The webinar will also present highlights from the FRC's forthcoming publication, 'Effective Stewardship Reporting: examples from 2021 and expectations for 2022'.

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

EFRAG published its Final Comment Letter in October 2021.

The feedback statement summarises the main comments received by EFRAG on its draft comment letter and explains how the comments were considered by EFRAG during its technical discussions leading to the publication of EFRAG's final comment letter.

A press release and the feedback statement are available on the EFRAG website.

The ITCG will discuss the following topic:

• Digital reporting implications for the Exposure Draft Management Commentary (continued from the September 2021 ITCG meeting)
  

The agenda papers for this meeting are available on the IASB website.

The Bulletin, which follows on from Policy Statement (PS) 20/17 further sets out the FCA's disclosure expectations and supervisory strategy with respect to the new requirement.  It is aimed at a number of different stakeholders including listed companies, their directors and advisors (including external auditors), investors and asset owners more broadly. 

The Bulletin serves to emphasise the seriousness with which the FCA and the Financial Reporting Council (FRC) both view compliance with the new Listing Rule, confirming that the FRC and FCA will work collaboratively to identify instances of non-compliance – including reporting such instances to one another where discovered - and review concerns raised by stakeholders about the quality of TCFD-aligned disclosures.  From 2022, the review of TCFD-aligned disclosures will be embedded into the FRC's routine reviews or premium listed company annual reports.

Where a listed company fails to make a suitable statement under the Listing Rules, the FCA will request that a listed company publishes the TCFD statement via a Regulatory Information Service (RIS) in line with the Listing Rules as soon as possible after discovery, with any non-compliance leading to regulatory action and possible sanctions.

The Bulletin also confirms that following consultation in Consultation Paper (CP) 21/18, the FCA aims to finalise rules for TCFD-aligned disclosures for issuers with standard listed equity shares under Listing Rule 14 (other than standard listed investment companies and shell companies) in time for them to apply for accounting periods beginning on or after 1 January 2022.  It will also, along with the FRC, monitor and enforce compliance with that proposed new rule (Listing Rule 14.3.27R).

Included in the Bulletin is a consultation on the addition of a proposed new Technical Note to the FCA's Knowledge Base which provides further guidance on its disclosure expectations.  Feedback is requested by 13 December 2021.

The Primary Market Bulletin and the proposed Technical Note are available on the FCA website.  

The FRC explains that the material is relevant to audit in all sectors, including the public sector, and should be used not only by audit firms focusing on audit quality but also by audit committees to support their engagement with their auditor.

The FRC’s definition of a high quality audit

The FRC sets out six factors that it uses to define high-quality audits as those that:

1. provide investors and other stakeholders with a high-level of assurance that financial statements give a true and fair view;
2. comply with both the spirit and the letter of auditing regulations and standards;
3. are driven by a robust risk assessment, informed by a thorough understanding of the entity and its environment;
4. are supported by rigorous due process and audit evidence, avoid conflicts of interest, have strong quality management, and involve the robust exercise of professional judgement and professional scepticism;
5. challenge management effectively and obtain sufficient audit evidence for the conclusions reached; and
6. report unambiguously the auditor’s conclusion on the financial statements.

Key attributes of a good audit

The FRC sets out 19 key aspects of the audit process, across three key areas - risk assessment and planning; execution; and completion and reporting. 

For risk assessment and planning, the nine key aspects are:

1. Careful risk assessment – appropriately tailored to the risks identified; taking account of management bias and external sources of data.
2. Timely planning – well in advance of the year end, involving relevant partners and specialists, giving enough time to design appropriate procedures to address the risk and report to those charged with management; making allowance for the unexpected and for adapting as the audit progresses.
3. Knowledge and understanding – tailored to the sector and the specific company; conscious that a complex business model can result in an audit that is not focused on the right risks; evaluating and planning for the level of judgement and specialist knowledge required.
4. Informed expectations –key financial metrics and performance. measures should be clearly recorded with the basis of the expectations explained.
5. The auditors’ responsibilities relating to fraud – considering the risk of fraud particularly carefully; being alert to the possibility of linked transactions; discussion and documentation of the vulnerability of the entity to fraud.
6. Appropriate resources – covering both the skills and the time needed; agreeing with the entity that sufficient time is available; allocating more complex risk areas to more experienced team. members or specialists; flagging resourcing issues to firm’s leadership.
7. Planning analytical review – completed well, this blends the team’s knowledge, expectations and year-to-date management information and flags anomalies to resolve before the start of fieldwork.
8. Planning the group audit – clear communication and shared understanding regarding significant components and audit approach; timely interactions and robust challenge from both the group and the component audit teams.
9. Communicating to those charged with governance – communicating the audit approach, any changes to the approach and the rationale behind them.

