We comment on the periodic review of FRS 102

29 Oct, 2021

We have published our comment letter on the periodic review of FRS 102 and other UK and Ireland accounting standards.

In general, we consider that the UK financial reporting regime is working well and is achieving the intended objectives. We have developed our response in the context of the Financial Reporting Council's (FRC's) aim to achieve consistency with global accounting standards through the application of an IFRS-based solution unless an alternative solution is clearly better. With this in mind, we support the implementation of the principles of IFRS 15 Revenue from Contracts with Customers and IFRS 16 Leases into FRS 102, with appropriate simplifications, clarifications and transitional provisions to achieve a proportionate solution.

However, we are not in favour of introducing the impairment model of IFRS 9 Financial Instruments for all FRS 102 reporters and instead recommend that a sub-set of FRS 102 preparers with fiduciary responsibilities should, instead, be required to apply IFRS 9 rather than Sections 11 and 12 of FRS 102 (together with the disclosure requirements set out in IFRS 7).

In progressing the periodic review, we strongly urge the FRC to work with the UK government and specifically the Department for Business, Energy and Industrial Strategy (BEIS) to achieve broader reform of the UK corporate reporting regime. Of particular relevance to the periodic review is the opportunity to revisit the current regimes for small companies and micro-entities and question whether they are functioning as desired.

Furthermore, more widely, difficulty continues to exist in reconciling the requirements set out in the Accounting Regulations (SI 2008/409 and SI 2008/410) with those in accounting standards. We therefore call upon the FRC and BEIS to collaborate on a project to remove (or at least, significantly reduce) the accounting requirements contained in the Accounting Regulations and to place the remit for developing accounts presentation and disclosure squarely with the FRC (or its successor).

Given the substantial issues which need to be considered as part of this periodic review, we consider the timeframe for publication of an exposure draft and the proposed effective date of the revised standards to be rather optimistic. We would prefer that the FRC take the time to gather appropriate input and feedback and to consider carefully how to implement new requirements such as those in IFRS 15 and 16 in a proportionate manner while preserving the core principles of those standards.

Please click to access the full comment letter

ESMA announces enforcement priorities for 2021 financial statements

29 Oct, 2021

The European Securities and Markets Authority (ESMA) has announced the priority issues that the assessment of listed companies' 2021 financial statements will focus on. A special focus is on COVID-19 and climate-related disclosures.

The common enforcement priorities related to 2021 IFRS financial statements include:

  • careful assessment and transparency in accounting for longer-term impacts of the COVID-19 pandemic and the recovery phase;
  • consistency between the information disclosed within the IFRS financial statements and the non-financial information concerning climate-related matters, consideration of climate risks, disclosure of any significant judgements and estimation of uncertainty regarding climate risks while clearly assessing materiality; and
  • enhanced transparency regarding the measurement of Expected Credit Loss (ECL), particularly in relation to management overlays, significant changes in credit risk, forward-looking information, changes in loss allowances, credit risk exposures and collateral, and the effect of climate-related risk on ECL measurement.

ESMA also reminds issuers that starting from the financial year 2021, all annual financial reports shall be prepared in compliance with the European Single Electronic Format, or ESEF (xHTML or inline XBRL).

ESMA and European national enforcers will monitor and supervise the application of the IFRS requirements outlined in the priorities, with national authorities incorporating them into their reviews and taking corrective actions where appropriate. ESMA will collect data on how European listed entities have applied the priorities and will publish its findings in a separate report.

Please click for the following documents on the ESMA website:

Agenda for November 2021 CMAC meeting

28 Oct, 2021

Representatives from the International Accounting Standards Board (IASB) will meet with the Capital Markets Advisory Council (CMAC) by video conference on 11 November 2021. The agenda for the meeting has been released.

The full agenda for the meeting is sum­marised below:

Thursday, 11 November 2021 (11:00-14:35)

  • Welcome
  • IASB Update
  • Goodwill and impairment
    • Disclosures for business combinations
    • Amortisation of goodwill
    • Convergence with US GAAP
  • Supplier finance arrangements — Proposed amendments to IAS 7 and IFRS 7
    • Overview of upcoming exposure draft
    • Feedback from members on the proposals

Agenda papers for this meeting are available on the IASB's website.

