May

FRC publishes thematic review findings on discount rates

17 May, 2022

The Financial Reporting Council (FRC) has published a thematic review on discount rates used under IFRS Accounting Standards.

The report notes that while discounted cash flows and discount rates are commonly used under IFRS Accounting Standards, determining an appropriate discount rate is a complex area of financial reporting and can be an area of significant estimation uncertainty and a source of errors in financial reporting. 
 
The FRC’s review found:

  • Assumptions used for discount rates and cash flows should be internally consistent, and care should be taken to avoid double-counting risks. When nominal rates are used, the effects of inflation on the cash flows should not be overlooked; particularly in the current interest rate environment of low nominal interest rates and relatively high inflation.
  • There is general scope for improvement in the usefulness of the disclosures provided by many companies, with high quality disclosures including both the discount rate used, and an explanation of how it was determined.
  • Companies may need to consider whether specialist third party advice is required when valuing a material item, and where there is no internal expertise.

The review includes some case studies, based on issues the FRC finds in its routine monitoring of corporate reporting, to illustrate some of the challenges which companies may face in this area.
 
To encourage improvement in the general quality of company disclosures, the review also includes examples of good practice where companies have clearly described the factors they considered in determining the discount rate; for example, explaining whether  risk and inflation were included in the cash flows or the discount rate.
 
The full review is available on the FRC website.

ESMA publishes 26th enforcement decisions report

17 May, 2022

The European Securities and Markets Authority (ESMA) has published further extracts from its confidential database of enforcement decisions taken by European national enforcers. This batch deals with decisions in relation to IFRS 9, IAS 2 (two decisions), IFRS 15 (three decisions), IFRS 16/IAS 36, IAS 36 (two decisions), IFRS 8 and IAS 7/IAS 8.

The European national enforcers of financial information monitor and review financial statements published by issuers with securities traded on a regulated European market and who prepare their financial statements in accordance with International Financial Reporting Standards (IFRS) and consider whether they comply with IFRS and other applicable reporting requirements, including relevant national law.

ESMA has developed a confidential database of enforcement decisions taken by individual European enforcers as a source of information to foster appropriate application of IFRS.

The publication of enforcement decisions is designed to inform market participants about which accounting treatments European national enforcers may consider as complying with IFRS, i.e. whether the treatments are considered as being within the accepted range of those permitted by IFRS. ESMA considers the publication of the decisions, together with the rationale behind them, will contribute to a consistent application of IFRS in the European Union.

Topics covered in the latest batch of extracts, covering the period from March 2020 to November 2021, include:

Standard Topic
IFRS 9 Financial Instruments
Consideration of credit enhancements in the measurement of expected credit losses
IAS 2Inventories Measurement of net realisable value of inventory
IAS 2Inventories Costs to make the sale in calculating the net realisable value of inventories
IFRS 15Revenue from Contracts with Customers Recognition of revenue over time
IFRS 15Revenue from Contracts with Customers Significant financing component
IFRS 15Revenue from Contracts with Customers Presentation of litigation proceeds as revenue
IFRS 16Leases
IAS 36 — Impairment of Assets
Impairment test of cash generating unit comprising right of use assets
IAS 36 — Impairment of Assets COVID-19 impairment indicators
IAS 36 — Impairment of Assets Identifying cash-generating units (GGUs)
IFRS 8 — Operating Segments Operating Segments
IAS 7 Statement of Cash Flows
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
Change in the composition of cash and cash equivalents

Click for access to the full report (link to ESMA website).

IPSASB consultation paper on natural resources

17 May, 2022

The International Public Sector Accounting Standards Board (IPSASB) has issued a consultation paper 'Natural Resources'.

The introduction to the consultation paper notes that natural resources are generally understood to be resources such as sunlight, air, water and land that exist without the actions of humankind. They account for a significant proportion of the economic resources in many jurisdictions. However, governments often lack sufficient information on the monetary value of natural resources, and as a result, grant rights to these resources without regard to financial and environmental sustainability, or intergenerational fairness.

Currently, there is no explicit International Public Sector Accounting Standard (IPSAS) guidance on accounting for natural resources in their original state. Therefore, the IPSASB is now working to address this gap. The first phase of its work focuses on the financial reporting of tangible, naturally occurring resources, including subsoil resources, water, and living resources, which are in their natural state. This consultation paper is the first project output, and considers whether natural resources can be recognised as assets in general purpose financial statements or should be disclosed in broader financial reports.

