FRC publishes thematic review of IFRS 3

30 Sep, 2022

The Financial Reporting Council (FRC) has published its thematic review of business combinations, an area of infrequent reporting for many companies, but which is often significant and has a widespread impact on the company financial statements.

The FRC's review looked at a sample of 20 companies across various industries.  While the FRC was broadly satisfied with the quality of reporting of business combinations, it observed several areas where improvements can be made.  Specifically the FRC expects companies to:   

  • Clearly explain the impact of the business combination on the group’s strategy, resources, operations, and performance. Explanations should be clear and concise, highlighting the reasons for any significant changes (for example, on liquidity and funding). Where alternative performance measures (APM’s) are used to explain the impact of the combination, the FRC expects companies to apply the recommendations from its recent APM thematic review.  
  • Provide a comprehensive understanding of the effects of the business combination supported by consistent information throughout the annual report, allowing the reader to follow ‘the full story’.
  • Avoid boilerplate disclosures, making sure explanations reflect the specific circumstances, for example when describing the factors giving rise to goodwill and explanations of contingent consideration arrangements. Better disclosures explain the valuation techniques used to value acquired assets and liabilities and the key assumptions used.
  • Provide meaningful sensitivities and/or ranges of reasonably possible outcomes for significant estimates made in accounting for the business combination.
  • Disclose clearly the potential variability in future amounts payable for contingent consideration. Better disclosures provide specific details of the target measures on which the contingency is based and the time period over which they are to be assessed.     
  • Make sure business combination related cash flows are correctly classified, with cash flows for acquisition-related costs presented within operating cash flows and not investing in the consolidated accounts. Similarly cash flows relating to payments linked to continuing employment should be reported within operating cash flows.
  • Carefully consider what deferred tax balances should be recognised as a result of the combination.
  • Explain how transactions not accounted for as part of the business combination have been treated and the line item(s) in the financial statements in which they have been recognised. When contingent payments are linked to continuing employment of personnel they should be excluded from consideration for the business combination and accounted for as post acquisition employment expense.

The FRC report includes examples of better practice disclosures and a case study (in the appendix) to encourage improvement in the general quality of company disclosures.

A press release and the full thematic review are available on the FRC website.

Financial Reporting Lab publishes September 2022 newsletter

30 Sep, 2022

The Financial Reporting Lab ("Lab") has published the September 2022 edition of its quarterly newsletter.

The newsletter provides an update on the Lab's recent publications (such as Digital security risk disclosure, Improving ESG data production and structured digital reporting) and provides an update on its upcoming report on net zero.

The newsletter also includes an invitation to participate in the stewardship reporting project and includes a reminder about the draft 2023 Taxonomy Suite being open for comment.

The full newsletter is available on the FRC website here

September 2022 ISSB meeting notes posted

30 Sep, 2022

The ISSB met in Frankfurt on 20-23 September 2022. We have posted our comprehensive Deloitte observer notes for all projects discussed during the meeting.

General Sustainability-related Disclosures—Summary of comments

The ISSB received over 700 comment letters and/or surveys. Almost all respondents supported the ISSB’s overall aim to develop a comprehensive global baseline of sustainability-related financial disclosures for the capital markets. However, many respondents asked for greater clarity, support, guidance and examples to enable effective application of the ED IFRS S1. Many respondents also suggested that the ISSB should give more consideration to the range of capabilities and preparedness of entities around the world, especially for smaller entities and entities in emerging markets, to apply IFRS S1. Many respondents emphasised the importance of close collaboration with the IASB and the importance of improving understandability, connectivity and consistency by using shared definitions and concepts across IFRS Sustainability Disclosures Standards and IFRS Accounting Standards. In addition, many respondents observed that key differences in concepts, terminologies, and definitions remain between the ISSB’s proposals and jurisdictional initiatives. They emphasised the importance for the ISSB to work together with jurisdictions, including Europe and the United States, in developing a global baseline of sustainability-related financial disclosures.

Climate-related Disclosures—Summary of comments

The ISSB received comment letters and survey responses from nearly 700 respondents. The proposals in the ED were generally well-received, in particular by users of general purpose financial reporting, who expressed strong agreement with the proposed objective and the specific proposals.  While there was broad support for IFRS S2, many respondents also asked for greater support, guidance and examples to enable effective application of the proposals.

