UKEB introduces research on goodwill subsequent measurement at IFASS meeting

27 Sep, 2022

At the meeting of the International Forum of Accounting Standard Setters (IFASS) currently held in London, a representative of the UK Endorsement Board (UKEB) introduced the recent research report 'Subsequent Measurement of Goodwill: A Hybrid Model'.

The UKEB representative noted that the research objective of the UKEB's goodwill research project is to contribute to the ongoing international debate on the subsequent measurement of goodwill by exploring the practical implications of a potential transition to a hybrid model consisting of an annual amortisation charge, combined with impairment testing that would take place only when there was an indicator of impairment, and supporting disclosures to increase management accountability for acquisitions.

The research explored the effects of the application of the impairment-only model for UK IFRS reporters from 2005 to 2021. It found that:

  • The carrying amount of goodwill in the FTSE 350 increased from £227 billion in 2005 to £397 billion in 2021.
  • A total of 228 companies in the FTSE 350 reported goodwill in 2021, representing on average 18% of total assets and 63% of net assets.
  • Current disclosures on goodwill and impairment provide limited insight into the age of goodwill or the acquisitions that led to its recognition on companies’ balance sheets.

The research also indicated that a transition to a hybrid model would be practically feasible as the majority of preparers involved in the outreach believe it is possible to estimate a useful life for goodwill through consideration of a range of relevant factors and if sufficient application guidance is provided. They also believed that suitable transition arrangements could be provided for legacy goodwill. No significant adverse consequences for financial stability or for processes, operations or costs were identified.

Feedback from outreach participants also revealed that the following benefits from a hybrid model could be anticipated:

  1. More faithful representation of underlying economics by reflecting the consumption of economic benefits (although not all stakeholders agree that goodwill is a wasting asset).
  2. Reduced impact of the shielding effect because the hybrid model would require management tracking of goodwill on an acquisition by acquisition basis.
  3. Improved comparability between entities that grow organically and those that grow through acquisition.
  4. Disclosure of management assumptions underpinning the estimate of useful life would increase management accountability for acquisitions.
  5. Potential cost savings as impairment testing will be done on an indicator only basis (potentially offset by cost of monitoring useful life of goodwill).

The full research report is available on the UKEB website.

The UKEB will also present its research at the upcoming ASAF meeting on 29 September 2022 (15:15-16:30). The ASAF meeting is open to observers and can be watched online.

EFRAG discussion paper on variable consideration

27 Sep, 2022

The European Financial Reporting Advisory Group (EFRAG) has published a discussion paper entitled 'Accounting for Variable Consideration - from a Purchaser's Perspective'.

Transactions or contractual arrangements involving variable consideration often occur in practice and can arise for a variety of reasons, for example, whenever there is a risk-sharing arrangement in an exchange transaction involving a buyer and seller.

EFRAG points out that there is currently divergence in practice on how a purchaser should account for the variable consideration related to some transactions. EFRAG also notes that the IFRS Interpretations Committee received numerous submissions on IAS 16 and IAS 38 on that topic, but in its discussions concluded that the matters raised were too broad to be addressed within the confines of existing IFRSs.

The IASB added the topic to its research pipeline after its 2015 agenda consultation. However, due to other priorities, the IASB did not include this project on its active research agenda. Moreover, following constituents’ feedback to the IASB’s 2021 agenda consultation, the project was excluded from the IASB’s 2022-2026 work plan.

Therefore, EFRAG went ahead and now published a discussion paper focussing on two issues faced by purchaser entities where there is divergence in practice. These issues are (a) when to recognise a liability for variable consideration; and (b) whether/when subsequent changes in the estimate of variable consideration should be reflected in the cost of the acquired asset. The discussion paper also presents alternatives for accounting requirements for the two issues and outlines the qualitative characteristics of useful information for each of these alternatives. In addition, the discussion paper assesses the general IFRS requirements for variable consideration.

Comments on the discussion paper were originally requested by 31 May 2023, however in March 2023, this deadline was extended to 30 November 2023 in order to allow more time for interested stakeholders to provide their views.