Comments on the consultation paper are requested by 17 October 2022.

Please see the IPSASB website for a press release as well as an access page for a video introduction, the consultation paper, and an At a Glance summary.

UK Endorsement Board adopts IFRS 17

17 May, 2022

The UK Endorsement Board (UKEB) has approved the adoption of International Financial Reporting Standard (IFRS 17) 'Insurance Contracts' for use by UK companies.

The adoption covers both IFRS 17 issued by the International Accounting Standards Board (IASB) in May 2017, and subsequent amendments in June 2020 and December 2021.

The UKEB secretariat's Endorsement Criteria Assessment concludes that:

  • IFRS 17 meets the criteria of understandability, relevance, reliability and comparability required of the financial information needed for making economic decisions and assessing the stewardship of management, as required by SI 2019/685 (see Regulation 7(1)(c)); and 
  • application of IFRS 17 is not contrary to the principle that an entity’s accounts/consolidated accounts must give a true and fair view as required by SI 2019/685 (see Regulation 7(1)(a)).

Additionally the UKEB concludes that IFRS 17 is likely to be conducive to the long-term public good in the UK.

The effective date of UK-adopted IFRS 17 is 1 January 2023 with early application permitted for entities that apply IFRS 9 Financial Instruments on or before the initial application of IFRS 17.

The UKEB will carry out a review of the impact of the adoption of the standard and a report setting out the conclusions of this review will be published by the UKEB by 1 January 2028.

For more information, including the Endorsement Criteria Assessment see the UKEB website here.  A link to an updated adoption status report is also available on the UKEB website.

IASB issues May 2022 'Investor Update' newsletter

16 May, 2022

The IASB has issued the latest edition of its newsletter 'Investor Update', which profiles recently introduced IFRS Standards and other changes that are in the pipeline as well as how those changes may affect companies and performance.

This issue features:

  • In profile — Dr Kenneth Lee, Associate Professorial Lecturer at the London School of Economics and Political Science, member of the Capital Markets Advisory Committee
  • We need your views — IFRS Sustainability Disclosure Standards
  • Stay up to date
  • Resources for investors

The Investor Update newslet­ter is available on the IFRS Foundation’s website.

ESMA disclosures recommendations regarding the expected impacts of IFRS 17 application

16 May, 2022

The European Securities and Markets Authority (ESMA) has issued a public statement on 'Transparency on implementation of IFRS 17 'Insurance Contracts''.

The statement highlights the importance of issuers accompanying users of their financial statements, so that they understand the expected accounting implications of the new standard’s application.

ESMA’s recommendations cover the disclosures of expected impacts of the initial application of IFRS 17 in the interim and annual financial statements for 2022.

Where the impact is expected to be significant, ESMA expects issuers to:

  • provide information about the significant accounting policy choices to be taken upon initial application of IFRS 17 such as methods to calculate the discount rate, how the level of aggregation requirements will be applied;
  • disaggregate the expected impact in a way that is useful to users of financial statements; and
  • explain the nature of the impacts (on recognition, measurement and presentation) so that users of the financial statements can understand the changes and their key drivers when compared to the accounting principles on classification applied under IFRS 4.

ESMA also encourages issuers to explain the impact, if any, of the application of IFRS 17 on alternative performance measures that the issuer may use.

Please click to access the full statement on the ESMA website.

ESMA statement on the implications of Russia’s invasion of Ukraine

16 May, 2022

The European Securities and Markets Authority (ESMA) has released a public statement on the implications of Russia’s invasion of Ukraine on half-yearly financial reports.

The statement notes the significant challenges to business activities and effects on the global economic and financial system posed by the invasion and provides overarching messages to issuers and auditors including:

  • A reminder of the main IFRS requirements which may be applicable in the context of Russia’s invasion of Ukraine e.g., impairment of non-financial and financial assets, and loss of control;
  • ESMA’s expectations regarding disclosures in financial statements e.g., judgements made, significant uncertainties, and going concern risks;
  • ESMA’s expectations regarding disclosures in interim management reports e.g., direct and indirect impact of Russia’s invasion of Ukraine and imposed sanctions on issuers’ strategic orientation and targets, operations, financial performance, financial position and cash-flows, measures taken to mitigate the impacts, and cybersecurity risks; and
  • A reminder of issuers' obligations vis-à-vis the Market Abuse Regulation.