EC event on sustainability reporting standards and the future of sustainability reporting

28 Oct, 2021

The European Commission (EC) organises a side event to COP 26 with the participation of the European Financial Advisory Reporting Group (EFRAG).

This EC side event to COP 26 will highlight the Corporate Sustainability Reporting Directive (CSRD) proposal and in particular EFRAG’s work on EU sustainability reporting standards. 

Against the backdrop of COP26, this event will consider EFRAG’s work in the context of key global initiatives, including the standards of the Global Reporting Initiative, the plans of the IFRS Foundation and its future International Sustainability Standards Board, and the work of the Task Force on Climate-related Financial Disclosures (TCFD). 

Further details and how to register for the event are available on the EFRAG website

IFRS Foundation publishes fifth compilation of IFRS Interpretations Committee agenda decisions

28 Oct, 2021

The IFRS Foundation has issued 'Compilation of Agenda Decisions — Volume 5' which contains all the agenda decisions made by the IFRS Interpretations Committee from April 2021 to October 2021.

The IFRS Foundation initiated the new compilation series in October 2019 and will continue it by publishing new volumes biannually in April and October. For more information, see the press release and compilation on the IASB website.

IASB meeting agenda updated

28 Oct, 2021

The IASB has added another slot on primary financial statements to its agenda for Friday.

The Board will continue yesterday's discussion on Friday at 9:30. We have updated our agenda for the meeting accordingly.

Update: During the meeting session on 28 October, the IASB has decided to have its session on primary financial statements on 28 October as it finished early with the discussions on rate-regulated activities. The primary financial statements discussions will now begin at 14:45 on Thursday 28 October.

FRC publishes findings on the quality of corporate reporting in 2020/2021

27 Oct, 2021

The Financial Reporting Council (FRC) has published its Annual Review of Corporate Reporting 2020/2021. The report sets out the FRC’s expectations of areas of corporate reporting that require improvement and highlights the ten most frequently raised topics where improvements to reporting quality are needed.

The FRC indicates that, despite the continuing challenges of Covid-19, its detailed monitoring work did not identify a decline in the quality of corporate reporting. It notes that although there have been improvements in certain areas such as better APM disclosures (definitions, reconciliations and labelling), some improvements in judgements and estimates disclosures and incremental improvements in aspects of narrative reporting (with respect to the quality of information and linkage to the financial statements) there are still “opportunities for further improvement”.

These include better disclosures with respect to IFRS 15 Revenue from contracts with customers, IFRS 16 Leases and financial instruments (IFRS 9 Financial Instruments and IFRS 7 Financial Instruments: Disclosures), improvements in cash flow statement disclosures (where the FRC continues to be concerned” by the number of queries raised) and improvements in climate-related disclosures. On the latter, whilst the FRC has identified some improvements, for example, better explanations of net zero commitments and scenarios, it highlights that “there is considerable scope for further enhancements in this area”.

The findings follow a review of 246 annual reports and accounts with 72% of those reviews in the FTSE 350. The FRC stresses that as well as meeting the detailed disclosure requirements of the standards companies need to consider the overall objectives of financial reporting as “providing only the specifically required disclosures may not always be sufficient to comply with the overall objectives”.

The report identifies that the ten most frequently raised topics where improvements to reporting quality are needed are:

  • Judgement and estimates
  • Revenue
  • Statement of Cash Flows
  • Impairment of assets
  • Alternative Performance Measures
  • Financial instruments
  • Strategic Report and Companies Act
  • Provisions and Contingencies
  • Leases
  • Income Taxes
  • Fair value measurement
  • Business Combinations

Each of these topics is analysed in detail in the report with key findings and significant issues encountered from the reviews. Example disclosures that would meet the FRC’s expectations are also provided.

Whilst not in the ‘top ten’ list of areas noted above, the FRC also draws attention to issues it has encountered with respect to presentation of primary financial statements (for example classification of assets and liabilities as current or non-current and instances of inappropriate offsetting) as well as other disclosure areas such as not providing an accounting policy for material transactions.

Going forwards the FRC has signalled its intention to focus its attention on:

  • disclosures with respect to judgements and estimation uncertainty in light of the continuing impacts of Covid-19 especially with respect to going concern and viability; and
  • how companies have disclosed climate-related risks including how they have disclosed their compliance with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations on a comply-or-explain basis. It expects material climate-change policies, risks and uncertainties to be included in narrative reporting and appropriately considered and reflected in the financial statements. Attention will also be focused on compliance with Streamlined Energy and Carbon Reporting (SECR) disclosure requirements.