Please click for access to the following additional information on the EFRAG website:

FRC Lab publishes a report on structured digital reporting

27 Sep, 2022

The FRC Lab (“the Lab”) has published a report which identifies lessons learnt from the first year of mandatory structured digital reporting under the European Single Electronic Format (ESEF) Transparency Directive regulation. The review builds upon a previous early implementation study of voluntary practice conducted in 2021.

Entities admitted to trading on UK regulated markets are required to produce their annual financial reports in a structured digital format (i.e. using XBRL tagging) and submit that report to the Financial Conduct Authority for filing in the National Storage Mechanism (NSM).  The Lab reviewed a sample of UK filings and held outreach events with companies and various stakeholders (such as tagging software and service providers, design agencies and assurance providers) to gather feedback and identify areas for improvement.

While many companies had risen to the challenge of producing a report in the new digital format, the Lab noted that ‘much remains to be done’ as data quality and usability are below the level expected for companies in a leading capital market.

The Lab report focuses on three areas: highlighting what companies did well, areas for improvement, and outlining expectations of better practice to meet the needs of investors and other users. The Lab’s key findings and suggestions include:

  • Processes around digital reporting – the FRC were pleased to see many companies producing the report in the required format, providing disclosures about their governance and internal and external assurance process and using the FCA’s testing facility to address issues ahead of final submission.  However, companies can improve their review and governance processes (for example at management and board level taking greater ownership of the file and the tagging process)) and the naming structure of the files submitted to the NSM (noted as the cause of many rejected filings).
  • Usability and design – companies demonstrated an improved design in their structured reports which alleviated previous issues with fonts and images displaying incorrectly.  Some companies filed their structured report early and published this on their websites.  However, for many, improving the usability of the report and filing in a timely manner (deadlines are reverting to 4 months after extensions allowed during the pandemic) remain areas for improvement.
  • XBRL tagging – the Lab continues to observe some tagging errors.  Many companies can still improve their selection of tags, the selection of appropriate anchors for extensions and the completeness of calculations.  The Lab highlights that companies should ensure that technical accounting staff familiar with the taxonomy should be involved in the review of the tags, and encourages comparisons with peers’ tagging as a helpful check.  The report also suggests that entities start testing text block tagging of the notes in preparation for the enhanced tagging requirements effective for financial years starting on or after 1 January 2022.

While the FRC Lab report focuses on the reports prepared under the FCA’s DTR requirements for listed companies, the principles and examples can be applied to other forms of digital reporting such as digital submissions to HMRC (available since 2011) and voluntary digital reporting for Companies House filings.

The Lab report, including a one-page summary outlining improvements and better practice, is available on the FRC website.

Taskforce on Disclosures about Expected Credit Losses (DECL) publishes updated guidance

27 Sep, 2022

The Taskforce on Disclosures about Expected Credit Losses ("the DECL Taskforce") has published updated guidance on what good IFRS 9 Expected Credit Loss accounting (ECL) disclosures look like.

In November 2017, the Financial Conduct Authority (FCA), Financial Reporting Council (FRC) and the Prudential Regulatory Authority (PRA) set up the DECL Taskforce. The idea being that the Taskforce would be a partnership between preparers and users, coming together to engage constructively on expected credit loss (ECL) disclosure.

The report follows two earlier reports published in November 2018 and December 2019.  The first report consisted of recommendations to describe what a comprehensive set of good ECL disclosures might look like, drawing from and building on existing disclosure recommendations and requirements. The second report added guidance and illustrative examples that showed how the recommendations in the first report could be presented in a way that enhances comparability between banks.  

Whilst the third report does not include a significant number of new recommendations or significant amendments to much of the material contained within the second report, enhancements have been made, the most significant of which are as follows:

  • A comparison of preparers’ and users’ assessments of adoption of selected Taskforce recommendations. This assessment showed greater than 90% “full adoption” of those recommendations.
  • Good practice examples, drawn from banks’ and building societies’ financial statements.
  • Updated recommendations based on the assessments and examples and addressing gaps, deficiencies or to otherwise improve existing material.  In particular the report includes material intended to improve the granularity and comparability of ECL disclosures and enhanced recommendations and supporting material about “judgemental adjustments” (such as post-model adjustments and overlays) made to modelled ECL.  