For execution, the eight key aspects are:

1. Fieldwork must execute the agreed audit plan – applying high-quality judgement to assess both corroborative and contradictory evidence; using the approach set out in the audit plan or explaining clearly why this has been varied, with partner approval and communication with those charged with governance where this is the case.
2. Appropriate oversight and direction – a well-structured team, with clear communication channels and frequent access to appropriately senior team members.
3. Proportionate approach to higher risk engagements – greater involvement of the engagement partner; access of partner, quality control reviewer and audit team to the support of central functions and appropriate specialists.
4. Audit documentation tells the story – the file should show an understandable and easy to follow narrative of the audit and the critical thinking applied, with suitable cross-referencing across the file where necessary.
5. Professional scepticism and challenge of management – auditors must “stand back” and evaluate the overall audit evidence, both corroborative and contradictory; they should persist in challenging management where concerns have not been addressed; junior team members should be empowered to raise concerns; relevant matters should be brought to the attention of those charged with governance who also have a part to play in challenging management.
6. Specialists and experts appropriately involved – specialists and experts included in all key phases of work, able to challenge management and share their findings with the wider audit team; clear documentation and understanding of the advice requested and the advice received.
7. Sufficient group oversight - close contact, supervision and oversight of component audit teams to deal with issues that may arise at the component level; clear documentation of the consolidation process that brings together the story of the group audit.
8. Consultation and oversight – appropriate consultation is a strength, supporting the team when reaching a conclusion on significant matters; audit teams should have the confidence to consult and request additional oversight; a clear record of consultation, conclusions, rationale and how matters were resolved.

For completion and reporting, the two key aspects are:

1. Assess that sufficient, appropriate audit evidence has been obtained – despite a two-way dialogue with those charged with governance throughout the process, communicating about the audit as a whole, not shying away from explaining the challenges along the way, which will in many cases link through to the key audit matters in the audit report.
2. Communicate matters of interest - to those charged with governance: including governance concerns, deficiencies in controls, aggressive assumptions and estimates and insufficient disclosures. The FRC recommends using graduated findings as it facilitates more effective communication with those charged with governance.

Key elements of a high-quality audit practice

The FRC highlights the following six attributes that it considers contribute to the running of high-quality audit practices:

• Firm’s quality risk assessment process – undertaking risk assessment of quality arrangements on a stand-alone basis, establishing quality objectives, identifying and assessing quality risks and implementing responses to those quality risks.
• Governance and leadership - senior leadership must live and drive the right values, ethics and behaviours that support high audit quality throughout the firm. There must be an emphasis on the public interest role of audit.
• Performance monitoring and remediation – an effective feedback loop to monitor the performance of the audit practice, including inputs from stakeholders and audit quality indicators, and embracing improvements through processes such as root cause analysis.
• Quality monitoring – incorporating “cold reviews” of completed audits and “hot reviews” of audits in progress, evaluating how effective the process is and how it integrates with other elements of the quality control system.
• Resources:
  • Resource planning and people management – focusing on attracting and retaining high-quality talent and ensuring there is sufficient capacity to manage reasonable demands, which may include monitoring project management and milestones.
  • Appraisals and rewards – ensuring that reward and performance management is aligned to the delivery of high-quality audit.
  • Methodology and technology – consistently applied methodology and the use of technology, delivered by appropriately trained people, supported by a robust and effective platform.

• Information and communication – investment in training, supported by ongoing information and communication and by access to central teams with in-depth knowledge.  

To support the delivery of high-quality audit, the report provides a range of examples of good practice identified by the FRC over recent audit quality inspections and supervision work.

A press release and the full report is available from the FRC website.

A link to a podcast on the report with the FRC's CEO, Sir Jon Thompson, is also available on the FRC website. 

Last year the FCA delayed, by one year, the mandation of Disclosure and Transparency Rule 4.1.14, which introduced a requirement for companies on a regulated market to publish annual reports in XHTML format. These requirements now apply for financial years beginning on or after 1 January 2021.  As a result of the requirements, electronic data for thousands of companies will become available for automatic extraction, analysis and comparison.  However, such data will only be useful if it is of high quality.  

The joint letter is therefore intended to remind in-scope companies of their obligations.  It also sets out combined expectations on quality and identifies actions the FRC and FCA may take in the event of their expectations not being met.