General Sustainability-related Disclosures and Climate-related Disclosures—Plan for redeliberations

Noting that there has been widespread support for the proposed requirements in the EDs, the staff suggested focusing on a limited number of topics for redeliberations, which are for joint topics relevant to both EDs: scalability, and current and anticipated effects of sustainability-related and climate-related risks and opportunities. For IFRS S1: enterprise value; breadth of reporting required; 'significant’ sustainability-related risk or opportunity; identifying significant sustainability-related risks and opportunities and disclosures; application of the materiality assessment; connected information; and frequency of reporting. For IFRS S2: strategy and decision-making, including transition planning; climate resilience; greenhouse gas emissions; and industry-based requirements, including financed and facilitated emissions.

General Sustainability-related Disclosures and Climate-related Disclosures—Scalability

Most respondents to the consultation suggested that the ISSB should give more consideration to the range of capabilities and preparedness of entities around the world to apply the proposals in the EDs. At this meeting, the ISSB members were asked (i) whether they want to explore mechanisms to enable the requirements to be scalable, (ii) for feedback on the proposed mechanisms for addressing scalability and (iii) for feedback on the factors that should be used when evaluating which mechanism could be used for addressing particular scalability challenges.

Climate-related Disclosures—Financed and Facilitated Emissions

The ED IFRS S2 proposed the addition of “transition risks exposure” as a disclosure topic in the industry-based disclosure requirements for four industries–commercial banks, investment banking and brokerage, asset management and custody activities and insurance. The staff thinks the ISSB will need to consider in its future redeliberations the scope of the proposals, data considerations, industry breakdown, complexity and requests for increased flexibility.

IASB Update—Developing the IASB’s future work programme

In the presentation, the staff outlined a breakdown of the IASB’s activities, its projects, key messages from the IASB’s agenda consultation and financial reporting issues added to the IASB’s work plan. The staff also provided a closer look at the IASB projects on Intangible Assets, Climate-related Risks in the Financial Statements and Management Commentary.

ISSB discussions

As this was a meeting to discuss feedback the ISSB was not asked to make any decisions. The summary meeting notes capture the main reflections of the ISSB members. Importantly, the ISSB supported the proposed redeliberation plan. The ISSB will start to discuss specific issues in October.

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

September 2022 IASB meeting notes posted

30 Sep, 2022

The IASB met in London on 20-22 September 2022. We have posted our comprehensive Deloitte observer notes for all projects discussed during the meeting.

The following topics were discussed:

Equity Method

The staff recommended that when measuring the carrying amount to be derecognised in a partial disposal would identify the cost of the specific portion of the investment being disposed of or, if it cannot be identified, apply the last-in, first-out method. They also recommended relief to allow the weighted average method to be used as a practical expedient for equity method investments held prior to the transition date. Several IASB members expressed concerns about the approach and more work will need to be undertaken. The IASB decided that when an equity accounted investee issues equity instruments, and the investor continues to apply the equity method, an ownership interest increase would be treated as a purchase of an additional interest whereas a decrease would be a partial disposal. The IASB also discussed application questions related to transactions between an investor and its associate or joint venture and acknowledged conflicts between the requirements in IFRS 10 and those in IAS 28.

Goodwill and Impairment

The IASB made several changes to its preliminary views in relation to disclosures about the objectives and rationale for the business combinations an entity has made, including an exemption from some of the disclosure requirements when disclosure would be seriously prejudicial to the entity’s objectives for the business combination. The IASB decided that, if some disclosure requirements are required only for a sub-set of business combinations, the focus should be on strategically important business combinations—i.e. those for which failing to meet the objectives would seriously put at risk the entity achieving its overall business strategy.

Post-implementation Review (PIR) of IFRS 9—Classification and Measurement

At this meeting, the IASB discussed questions relating to matters raised by respondents to the RFI that are not covered by other staff papers. The staff recommended that the IASB not consider further issues related to: derecognition and whether ‘substantially all of the risks and rewards’ of a financial asset have been transferred; assessing whether the entity has a practice of settling similar contracts net in cash when considering using the ‘own use exemption’; the disposal of equity instruments classified as FVTOCI; whether interest rates contractually linked to an index that adjusts the time value of money based on a market interest rate and/or inflation rate introduce ‘leverage’ in the context of recent significant rises in inflation rates; and whether rates including a leverage factor imposed by the government should follow IFRS 9 for regulated rates guidance and, if so, how to consider whether the rate provides exposure to risks or variability in the contractual cash flows that are inconsistent with a basic lending arrangement. The staff therefore recommend that questions about purchased or originated credit-impaired financial assets be considered as part of the upcoming PIR of the impairment requirements in IFRS 9. IASB members were generally supportive of the staff suggestions, but no decisions were made.  

