The update reports on the EFRAG Financial Reporting Board (EFRAG FRB) webcast meeting on 27 January 2023, the EFRAG Financial Reporting Technical Expert Group (EFRAG FR TEG) webcast meetings on 18 and 19 January 2023 and the joint physical meeting of the EFRAG FR TEG and EFRAG Sustainability Reporting Technical Expert Group (EFRAG SR TEG) on 17 January 2023.

The update also lists EFRAG publications issued in January including:

• EFRAG's Final Endorsement Advice Letter relating to its due process regarding Lease Liability in a Sale and Leaseback (Amendments to IFRS 16)
• EFRAG's Draft Comment Letter in response to the IASB's
  Exposure Draft 2023/1 International Tax Reform - Pillar Two Model Rules (Proposed Amendments to IAS 12)
• EFRAG and ICAS's Academic Study: Do companies disclose relevant information about intangibles? – insights from business model reporting and risk reporting
• EFRAG and ICAS's Academic Study: The theory and practice of discounting in financial reporting under IFRS

The update also covers EFRAG's sustainability reporting and related activities.

Please click to download the January EFRAG Update from the EFRAG website.

The Board will discuss the following:

• Maintenance and consistent application
• Post-implementation review of IFRS 9 — Impairment
• Rate-regulated activities
• Dynamic risk management
• Financial instruments with characteristics of equity
• Business combinations — Disclosures, 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.

The following topics have been discussed:

Maintenance and consistent application

The IASB made its final decisions on supplier finance arrangements and lack of exchangeability, and discussed potential items for the next annual improvements cycle.

Supplier Finance Arrangements—The IASB decided that the effective date for the amendments should be for annual reporting periods beginning on or after 1 January 2024, with earlier application permitted. The IASB also decided not to require disclosure of comparative information for prior periods in the annual reporting period it first applies the amendments. Further, the IASB decided not to require the disclosure of certain quantitative information in an entity’s first annual financial statements after the amendments become effective. The IASB expects to issue the amendments in the second quarter of 2023.

Lack of Exchangeability—The IASB decided to proceed with the amendments to IFRS 1 as proposed in the ED but make no amendments to IFRS 13. The IASB also decided to require an entity to apply the amendments for annual reporting periods beginning on or after 1 January 2025, with earlier application permitted. The IASB expects to issue the amendments in the third quarter of 2023.

Annual Improvements to IFRS Accounting Standards—The IASB decided to propose amendments relating to the following items in its next Annual Improvements cycle: hedge accounting by a first-time adopter (IFRS 1); determination of a ‘de facto agent’ (IFRS 10); transaction price (IFRS 9); cost method (IAS 7); gain or loss on derecognition (IFRS 7); credit risk disclosures (IFRS 7).

Post-implementation Review of the IFRS 9 Impairment Requirements

The IASB discussed which items to include in the upcoming Request for Information (RFI) on the post-implementation review of the IFRS 9 impairment requirements. The IASB decided to include the following topics: general approach to recognition of expected credit losses (ECL); determining significant increase in credit risk; measurement of ECL; purchased or originated credit-impaired financial assets; simplified approach for trade receivables, contract assets and lease receivables; loan commitments and financial guarantee contracts; interaction between ECL and other requirements; transition; and objective-based disclosure requirements. The IASB will be asked to approve the publication of, and set a comment period for, the RFI at a future meeting.

Rate-regulated Activities

The IASB redeliberated the proposals on recognition and total allowed compensation in the Exposure Draft Regulatory Assets and Regulatory Liabilities. The IASB made specific decisions with regard to the recognition threshold, enforceability and recognition and performance incentives.

Dynamic Risk Management

The IASB discussed whether financial assets measured at FVOCI or FVPL are eligible for inclusion in the concept of current net open risk position (CNOP). The IASB decided that financial assets measured at FVOCI are eligible for designation in the CNOP, while financial assets measured at FVPL are not eligible for designation in CNOP. The IASB also decided not requiring the retrospective assessment against an entity’s target profile, and only keep the retrospective assessment to check whether the entity has mitigated interest rate risk during the assessment period when applying the DRM model. Instead, the IASB decided the introduction of another retrospective assessment based on the entity’s capacity to realise the expected benefits.

Financial Instruments with Characteristics of Equity

The IASB made decisions related to the classification and presentation of issued financial instruments applying IAS 32 and IAS 1. The IASB made specific decisions with regard to the fixed-for-fixed condition, reclassification, the effects of laws on contractual terms, obligations to redeem own equity instruments, and presentation of financial liabilities and equity instruments.

Business Combinations—Disclosure, Goodwill and Impairment

The IASB decided on certain aspects of the proposed package of new disclosures, focusing on the application of the ‘management approach’, how long information should be required for, changing metrics, use of ranges, and key objectives.