The report highlights the FRC’s key disclosure expectations for 2021/22. It expects:

  • clear explanations of the significant judgements made by management, including those used in their assessment of going concern, with sufficient detail to understand the specific judgements made and their financial reporting effects.
  • clear descriptions of key assumptions underlying major sources of estimation uncertainty, including information about the sensitivity of amounts recognised in the financial statements to changes in assumptions.
  • information in the financial statements to be consistent with that reported in the rest of the annual report and accounts.
  • material climate change policies, risks and uncertainties to be discussed in narrative reporting and appropriately considered and disclosed in the financial statements, particularly where investors may reasonably expect a significant effect on the expected life or fair value of an asset or liability.
  • the nature and extent of material risks arising from financial instruments and related risk management to be adequately addressed, including: the use of factoring and reverse factoring in working capital financing; the approach to and significant assumptions made in the measurement of expected credit losses; concentrations of risks and information about covenants (where material).
  • APMs not to be given greater prominence or authority than amounts stemming from the financial statements and the basis for classifying amounts as adjusting, ‘non-underlying’ or ‘non-core’ to be explained.
  • information that meets the disclosure objectives of the relevant accounting standards, as well as the specific disclosure requirements.
  • material information that is not obscured by immaterial items.

Alongside the report the FRC has also issued a Bulletin aimed at CEOs, CFOs and Audit Committee Chairs which complements the messages in the review and provides key focus areas for the coming reporting season. The bulletin covers key messages from:

A press releasesummary report and full report and the Bulletin are available on the FRC website.  Our related Governance in brief publication is available here.

Recent sustainability and integrated reporting developments

27 Oct, 2021

A summary of recent developments at WBCSD, the Carbon Tracker initiative, UNEP FI, G20, CAQ, GRI, IIRC, FRC, A4S, SASB, XRB, FASF, CSA, EFAA, EFRAG, and Deloitte.

The World Business Council for Sustainable Development (WBCSD) has released the 2021 edition of Reporting matters. The press release on the WBCSD website offers a summary of the key findings and access to the full report.

The Carbon Tracker initiative has released Flying blind: The glaring absence of climate risks in financial reporting showing that over 70% of reviewed companies fail to disclose climate risk in their financials reporting. Key findings and access to the full report are available on the Carbon Tracker website.

The United Nations Environment Programme Finance Initiative (UNEP FI) has published a global investor statement urging governments to undertake five priority actions before COP26, including committing to implementing mandatory climate risk disclosure requirements aligned with the TCFD recommendations. The statement can be accessed here.

The G20 Presidency has published the G20 Sustainable Finance Roadmap that contains as Action 6 "G20 to welcome the work program of the IFRS Foundation to develop a set of internationally consistent, comparable, and reliable baseline standards for disclosure of sustainability-related information on enterprise value creation." The roadmap can be accessed on the G20 website, the full Action 6 is on page 9.

The Center for Audit Quality (CAQ) of the American Institute of Certified Public Accountants (AICPA) has published Audited Financial Statements and Climate-Related Risk Considerations discussing items that public companies a re currently reporting and how that information is material to their financial statements. The report can be downloaded from the CAQ website.

The Global Reporting Initiative (GRI) has announced that they have revised and strengthened their Universal Standards and have published their first sector-specific standard (for oil and gas). More information is available on the GRI website.

The International Integrated Reporting Council (IIRC) has published Transition to integrated reporting: A Guide to getting started as companion publication to the <IR> Framework. In addition, the <IR> Framework is now available in an Italian and a Turkish translation.

The UK Financial Reporting Council (FRC) has published FAQs on International Sustainability Standards Setting. The purpose of the FAQs is to inform stakeholders of developments in sustainability standard setting by the IFRS Foundation. Please click to access the FAQs on the FRC website.

The FRC has also released Taskforce on Climate-related Financial Disclosures (TCFD): ahead of mandatory reporting to help companies prepare for mandatory TCFD reporting in the UK. The report and a snapshot of the status of current reporting against the TCFD framework can be accessed through the press release on the FRC website.

The Prince of Wales' Accounting for Sustainability Project (A4S) has published a guide to TCFD Climate Scenario Analysis. Scenario analysis is a key recommendation of the TCFD and allows a company to understand and quantify the risks and uncertainties it may face under different hypothetical futures. The guide can be downloaded from the A4S website.