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

To ensure a balanced representation of stakeholders, the membership of the EFRAG General Assembly will extended with a Chapter covering Civil Society (including NGOs, academics, trade unions, and consumer organisations) in addition to its European Stakeholder Organisations Chapter and National Organisations Chapter. EFRAG Member Organisations can contribute to the sustainability reporting pillar or to the financial reporting pillar or to both.

EFRAG has published a call for expressions of interest for EFRAG membership, and is inviting all organisations including civil society to join its new sustainability reporting pillar. Expressions of interest are welcome by 8 December 2021.

Please click for more information on the EFRAG website.

Note: A briefing note published on 3 December 2021 explains who qualifies for EFRAG membership.

The ITCG discussed the following:

• Review of common reporting practice
• Digital reporting implications for the Exposure Draft Management Commentary
• Technology update

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

In November 2020, the FRC issued a thematic review of climate-related considerations for a sample of financial statements for large groups prepared under IFRS.  In the thematic, the FRC stated that future work in this area may include ‘highlighting areas of the financial statements of UK GAAP reporters where climate change could be a consideration’.  The ESG Statement of Intent, published by the FRC in July 2021, stated that the FRC would ‘develop guidance on the consideration by UK GAAP reporters of the impact of climate-related issues on the company’s financial statements’.  FRS 102 Factsheet 8: Climate-related matters (‘the factsheet’) is designed to address these public commitments.

Financial Reporting

The FRC emphasises that there is increasing legislation and guidance on the content of the narrative sections of the annual report; however, less attention has been paid to the financial statements themselves.

The factsheet outlines the ways in which climate-related matters may impact a set of financial statements prepared under FRS 102, including:

• How the general requirements of FRS 102 should be applied in the context of climate-related matters – in particular, in the context of the risks, uncertainties, judgements and estimations that need to be considered when preparing financial statements.
• How climate-related matters could impact the recognition and measurement of items in the financial statements.
• How climate-related matters could impact the disclosures in the financial statements and what additional disclosures may be required.

The FRC discusses examples of climate change impacts that FRS 102 reporters should be considering (under different sections of FRS 102):

• Appendix Fair value measurement to Section 2 Concepts and Pervasive Principles
• Section 3 Financial Statement Presentation
• Section 8 Notes to the Financial Statements
• Section 11 Basic Financial Instruments
• Section 12 Other Financial Instruments Issues
• Section 13 Inventories
• Section 17 Property, Plant and Equipment
• Section 18 Intangible Assets other than Goodwill
• Section 19 Business Combinations and Goodwill
• Section 21 Provisions and Contingencies
• Section 24 Government Grants
• Section 26 Share-based Payment
• Section 27 Impairment of Assets
• Section 28 Employee Benefits
• Section 29 Income Tax

The factsheet also documents examples of items that may need to be presented in the financial statements that are primarily related to or driven by climate-related matters, but that may not sit clearly within one of the sections of FRS 102.  These include: green bonds; carbon offsetting; and emission trading schemes.

Narrative Reporting

The second part of the factsheet summarises current and proposed legal and regulatory narrative reporting requirements applicable to companies in the UK in relation to climate and associated matters.  This has been included to support entities in considering how to achieve the required linkage between their financial and narrative reporting.

The FRC notes that as well as providing the required climate-related disclosures as part of their narrative reporting, and considering whether applying the requirements of FRS 102 means that climate-related matters impact the financial statements, entities must also ensure consistency between the matters disclosed in the financial statements and those presented within narrative reporting.  Ultimately the narrative reporting and the financial statements should show a coherent linkage and entities may consider disclosing whether, and why, apparently significant matters presented within narrative reporting have, or have not, had a material impact on the financial statements.

The FRC also highlights that the draft legislation for the inclusion of Task Force on Climate-related Financial Disclosures (TCFD)-aligned disclosures in the annual reports of all publicly quoted companies, public interest entities and large private companies (‘’Large’’ in this context refers to companies or LLPs with more than 500 employees and turnover exceeding £500m.) for periods beginning on or after 6 April 2022 (with equivalent legislation for large LLPs expected to follow) will apply to many entities applying FRS 102.

Please click to access the press release and FRS 102 Factsheet 8: Climate-related matters on the FRC website.

The agenda items for discussion are as follows:

• Due Process Handbook - Review of full draft of the Due Process Handbook
• Disclosure Requirements in IFRS Standards A Pilot Approach – Project Update
• PIR: IFRS 9 – Classification & Measurement - Project Implementation Plan
• Goodwill subsequent measurement - Update

The meeting agenda and papers and details of how to register are available on the UKEB website. 

The meeting recording can be found on the UKEB website here.