Please click to access the statement on the ESMA website.

CIPFA LASAAC issues an exceptional consultation on time limited changes to the Code of Practice on Local Authority Accounting

16 May, 2022

The Chartered Institute of Public Finance and Accountancy (CIPFA) and the Local Authority (Scotland) Accounts Advisory Committee (LASAAC) are seeking comments on temporary proposals to update of the Code of Practice on Local Authority Accounting in the United Kingdom for infrastructure assets.

The proposals intend to address issues raised by auditors in relation to the derecognition of parts of infrastructure assets when replacement expenditure is undertaken. The issue arises principally because of difficulties in generating decision-useful information in relation to these types of assets which meets the needs of accounting standards. There are also related issues for the reporting of gross historical cost and accumulated depreciation.

CIPFA LASAAC and CIFPA's Accounting and Financial Reporting Forum have established a Task and Finish Group to assist with the resolution of this issue.  Upon the advice of the Task and Finish Group, CIPFA LASAAC has proposed a temporary solution, with changes to the code for the reporting including proposals to:

  • confirm the accounting consequences of derecognition, i.e. that the effect on the carrying amount is nil (on the presumption that replaced parts are fully depreciated)
  • temporarily adapt the code to remove the reporting requirements for gross historical cost and accumulated depreciation
  • provide extra guidance on how depreciation may be applied for infrastructure assets

This proposal is a temporary solution which will allow CIPFA LASAAC to consult on a longer-term solution later in the year.  

Comments are requested by 14 June 2022.

A press release, the Invitation to comment and a copy of the exposure draft are available on the CIPFA website.

Draft audit reform bill included alongside the Queen’s Speech

13 May, 2022

A draft audit reform bill was included within the supporting papers issued alongside the Queen's speech on the 10th May.

Whilst the Government set out its commitment to reform with the draft bill announced, uncertainty remains as to the detail and timing of the bill. Some commentators have noted that it is highly unlikely for the bill to feature within the 2022/23 Parliamentary sessions but its trailing will enable some consultation and pre-legislative scrutiny to commence.

The main elements of the Draft Audit Reform Bill were described in the supporting papers as being:

  • Establishing a new statutory regulator, the Audit, Reporting and Governance Authority, that will protect and promote the interests of investors, other users of corporate reporting and the wider public interest.
  • Providing new measures to open up the market, including a new approach of managed shared audit in which challenger firms undertake a share of the work on large-scale audits. This will improve the quality and usefulness of audit; and boost resilience, competition, and choice in the audit market.
  • Bringing the largest private companies in scope of regulation in the definition of ‘public interest entities’, recognising the public interest in companies of this size.
  • Giving the new regulator effective powers to enforce directors’ financial reporting duties, to supervise corporate reporting, and to oversee and regulate the accountancy and actuarial professions.
  • Reforming the regulation of Insolvency Practitioners to give greater confidence to creditors and strengthening corporate governance of firms in or approaching insolvency so that ‘asset stripping’ can be more effectively tackled.

As per the documentation issued on 10th May, the Government’s Response to the consultation on the BEIS White Paper is expected to be published shortly. 

For the full text of the Queen’s Speech and the supporting narrative click here.

May 2022 IASB meeting agenda posted

13 May, 2022

The IASB has posted the agenda for its next meeting, which will be held via video conference on 23–27 May 2022. There are ten topics on the agenda.

The Board will discuss the following:

  • Second Comprehensive Review of the IFRS for SMEs Accounting Standard
  • Disclosure Initiative — Subsidiaries without public accountability: Disclosures
  • Dynamic Risk Management
  • Maintenance and Consistent Application
  • Board work plan update
  • Post-implementation review of IFRS 9
  • Primary financial statements
  • Disclosure Initiative — Targeted Standards-level Review of Disclosures
  • Rate-regulated activities
  • Goodwill and impairment

The full agenda for the meeting can be found here. We will post any updates to the agenda, our com­pre­hen­sive pre-meet­ing summaries, as well as observer notes from the meeting on this page as they become available.

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