Financial Instruments with Characteristics of Equity (FICE)

The IASB decided to clarify that: IAS 32:23 would apply to an obligation to redeem own equity instruments settled in a variable number of another type of own equity instruments. It decided that on expiry of a written put option on own equity instruments: the financial liability would be reclassified to the same component of equity as that from which it was reclassified on initial recognition of the put option; and the cumulative amount in retained earnings related to the put option would be permitted to be reclassified to another component of equity but amounts previously recognised in profit or loss on remeasuring the financial liability would not be reversed. Furthermore, written put options or forward purchase contracts on own equity instruments are presented gross rather than net.

Primary Financial Statements

The IASB decided not to proceed with any specific requirements for unusual income and expenses. It also decided that all entities would classify income and expenses from associates and joint ventures accounted for using the equity method in the investing category. It withdrew the proposal that an entity classify incremental expenses in the investing category but confirmed the proposal that the specified subtotals listed (in paragraph 104 of the ED) are not management performance measures and adding ‘operating profit or loss and income and expenses from investments accounted for using the equity method’ to the list of specified subtotals. Lastly, it withdrew the proposed prohibition on a mixed presentation of operating expenses.

Work Plan

The staff provided an update on the IASB’s work plan since its last update in May 2022. The IASB decided to consider in the second half of 2023 when to begin the PIRs of the hedge accounting requirements of IFRS 9 and the requirements of IFRS 16. The IASB also discussed clarifying the purpose of a PIR and managing stakeholder expectations about their objectives.

PIR of IFRS 15 Revenue from Contracts with Customers

The staff anticipate that they will undertake outreach from October 2022 to Q1 2023. The RFI is expected to be published in H1 2023, with a 120-day comment period.

Contractual Cash Flow Characteristics

In 2022, the IASB added a project to clarify particular aspects of the IFRS 9 requirements for assessing a financial asset’s contractual cash flow characteristics (i.e. the ‘solely payments of principal and interest’ (SPPI) requirements). The IASB decided to clarify that for contractual cash flows to be SPPI, a basic lending arrangement does not give rise to variability in cash flows due to risks or factors that are unrelated to the borrower, even if such terms and conditions are common in the specific market in which the entity operates. The IASB also decided to set out the factors when a financial asset that includes contractual terms that change the timing and amount of the contractual cash flows can be consistent with a basic lending arrangement and therefore have SPPI cash flows. The IASB further decided to clarify that the reference to ‘instruments' in paragraph B4.1.23 of IFRS 9 include lease receivables.

Extractive Activities

The staff presented papers summarising their reviews of disclosure-related stakeholder feedback from research carried out between 2018 and 2021, relevant academic literature and relevant jurisdictional requirements and a sample of annual filings. Overall, IASB members expressed support for the proposed direction of the project and for the three suggested areas for further research. It was noted that it was very important to communicate clearly to stakeholders that these are the only topics that will be taken forward in this project, and that other potential areas identified have now been scoped out. The IASB was not asked to make any decisions.

Maintenance and consistent application

At its June 2022 meeting, the IFRS Interpretations Committee voted to finalise the agenda decision Cash Received via Electronic Transfer as Settlement for a Financial Asset (IFRS 9). The staff recommended that, rather than finalising the agenda decision, the IASB explore amending IFRS 9. In relation to the forthcoming amendments to IAS 1 for non-current liabilities with covenants, the staff recommended that the IASB clarify requirements around the early application of the 2020 amendments and the 2022 amendments. IASB members agreed with the staff recommendations. Several IASB members noted that the IASB should move quickly as it affects almost all entities in all industries. The Chair acknowledged this but said that it is important to note that the staff recommendation uses the term ‘explore standard-setting’ which means that it is not certain yet that standard-setting will be undertaken. Only if the issue can be resolved in a timely fashion without significant disruption would the IASB move to standard-setting.