The guidance is aimed primarily at the biggest UK-headquartered banks and building societies but is also likely to be relevant to a much wider group of preparers.

A press release, the updated guidance, a letter from the co-chairs and the Taskforce's Press Release are available on the FRC website.

Pre-meeting summaries for the September 2022 IASB-FASB joint education meeting

26 Sep, 2022

The FASB and the IASB will hold a one-day joint education meeting on 30 September 2022. We have posted our pre-meeting summaries for the meeting that allow you to follow the IASB and FASB discussions more closely. We summarised the agenda papers made available by the IASB staff and point out the main issues to be discussed by the IASB and FASB.

The following topics are on the agenda:

Goodwill and Impairment (IASB) and Identifiable Intangible Assets and Subsequent Accounting for Goodwill (FASB)

The IASB has, and the FASB had, on their respective agenda projects covering the accounting for goodwill and intangible assets acquired in a business combination. The purpose of this meeting is to provide an opportunity for FASB and IASB members to discuss the status of the respective projects; the subsequent accounting for goodwill (including the FASB’s progress with developing an amortisation-with-impairment model and recent decision to deprioritise and remove the project from its technical agenda, and the IASB’s research on this topic); and the redeliberations of the IASB in relation to disclosures about business combinations.

Disaggregation-related projects

Both the IASB and the FASB are currently undertaking, or will undertake, projects whose objectives include providing users of financial statements with more disaggregated information. The purpose of this meeting is to provide both boards with an opportunity to share comments and ask questions about these projects.

Digital Assets

The boards will discuss the results of the FASB’s research and outreach related to digital assets, which led the FASB to add a project to its technical agenda—Accounting for and Disclosure of Crypto Assets. The IASB will outline its work and its decision not to add a project on cryptocurrencies and related transactions to its work plan.

2021 Agenda Consultation (FASB) and Third Agenda Consultation (IASB)

Both the IASB and the FASB have recently finalised their agenda consultations. The purpose of this meeting is to provide both boards with an opportunity to share comments and ask questions about these consultations.

Our pre-meet­ing summaries is available on our IASB-FASB September education meeting notes page and will be sup­ple­mented with our popular meeting notes after the meeting.

Updated IASB and ISSB work plan — Analysis (September 2022)

26 Sep, 2022

Following the IASB's and ISSB's September 2022 meeting, we have analysed the work plan on the IFRS Foundation website to see what changes have resulted from the meetings and other developments since the work plan was last revised in July 2022. Changes are numerous, many of them clarifications of expected timing.

Below is an analysis of all changes made to the work plan since our last analysis on 25 July 2022.

Standard-setting projects

  • Climate-related disclosures — Feedback to the exposure draft will be discussed in December 2022 (previously Q4 2022)
  • Contractual cash flow characteristics of financial assets — This project was moved from the maintenance agenda to the standard-setting agenda
  • Disclosure initiative — Targeted standards-level review of disclosures — The IASB will now decide on the project direction in October 2022 (previously Q4 2022)
  • General sustainability-related disclosures — Feedback to the exposure draft will be discussed in December 2022 (previously Q4 2022)
  • Second comprehensive review of the IFRS for SMEs — After publishing the exposure draft of proposed amendments in September 2022, the next project step is now discussion of the feedback received in H1 2023

Maintenance projects

  • Lease liability in a sale and leaseback — This project is still in the work plan, although it was completed by issuing final amendments in September 2022
  • Non-current liabilities with covenants — Final amendments are now expected in November 2022 (previously Q4 2022)
  • Supplier finance arrangements — A decision on the project direction is now expected in November 2022 (previously no date given)

