Officer (CFO)) is held by a woman (including those self-identifying as a woman).
  • At least one member of the board is from a non-White ethnic minority background (as referenced in categories recommended by the Office for National Statistics (ONS)).

In cases where in scope companies have not met all of the targets, the FCA propose to require them also to indicate the targets they have not met and to explain the reasons for not meeting the target(s).  New listing Rules 9.8.6R(10) and LR 14.3.27R(2) would be introduced to require publication of the numerical data on gender and ethnic diversity of the board and most senior level of executive management.

The FCA is also proposing changes to the Disclosure Guidance and Transparency Rules (DTR) - specifically DTR 7.2.8AR - to require companies in scope to ensure that any existing disclosure on diversity policies addresses key board committees and also considers broader aspects of diversity such as ethnicity, sexual orientation, disability and lower socio-economic background.  Under the proposals DTR 7.2.8AR would be amended to:

a. indicate that this disclosure should also include how any diversity policies apply to the key committees of the board, specifically the committees on remuneration, audit and nominations, and
b. clarify that the aspects of diversity to which the diversity policy may relate could include, for example, ethnicity, sexual orientation, disability and socio-economic background (in addition to the aspects of diversity already referred to in the rule)

The FCA also propose to add separate guidance, at DTR 7.2.8CG, which would encourage the publishing of fuller data on the diversity of their board and relevant board committees, where currently there is relatively little information.

It is proposed that the new Listing Rule requirements will apply to accounting periods beginning on or after 1 January 2022.  The FCA encourages companies to consider making disclosures on a voluntary basis in annual financial reports published before then.  The FCA encourages issuers to consider their disclosures under DTR 7.2.8AR in light of its proposals as soon as possible. However, in order to provide them with more opportunity to address these matters, it proposes that the changes to DTR 7.2.8AR and the new guidance would come into force at the same time and for the same accounting period as its new LR requirements.

Comments are requested by 20 October 2021.

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

Joint webinar on IASB Third Agenda Consultation and EFRAG Proactive Research Agenda

29 Jul 2021

The EFRAG, Accountancy Europe, BusinessEurope, EFFAS and the IASB will host a joint webinar on 9 September 2021 on the IASB’s Third Agenda Consultation and EFRAG's Proactive Research Agenda.

The webinar will feature discussions on the following:

  • “Is the overall strategic direction and overall balance of the IASB's main activities about right?”
  • “Which new financial reporting issues should be prioritised and added to the IASB's Work Plan for 2022-2026?”
  • “What research projects should EFRAG include in its Proactive Research Agenda that are important for Europe and will generate debate at European and global level?”

For more in­for­ma­tion, see the press release on the EFRAG’s website. A detailed programme is available here.

FRC Lab publishes its second newsletter for 2021

29 Jul 2021

The Financial Reporting Lab of the Financial Reporting Council (FRC) has published its second newsletter for 2021 providing highlights of its activities.

The newsletter provides an update of the FRC Lab's current projects and a brief overview of its future activities. Some highlights include:

  • an update on the FRC Lab's recently published reports, including a report on reporting on stakeholders, decisions and Section 172 and a snapshot looking at current SASB reporting in the UK; and
  • an update on the ongoing projects and proposed new reports, including a report relating to reporting on risks, opportunities, uncertainties and scenarios and a guidance on mandatory adoption of ESEF (the European Single Electronic Format).

The full newsletter is available on the FRC website here.

EFRAG draft comment letter on the IASB's exposure draft on management commentary

28 Jul 2021

The European Financial Reporting Advisory Group (EFRAG) has issued a draft comment letter on the IFRS Practice Statement Exposure Draft ED/2021/6 'Management Commentary'.

The exposure draft intends to update the 2010 IFRS Practice Statement 1 Management Commentary. In its draft comment letter, EFRAG supports the “proposed objective-based approach including the six content elements and considers that developing specific, rule-based requirements for the management commentary is primarily the responsibility of legislators, security regulators and/or national standard-setters.  However, EFRAG suggests to address the subject of 'Governance' across the six proposed content elements, to give more emphasis​ to the discussion on 'Opportunities' and to consider an additional content element on 'Off-balance sheet commitments'.​”

Comments on EFRAG's draft comment letter are requested by 15 November 2021. For more in­for­ma­tion, see the press release and the draft comment letter on the EFRAG website.

July 2021 IASB meeting notes posted

28 Jul 2021

The IASB met on Tuesday 20 and Wednesday 21 July 2021 and had a joint education session with the FASB on Friday 23 July, both by video conference. The IASB has a break during August, with no scheduled public meetings. We have posted our comprehensive Deloitte observer notes for all projects discussed during the meeting.

This was the first meeting chaired by the new IASB Chair Andreas Barckow.

Post-implementation Review (PIR) of IFRS 9: The Board discussed the feedback from outreach and the staff analysis and recommendations on the matters to examine further in phase 2, i.e. which questions should be asked in the Request for Information (RFI). Most stakeholders said that generally the classification and measurement requirements are working well in practice. However, some users of financial statements and academics said that IFRS 9 is complex and thus difficult to understand.

The Board decided that the RFI would include questions about the business model assessment for financial assets, contractual cash flow characteristics assessment for financial assets, the option for equity instruments to present fair value changes in other comprehensive income, financial liabilities designated as fair value through profit or loss, modifications to contractual cash flows and transition to IFRS 9. The staff expect the RFI will be published around the end of September 2021.

