Annual ECON exchange of views with representatives of the IFRS Foundation

31 Aug, 2022

After a two-year suspension due to Covid-19, the annual exchanges of views between the Committee on Economic and Monetary Affairs (ECON) of the European Parliament and representatives of the IFRS Foundation were resumed this afternoon. Erkki Liikanen, Chairman of the IFRS Foundation Trustees, IASB Chairman Andreas Barckow and ISSB Chairman Emmanuel Faber stood ready to answer questions of the Parliamentarians.

Mr Liikanen introduced the session and explained how, as a result of the IFRS Foundation's five-year strategy review, the establishment of the ISSB came about given the overwhelming response to the Foundation's consultation on whether an international standard-setting body on sustainability reporting was needed and whether it should be hosted within the governance structure of the IFRS Foundation. Therefore, the Foundation now has two standard-setting bodies: The International Accounting Standards Board (IASB) and the Internation Sustainability Standards Board (ISSB).

Mr Barckow then explained about the recent agenda consultation of the IASB, which, as one result, led to adding a project on climate related risks to the maintenance pipeline of the Board. He noted that while constituents might expect this to be a topic to be more within the remit of the ISSB, connectivity was highly important and the IASB was most interested in making sure that the information produced under ISSB standards ties in seamlessly with the information produced under IASB requirements.

Mr Faber then spoke about the global importance of climate matters and why a global baseline is so important. He noted the progress on sustainability reporting in many jurisdictions and especially the EU and admitted that this creates complexities when trying to develop global standards, but stressed that the ISSB is very active in engaging with and listening to jurisdictional initiatives and values their input and cooperation.

Questions then mostly focused on the newly established ISSB and its interaction with the EU developments. The following topics were discussed:

  • Cooperation with the EU initiative. There clearly is cooperation and it has increased to at least weekly exchanges after the trilogue agreement on the  CSRD. The standards on climate are very close in substance, but "the worst is being close without being identical". ESRS might be included in the ISSB hierarchy as a source of guidance if a topic has not yet been covered by the ISSB. The lack of time is a problem when trying to to develop a global baseline while the building blocks are already being developed.
  • Materiality. The discussion about single and double materiality is more in the narrative than in reality. The two concepts are not mutually exclusive, rather two pillars of of the same principle. There is an overlap between them and the larger the overlap, the easier the life for companies will be. Cooperations such as the one with GRI are aimed exactly at trying to ensure the concepts do not lead to conflicts.
  • Will ISSB developments respect EU sovereignty and will they hamper EU progress? The EU is fully sovereign and the ISSB has no say in what the EU considers to be the best for the EU. However, global alignment is a prize worth waiting for a little (rather in terms of weeks than years). Also, the ISSB will follow a slightly different review process on its exposure drafts and will focus on the most critical issues while leaving others aside for the moment. Critical issues are considered those where other jurisdictions have already developed viable solutions. However, a global solution must be truly global - leaving important, but slower somewhat jurisdictions out would mean that "all is lost" on the idea of a global baseline.
  • IFRS Foundation Governance and cooperation between IASB and ISSB. The ISSB was placed as a sister board to the IASB under the auspices of the IFRS Foundation exactly because of the transparent, trusted and well-established governance of the Foundation. And while the Boards will operate independently, they will make sure that parallel and connected reporting without conflict is possible. One move was to appoint an ISSB Chair with a business and strong sustainability background together with an ISSB Vice-Chair with a background in standard setting.
  • Inclusiveness. The ISSB is almost gender-balanced and the IASB is also on a good way. Also, the background of people is diverse. This not only includes the Boards, but also the staff and the stakeholders contacted in outreach. One additional aspect the IFRS Foundation has to consider is geographical balance. In this context, today's appointment of the second Vice-Chair of the ISSB was pointed out who will have a special responsibility for emerging economies and the global South.
  • Developments worldwide and especially the backlash against ESG matters in some states of the United States. Similar to the EU, the sovereignty of other areas of the world is fully respected. However, it was noted that most US companies are concerned about the fragmentation of the world they are operating in as many of the are globally active and, therefore, also need a global solution in sustainability reporting. The SEC proposals were considered as being very ambitious.

A recording of the one-hour session is available on the website of the European Parliament. Mr Liikanen's introduction begins at 14:35 hrs, Mr Barckow's at 14:42 hrs, Mr Faber's at 14:48 hrs. The question and answer sessions begins at 15:01 hrs. Please note that the audio options include translations into twelve languages.