Rate-regulated Activities

The staff recommended that the IASB clarify that an entity would apply IFRIC 12 first and then, apply the requirements of the proposed new Standard to any remaining rights and obligations to determine if the entity has regulatory assets or regulatory liabilities. IASB members generally agreed that IFRIC 12 should be applied before the new Standard, however there were mixed views about how to achieve this.

An analysis of how the IASB’s work plan has changed as a result of the meeting is available here.

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

IFRS Foundation announces new IASB Board members

30 Sep, 2022

The Trustees of the IFRS Foundation have announced the appointment of Patrina Buchanan and Hagit Keren as IASB Board members. Both appointments are for a five-year term.

Ms Buchanan played leading roles in IASB projects to reform the accounting for leases and revenue recognition and consolidation for almost two decades. She has also led the Foundation’s projects that support consistent application of IFRS Accounting Standards, including managing the work of the IFRS Interpretations Committee. Her first term as IASB member will commence in December 2022.

Ms Keren joins the Foundation from KPMG Israel where she served as its Insurance Sector Lead. She brings knowledge and experience in implementing IFRS 17 Insurance Contracts. She was previously on secondment to the IFRS Foundation to establish and manage the IASB’s Transition Resource Group set up to support the implementation of IFRS 17. Ms Keren will join the Board in 2023.

Please click for additional information in the press release on the IFRS Foundation website.

ISSB issues podcast on latest Board developments (September 2022)

29 Sep, 2022

The IFRS Foundation has released a podcast discussing highlights from the September 2022 ISSB meeting. The podcast is hosted by ISSB Chair Emmanuel Faber and Vice-Chair Sue Lloyd.

Highlights of the podcast include discussions on:

  • key developments since the last board meeting;
  • highlights from the discussion on feedback to draft standards;
  • the importance of proportionality and scalability;
  • prioritisation and agenda setting; and
  • expectations for the October meeting in Montreal.

The podcast can be accessed through the press release on the IFRS Foundation’s website.

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

Third IVSC perspectives paper on intangible assets

29 Sep, 2022

The International Valuation Standards Council (IVSC) is publishing a series of perspectives papers 'Time to get Tangible about Intangible Assets' that notes that despite the importance of intangible assets to the capital markets, only a small percentage are recognised on balance sheets.

Following the first paper The Case for Realigning Reporting Standards with Modern Value Creation published in September 2021, the second paper Human Capital Introspective published in June 2022, a third paper Rethinking Brand Value can now be accessed through the press release on the IVSC website.

Standard setters discuss jurisdictional perspectives on sustainability reporting

28 Sep, 2022

The International Forum of Accounting Standard Setters (IFASS) is currently holding its fall meeting in London. The whole morning today was devoted to the discussion of sustainability reporting.

The meeting began with three presentations: A representative of the European Financial Reporting Advisory Group (EFRAG) introduced ESRS E1 Climate Change; a representative of the International Public Sector Accounting Standards Board (IPSASB) discussed the consultation paper Advancing Public Sector Sustainability Reporting; and Acting Chief Accountant Paul Munter presented on the proposed US Securities and Exchange Commission (SEC) rule The Enhancement and Standardization of Climate-Related Disclosures for Investors.

The objective of ESRS E1 is to specify disclosure requirements that would enable users of sustainability reporting to understand how an undertaking affects climate change in terms of actual or potential impacts, the undertaking’s past, current and future mitigation efforts, the plans and capacity of the undertaking to adapt its business model(s) and operations, the nature, type and extent of the material physical and transition risks and opportunities, and the effects of climate-related risks and opportunities on the undertaking’s development, performance, position over the short, medium and long term and its ability to create enterprise value. The proposed requirements are very comprehensive and granular, so while the overall feedback was generally supportive, there were calls to simplify and clarify. The IFASS members also commented on the degree of detail, but were told that while EFRAG was working hard on identifying possible simplifications, there was little room for them and that there was also the need to balance granularity for comparability against the call for simplifications. 