The Sustainability Accounting Standards Board (SASB) has formally released the SASB Standards XBRL Taxonomy to facilitate reporting in accordance with its 77 Industry Standards using structured data. More information is available here.

The New Zealand External Reporting Board (XRB) began consultation with business on the first part of the Government’s proposed climate-related disclosure standards by releasing its first climate-related disclosure consultation document. More information is available here.

Japan's Financial Accounting Standards Foundation (FASF) has announced that it has revised its organisation charter to include sustainability reporting standards in its purpose and business, in addition to its existing purpose/business on accounting standards. This move is for the organisation to become the counterparty of the IFRS Foundation's ISSB in Japan. The press release is only available in Japanese.

The Canadian Securities Administrators (CSA) have also published for comment proposed climate-related disclosure requirements. The requirements contemplate disclosure largely consistent with the TCFD recommendations. The proposed requirements can be accessed through the press release on the CSA website.

The European Federation of Accountants and Auditors for SMEs (EFAA) has released a podcast The Future of Corporate Reporting in Europe: What are the Implications and Next Steps for Europe’s Small- and Medium-Sized Practices? The podcast is available on YouTube.

The task force on sustainability reporting of the European Financial Reporting Advisory Group (EFRAG) has released a working paper on the basis for conclusions for the prototype for the climate standard they are working on. The paper is for information only and not open for public comments. Please click to access the paper here.

The Deloitte firms in the European Union have responded to the EFRAG consultation paper EFRAG Due Process Procedures on EU Sustainability Reporting Standard-Setting. Please click to access our comment letter.

IASB publishes webcast series on its management commentary ED

27 Oct, 2021

A series of five short webcasts on the IASB's exposure draft on management commentary has been made available to answer frequently asked questions about the project.

The aspects of the project addressed in the webcasts are:

  • Why and why now?
  • Value creation
  • Disclosure objectives
  • Key matters and materiality
  • Terminology

Each of the webcasts is about ten minutes long. They can be accessed through the press release on the IASB website.

European Union asked to follow a global baseline approach to ESG reporting

26 Oct, 2021

Supported and coordinated by the European Round Table for Industry, the Value Balancing Alliance, the World Business Council for Sustainable Development and the World Economic Forum, 57 organisations have sent an open letter to the European Commission, the European Parliament and the Council of the European Union calling on them to align upcoming European sustainability reporting standards with globally consistent and comparable performance metrics and disclosures.

The signatories to the letter point out that preparers and consumers of environmental, social and governance (ESG) data all over the world are struggling with a profusion of reporting frameworks and standards that do not enable consistent and comparable disclosures. At the same time, the standardisation that has taken place in financial reporting has proved to be a success. Therefore, the letter expresses strong support for the initiative of the International Financial Reporting Standards (IFRS) Foundation to create an International Sustainability Standards Board (ISSB) to develop globally accepted standards for sustainability reporting that can be adopted worldwide.

The letter also acknowledges that there are jurisdictions that are more advanced in their ESG reporting initiatives and might want to go further and faster to meet specific policy priorities. Therefore, the 57 organisations support the International Organisation of Securities Commissions (IOSCO) and the IFRS Foundation in their recommendation of a ‘building block approach’ for the establishment of a globally-consistent foundation of sustainability standards, upon which national and regional standard-setters may build supplementary standards that serve their needs. They also note that this building blocks approach has recently been endorsed by G7 and G20 finance ministers and central bank governors. The letter notes:

Global alignment of reporting standards is crucial to provide a comprehensive view of a company’s sustainability performance. We encourage the European Commission to support the establishment of the International Sustainability Standards Board and actively and urgently promote cooperation between EFRAG and the new Board. Increased international cooperation in aligning and harmonising sustainability reporting standards is essential to ensure a global level playing field.

Finally, the letter points to IOSCO’s proposal for a multi-stakeholder consultative committee to operate within the IFRS Foundation structure to help promote consistency and comparability with jurisdiction-specific reporting standards. The appropriate presence of multilateral bodies and major stakeholders in such a body, including the European Commission, could provide the necessary support for achieving a global baseline and an effective mechanism for cooperation with national or regional standard-setters.

Please click to access the full letter on the World Economic Forum website.

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