Research projects

  • Extractive activities — The work plan still notes that a decision on the project direction is expected in September 2022, while in fact the IASB decided to proceed with phases II and III of the project
  • Goodwill and impairment — A decision on the project direction is now expected in November 2022 (previously Q4 2022)
  • Post-implementation of IFRS 15 — A project newly added to the work plan; the next expected project step is a request for information to be published in H1 2023

Other projects

  • IFRS accounting taxonomy update — Amendments to IAS 1 and IFRS 16 —A project newly added to the work plan; the next expected project step is a proposed taxonomy update in November 2022
  • IFRS sustainability disclosure taxonomy — Feedback on the staff request for feedback will now be discussed in November 2022 (previously Q4 2022)
  • Third agenda consultation This project was removed from the work plan as the IASB concluded the agenda consultation by releasing a feedback statement in July 2022

The above is a faithful comparison of the IASB and ISSB work plan at 25 July 2022 and 26 September 2022. For access to the current work plan at any time, please click here.

UKEB announces IAG Advisory Group Appointments

26 Sep, 2022

The UK Endorsement Board (UKEB) has announced the establishment of its Investor Advisory Group (IAG) and welcomed its inaugural members.

The UKEB is establishing six advisory groups that will provide specialist knowledge and information as input into its technical decision-making.

For more information, see the UKEB website.

UKEB announces AAG Advisory Group Appointments

23 Sep, 2022

The UK Endorsement Board (UKEB) has announced the establishment of its Academic Advisory Group (AAG) and welcomed its inaugural members.

The UKEB is establishing six advisory groups that will provide specialist knowledge and information as input into its technical decision-making. For more information, see the UKEB website.

FRC and FCA to hold webinar on TCFD disclosures

23 Sep, 2022

The Financial Reporting Council (FRC) and the FInancial Conduct Authority (FCA) are jointly hosting a webinar which will provide their views on the first year of mandatory Task Force on Climate-Related Financial Disclosures (TCFD) reporting.

Further detail and information on how to register is available on the FRC website.

FRC publishes thematic review on deferred tax assets

23 Sep, 2022

The Financial Reporting Council (FRC) has published its thematic review of deferred tax assets.

The review, which follows an earlier 2016 thematic, was prompted by the number of companies recognising material deferred tax assets relating to tax losses stemming from COVID-19.

For a sample of 20 companies, the review considered:

  • the basis of recognition of deferred tax (i.e. deferred tax assets should only be recognised to the extent their recoverability is probable based on the availability of future taxable profits);
  • the related disclosures under IAS 12 Income Taxes;
  • whether the evidence supporting the recognition of deferred tax assets for losses appeared to be sufficiently robust; and
  • the consistency of the deferred tax disclosures against the context of the annual report and accounts as a whole.

The FRC did not identify any obvious issues with over-recognition of deferred tax assets, although it noted in some cases it was difficult to make a full assessment due to the lack of informative disclosure.

Whilst the FRC did identify instances of good practice across most individual aspects of deferred tax asset disclosure, it does highlight that there is scope for improvement.  The FRC expects companies to consider the findings in the thematic when drafting their forthcoming annual reports and accounts.  Specifically the FRC expects companies to:

  • Disclose company-specific information about the nature of convincing evidence supporting the recognition of deferred tax assets when there is a recent history of losses.
  • Base forecasts of future taxable profit on assumptions that are consistent with other forecasts used in the preparation of the annual report and accounts (subject to some specific differences).
  • Reassess the level of recognition of deferred tax assets when there are material changes to the deferred tax liabilities in the same taxable entity and tax jurisdiction.
  • Disclose company-specific information about deferred tax judgements and estimates, including relevant sensitivities and/or the range of possible outcomes in the next 12 months.
  • Explain the extent to which climate change risks have been reflected in deferred tax judgements and estimates, consistent with the degree of emphasis placed on those risks in the narrative reporting.
  • Provide disaggregated information about material components of the tax expense and deferred tax balances.
  • Provide transparent and informative tax disclosures that are consistent across the annual report and accounts.

To encourage improvement in the general quality of company disclosures, the review includes examples of good practice where companies have provided informative, transparent disclosures in relation to deferred tax assets.

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

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