IFRS Foundation announces second ISSB Vice-Chair

31 Aug, 2022

The Trustees of the IFRS Foundation have announced the appointment of Jingdong Hua as ISSB Board member. He will also act as the second Vice-Chair of the ISSB.

Mr Hua is the former Vice President and Treasurer of the World Bank, where his responsibilities included green bond initiatives and sustainable finance capacity-building programmes. He has also previously served as Deputy Treasurer of the Asian Development Bank and has held positions at the United Nations Development Programme and the African Development Bank. In his role as Vice-Chair, Mr Hua will oversee the development and implementation of the ISSB’s strategies to support and include stakeholders in emerging and developing economies as well as small and medium-sized companies. 

The press release announcing the appointment is available on the IFRS Foundation website.

Companies, investors and professional accountants call for global alignment in sustainability reporting

31 Aug, 2022

The International Federation of Accountants (IFAC) has published on its a joint statement by 65 organisations calling for stronger alignment of regulatory and standard-setting efforts around sustainability disclosure.

The statement notes that significant efforts by the International Sustainability Standards Board (ISSB), the US Securities and Exchange Commission (SEC), and the European Commission together with the European Financial Reporting Advisory Group (EFRAG) are underway, which all aim to address the need to enhance and evolve corporate reporting to include and consider sustainability information. However, current draft standards and initiatives are not technically compatible in terms of concepts, terminologies, and metrics. Therefore, leading financial market participants are asking financial market regulators to avoid regulatory and standard setting fragmentation by aligning on key concepts, terminologies, and metrics on which disclosure requirements are built.

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

ESMA updates ESEF reporting manual

25 Aug, 2022

The European Securities and Markets Authority (ESMA) has published the annual update of its reporting manual on the European Single Electronic Format (ESEF).

This year’s highlight is the new guidance in relation to the requirement to mark up the notes to the IFRS consolidated financial statement following the “block tagging” approach.

Please click to access the updated reporting manual on the ESMA website.

FRC webinar on ESG and sustainability reporting

25 Aug, 2022

The Financial Reporting Council (FRC) will host an online webinar between 2pm-3pm on 7 September 2022 to assist stakeholders in understanding the requirements of ESG and sustainability reporting.

The event panel will include:

  • Mark Babington – Director of Regulatory Standards
  • Kate O’Neil – Director of Stakeholder Engagement and Corporate Affairs
  • Sarah-Jayne Dominic – Head of Policy, Programmes and Strategy
  • Janet Luck – Senior Case Officer, Corporate Reporting Review

For more information, and to register for the event, visit the FRC website.

UKEB seeks members for Financial Instruments Working Group

25 Aug, 2022

The UK Endorsement Board (UKEB) is recruiting members for its Financial Instruments Working Group.

The group will be chaired by a senior member of the UKEB Secretariat and will provide the Secretariat with specialist knowledge, information and advice.

The closing date for applications for the working group is 15th September 2022. Further information on the role and how to apply may be found on the UKEB website.

FRC to host two roundtable events on auditor reporting

23 Aug, 2022

The Financial Reporting Council (FRC) is inviting investors, equity analysts and debt analysts to take part in one of two roundtables to discuss how auditor reporting in the UK can be further improved.

The FRC has committed to considering the quality, relevance, and accessibility of auditor’s reports. They are therefore looking to identify ways to provide users of audited financial information with more meaningful and useful information that at the same time is clear, concise, and accessible.

The roundtable events follow the FRC’s recent publication of six snapshots which provide a baseline for current practice in auditor reporting and are intended to form the starting point for the conversation on identifying improvements to the auditor’s report.

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

We comment on a tentative IFRS Interpretations Committee agenda decision

23 Aug, 2022

We have commented on the IFRS Interpretations Committee's publication in the July 2022 'IFRIC Update' of the tentative agenda decision not to take onto the Committee’s agenda the request for clarification on whether an entity considers currency exchange rate risks when applying IFRS 17 to identify portfolios of insurance contracts and how an entity applies IAS 21 in conjunction with IFRS 17 in measuring a group of insurance contracts that generate cash flows in more than one currency.