The IPSASB consultation is not about about standard-setting per se, but more about the question whether the IPSASB should move into the area of sustainability reporting. Triggering the IPSASB's initiative was the clear realisation that there is a marked gap in the public sector that needs to be filled, especially since natural resources are a major source of income of governments in some jurisdictions. Feedback to the consultation showed that stakeholders agreed that the public sector needs sustainability reporting, that the IPSASB should lead the development of public sector sustainability reporting guidance, and that the IPSASB should work in collaboration with other international bodies to address global inconsistencies. Comments from the room echoed the feedback that a global approach is needed and that the IPSASB should not start from scratch but should build on existing frameworks (especially on the ISSB standards) and adjust them to public sector needs. The IPSASB representative admitted that sustainability reporting was not a political priority for jurisdictions and also not an area of IPSASB expertise. So further steps of the IPSASB regarding sustainability reporting need to be carefully thought about.

The Acting Chief Accountant noted that the SEC proposed rule amendments that would require a domestic or foreign registrant to include certain climate-related information in its registration statements and periodic reports as investors have expressed a need for more consistent, comparable and reliable information about the effects of climate-related risks on a company’s business and as current climate-related disclosure practices are fragmented and inconsistent. He explained that the rule amendments are not aimed at telling businesses what to do, but if they do something, then the rule amendments would detail how to report on it. He also noted that many companies already report on sustainability outside of their filings, but to require them to include this information in their filings would streamline the reporting and, most importantly, ensure that the information reported is prepared with greater care and rigour. The SEC received more than 14,000 comments on its proposal - after evaluating the feedback, the Commission will decide whether to adopt final rules.

The presentations were followed by a panel discussion chaired by ISSB Vice-Chair Sue Lloyd with panel members from the Australian Accounting Standards Board (AASB), the UK Financial Reporting Council (FRC), the Korean Accounting Standards Board (KASB), the Pan-African Federation of Accountants (PAFA), and the Sustainability Standards Board of Japan (SSBJ). The panel members expressed full support for the global baseline approach of the ISSB, which they described as much needed. Other comments included:

  • Global baseline does not mean that the standards are basic; they will provide a full set of information for investors.
  • The fact that the standards are based on the TCFD recommendations is greeted in the UK where mandatory TCFD-reporting is currently being phased in.
  • There is some anxiety in African countries about what sustainability reporting will mean in practice.
  • Australia will use the ISSB standards as starting point and then, if necessary, add Australia-specific requirements (same approach as with IFRSs).
  • It was noted that the ISSB standards will need to allow for enough flexibility to actually build on them (e.g. regarding double materiality).
  • There were concerns from several jurisdictions regarding the industry specific part of the climate standard, which were perceived as not being international enough and in some cases divided rather arbitrarily between the two standards proposed by the ISSB.
  • The standards should be inclusive and scalable. This should not only refer to more advance and less advanced jurisdictions, but also to entity size.
  • It would be good if the standards could also be applied across different sectors.
  • The tension between investors calling for industry-specific requirements for reasons of comparability and the fact that industries and companies falling into these industries differ across jurisdictions was pointed out.
  • The amount of quantitative information required might be difficult to obtain. Might qualitative information work as an interim replacement?
  • The level of preparedness and knowledge between jurisdictions and between companies differs greatly. In some jurisdictions companies have other pertinent problems.
  • Jurisdictions are willing to support adoption of ISSB standards and capacity building, however, the ISSB will also have to provide support and supporting material.
  • The link between financial reporting and sustainability reporting was considered problematical, especially in jurisdictions where there is a great litigation risk (Korea, Australia).
  • The different time horizon between financial reporting and sustainability reporting was seen as difficult as the same issue might be assessed differently when looked at with a time horizon of one year or several years.
  • It was also noted, that some information that would be included in sustainability reporting simply could not be reflected in financial reporting.

FRC event on the Wates Principles

28 Sep, 2022

The Financial Reporting Council (FRC) will host an event on the benefits and opportunities of the Wates Principles for individual companies on 25 October 2022. The event will also explore what good practice in corporate governance looks like.

The Wates Principles have been widely adopted by large private companies and have become an important part of the UK’s corporate governance environment. 

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

FRC publishes revised ISA (UK) 600

28 Sep, 2022

The Financial Reporting Council (FRC) has published revised ISA (UK) 600 'Special Considerations - Audits of Group Financial Statements (Including the Work of Component Auditors) (Revised September 2022).

The revisions build upon the recently revised international version of the standard, with an enhanced focus on the risk of material misstatement at the financial statement level and the need for robust communication between group and component auditors.

Click for (all links to 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.