PIR of IFRS 10-12: In December 2020, the Board published an RFI as part of its PIR of IFRS 10-12, which was open for comment until 10 May 2021. The Board considered the feedback received within the comment letters and from an updated academic literature review. Many stakeholders agreed with the use of control as the single basis for consolidation in IFRS 10 and the need to take a holistic and qualitative assessment of all legal, contractual and other facts and circumstances and stressed the importance of application guidance and illustrative examples. Some respondents noted difficulties in some situations applying the definition of an investment entity and expressed concerns about the loss of information when an investment entity measures at fair value a subsidiary that is itself an investment entity. Respondents highlighted the usefulness of the IFRIC agenda decisions in applying IFRS 11 and some asked for these to be incorporated into the Standard. Feedback from respondents noted that IFRS 12 had resulted in significant improvements to financial reporting, however there were some requests for additional information. The Board was not be asked to make any decisions during this meeting but several Board members were encouraged that the overall feedback received in relation to these three Standards was very positive on the whole and supported that the Standards were working effectively. The Board will present its findings in a feedback statement after completing its deliberations.

Taxonomy: The Board published the Proposed IFRS Taxonomy Update PTU/2021/1 Disclosure of Accounting Policies and Definition of Accounting Estimates on 21 April 2021. The Board received five comment letters. The staff plan to issue the final IFRS Taxonomy Update along with the final taxonomy files in Q4 of 2021. No Board comments or decisions were made.

Disclosure Initiative—Targeted Standards-level Review of Disclosures: The Board decided to extend the deadline for comments for the Exposure Draft Disclosure Requirements in IFRS Standards—A Pilot Approach from 21 October 2021 to 12 January 2022. The decision was not straightforward, because the Board did not want extensions to be viewed as being normal.

Goodwill and Impairment: The Board continued its discussion of feedback on particular aspects of the DP—focusing this month on the location of the information resulting from, and practical challenges related to, the Board’s preliminary views on improving disclosures; improving the effectiveness of the impairment test; and the subsequent accounting for goodwill, including whether to reintroduce amortisation of goodwill. The Board was not asked to make any decisions at the meeting. However, directionally, the Board appeared to be giving weight to improving disclosures and the application of the impairment model.

Primary Financial Statements: The Board continued to discuss the approach for classifying items of income and expenses in the financing category of the statement of profit or loss.

The Board decided that the income and expenses from hybrid contracts with host liabilities and embedded derivatives be classified: for separated host liabilities in the same way as for other liabilities; for separated embedded derivatives in the same way as for stand-alone derivatives; and for contracts that are not separated to be classified in the same way as income and expenses on other liabilities.

For gains or losses on financial instruments designated as hedging instruments the Board decided that they be classified in the category affected by the risk the entity manages, except when it would involve grossing up gains or losses in which case they would be classified as operating. The same requirements would apply to derivatives used for risk management even if they are not designated as hedging instruments. However, if this creates undue cost or effort the gains or losses would be classified as operating. 

Gains or loses on derivatives not used for risk management would be classified as operating. However, if the derivative relates to financing activities and is not used in the course of the entity’s main business activities it would be classified as financing. FX differences would be classified in the same way as the item that gave rise to the differences, unless there is undue cost or effort, in which case the FX differences would be classified as operating. 

Maintenance and Consistent Application:

Classification of Debt with Covenants as Current or Non-Current—Transition, Early Application and Due Process: At its meeting in June 2021, the Board tentatively decided to propose narrow-scope amendments to IAS 1 to modify the requirements introduced by Classification of Liabilities as Current or Non-current (the 2020 amendments) on how an entity classifies debt and other financial liabilities as current or non-current in particular circumstances. The proposed amendments would also defer the effective date of the 2020 amendments to no earlier than 1 January 2024. The Board decided to require entities to apply the proposed amendments retrospectively in accordance with IAS 8, not provide a transition exemption for first-time adopters, permit an entity to apply the amendments earlier than their effective date and set a comment period of no less than 120 days for the Exposure Draft. Two Board members indicated that they are considering offering an alternative view in relation to the disclosoures proposed.

Supplier Finance Arrangements—Transition, Early Application and Due Process: At its meeting in June 2021, the Board decided to add a narrow-scope, disclosure-only standard-setting project to its workplan related to supplier finance arrangements (for example, reverse factoring or similar arrangements). The project involves the Board proposing amendments to IAS 7 and IFRS 7. The Board decided to propose that entities be required to apply the proposed amendments retrospectively in accordance with IAS 8 and not provide an exemption for first-time adopters. Early application would be permitted and the proposals would have a comment period of no less than 120 days.

IFRS Interpretations Committee: The Board had no questions about the most recent meeting of the IFRS Interpretations Committee.

Education session with the FASB: The purpose of the meeting was for the boards to share views on projects related to largely converged Standards, common projects and their agenda consultations. The boards discussed their reviews of the accounting for goodwill and impairment. They also discussed the work undertaken to date, and recent tentative decisions made, on their respective projects on supplier finance. The joint meeting lasted four hours, with members of both boards asking questions about the other Board’s projects. No decisions were made.

Please click to access the detailed notes taken by Deloitte observers for the entire meeting.

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 it when it applies IFRS 17.

 

Additional information

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

 

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 required “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.

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