We agree with the IFRS Interpretations Committee’s decision not to add this item onto its agenda for the reasons set out in the tentative agenda decision. However, we question whether one statement in the tentative agenda decision is consistent with the requirements of IFRS 17.

Please click to download our full comment letter.

IFRS Foundation announces three additional ISSB members

23 Aug, 2022

The Trustees of the IFRS Foundation have announced the appointment of Jenny Bofinger-Schuster, Hiroshi Komori and Veronika Pountcheva as ISSB Board members.

Ms Bofinger-Schuster joins the ISSB from Siemens, where she has served as Senior Vice President for sustainability and operational excellence, with responsibility for developing the company’s sustainability strategy and for implementing new disclosure requirements. She has been appointed for a five-year term beginning on 1 December 2022.

Mr Komori served as Senior Director and Head of the Stewardship and ESG Division at the Government Pension Investment Fund in Japan, where he developed the investor engagement and participation in international sustainability initiatives. He has been appointed for a three-year term beginning on 1 September 2022.

Ms Pountcheva joins the ISSB from METRO, where she served as Senior Vice President of corporate responsibility and Co-chief Executive Officer of NX Food, with responsibility for developing the company’s long-term sustainability strategy. She has been appointed for a five-year term beginning on 1 October 2022.

The press release announcing the appointments is available on the IFRS Foundation website.

FRC publishes snapshots of current practice in auditor reporting

18 Aug, 2022

The Financial Reporting Council (FRC) has published new research into the current state of auditor reporting in the UK.

The research comes following recent audit market reviews which have suggested ways to improve the ‘decision usefulness’ of the financial information companies publish. Additionally, concerns have been expressed that auditor’s reports have become too lengthy and contain too much standardised and boilerplate disclosures. The FRC has committed to considering the quality, relevance, and accessibility of current market practice, whilst ensuring that auditor’s reports are as concise as possible.

The research considered a sample of almost 400 auditor’s reports for companies in the FTSE 350, as well as large Alternative Investment Market (AIM) companies. The findings have been summarised as a series of six thematic ‘snapshots’ with the intention of initiating a conversation with stakeholders on how auditor’s reports can be improved. The 6 areas covered in the snapshots are as follows:

  1. Understandability and useability of auditor reports - The first snapshot looks at the overall useability and understandability of auditor’s reports.  It looks at the variation in length of audit reports between firms, industrial sectors and market segments.  Due to the absence of a common framework for assessing the useability and understandability of individual auditor reports, the research used objective measures such as readability scores and measurement of standardised or generic language within individual reports to give a proxy for understanding how useability and understandability varies across the market.
  2. Communicating judgements on materiality and the scope of group audits -The second snapshot reviews how auditors have used their reports to communicate judgements about materiality and the scope of group audits to users. This includes setting out the basis of judgements for the selection of materiality and performance materiality, as well as decisions on the scoping and coverage achieved by group audits.
  3. Key audit matters (KAMs) - The third snapshot provides an overview on how auditors have approached reporting KAMs. This includes a review of the number of KAMs in auditor’s reports, and a survey of the most common types of risks of material misstatement across the entire sample. In addition, the snapshot reviews how auditors have communicated these risks, and how they communicated their findings from the audit procedures addressing those risks. This snapshot also reviews how KAMs interact with the rest of the company’s annual report.
  4. Key audit matters on climate change, COVID-19, alternative performance measures, and graduated findings - . This snapshot takes a deep dive into how KAMs in auditor’s reports have addressed certain types of risks. These include risks arising from climate change, and the COVID-19 pandemic. The snapshot also examines how KAMs have addressed alternative performance measures used by management to report on a company’s performance, as well as the classification of exceptional items within the financial statements.  This snapshot also explores the use of graduated and binary findings by auditors when reporting on KAMs. 
  5. Going concern - This snapshot explores how auditors have approached the requirement to report on the appropriateness of the use of the going concern assumption.
  6. Fraud and other irregularities - The final snapshot looks at how auditors have responded to the new requirement to explain the extent to which their audit has been designed to detect fraud and other irregularities.

This research represents the first step in meeting the FRC’s undertaking to improve the useability and informativeness of auditor’s reports in its recent Position Paper on Restoring Trust in Audit and Corporate Governance. It forms a foundation for understanding current practice and will be used as a basis for engaging the users of auditor reports and other stakeholders to identify potential areas for improvement.

A press release and links to the 6 snapshots are available on the FRC website.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.