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

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.

The following topics were discussed:

Sources of guidance to identify sustainability-related risks and opportunities and disclosures

The ISSB decided to amend the references to ‘other standard-setting bodies whose requirements are designed to meet the needs of users of general purpose financial reporting’ and ‘entities that operate in the same industries or geographies’ to state that preparers may consider such sources, both in the identification of sustainability-related risks and opportunities and in the identification of disclosures about those risks and opportunities, but that such consideration is not a requirement. The ISSB also decided to amend the sources of guidance to explicitly state that preparers may consider the GRI Standards and ESRS to identify disclosures about sustainability-related risks and opportunities that meet the objectives of [draft] S1. However, this reference will be made in an appendix to IFRS S1.

Effective date

The ISSB decided to require that both IFRS S1 and IFRS S2 are effective for annual reporting periods beginning on or after 1 January 2024. The ISSB also confirmed that early application of IFRS S1 and IFRS S2 is permitted, but only if an entity applies both IFRS S1 and IFRS S2 at the same time. An entity will be required to disclose that it applies IFRS S1 and IFRS S2 early. ISSB members also voted in favour of the staff recommendation related to the applicable timing of the transitional relief from the requirement for an entity to report their sustainability-related financial disclosures at the same time as their financial statements; from the requirement for an entity to measure Scope 1, Scope 2, and Scope 3 emission in accordance with the GHG Protocol Corporate Standard, when they are doing so for the first time by applying IFRS S2; and from the requirement for an entity to disclosure its Scope 3 GHG emissions.

Due process and permission to ballot

The staff summarised the due process steps undertaken throughout the General Sustainability-related Disclosures and the Climate-related Disclosures projects and the ISSB confirmed that it is satisfied that the mandatory due process steps have been met in finalising redeliberations of [draft] S1 and [draft] S2. The ISSB also granted permission for the staff to begin the balloting process for IFRS S1 and IFRS S2 and none of the ISSB members indicated that they intend to dissent from the publication of IFRS S1 or IFRS S2.

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

The Lab has carried out projects on business model reporting in the past, but this project will look at how business model reporting has evolved, including how it is described, how the business model is used as a driver for other disclosures across the annual report and accounts and how it can provide the most useful information for stakeholders.

Further information on the Call for Participants is available on the FRC website.

The document addresses several frequently asked questions, such as:  

• What is corporate governance?
• What is meant by stewardship?
• Does the Corporate Governance code give the FRC powers to enforce against Directors?

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

The purpose of the thematic was to promote continuous improvement in the quality of the audit work performed over the accounting and disclosure of financial instruments, with a focus on the audit of expected credit losses (ECL) for larger banks, by providing auditors and audit committees with examples of good audit practice and common audit challenges.

The report focuses on:

• Classification and Measurement (C&M) of financial instruments
• ECL modelling
• ECL model assumptions
• Measuring Significant Increase in Credit Risk (SICR)
• Modelled Multiple Economic Scenarios (MES)
• Post Model Adjustments (PMAs)
• Completeness and accuracy of data inputs
• Individually assessed exposures
• IFRS 9 disclosures

The FRC performed the review by benchmarking key aspects of each firm’s methodology and assessing a sample of working papers for a recently completed audit by each firm to consider how the methodology was applied in practice. 

The FRC highlights that the Big 4 audit firms have made significant investment in their IFRS 9 audit methodologies and the review identifies a number of examples of good practice, including around the auditing of ECL models and assumptions.  Despite these good practices, the FRC also continues to observe instances of poorer application of methodology by some audit teams across a number of aspects of auditing IFRS 9, including ECL modelling, SICR, MES and individually assessed exposures.  

The thematic identifies a number of common features present in higher quality audits of IFRS 9-related balances:

• The audit team engaged the firm’s internal credit modelling specialists and economists to evaluate and challenge management around all critical assumptions and judgements which materially influenced the ECL estimates, and specifically considered the appropriateness of plausible alternative assumptions.
• A granular risk assessment was performed, identifying and assessing each constituent part of the ECL calculation and evaluating the impact of calculation methods, data inputs, model assumptions, and PMAs to determine which matters were of higher audit risk.
• An evolving audit approach that was reassessed throughout the audit, which considered and tested the design and operation of the bank’s controls around critical ECL elements. This ensured sufficient assurance was obtained as updated risk factors were identified during the course of the audit (for example, designing and performing additional substantive tests when management’s monitoring controls were found not to be operating as initially planned). 

The FRC expects this to be a useful resource for auditors, Audit Committees and stakeholders in the banking sector, highlighting the importance of consistent and appropriate application of IFRS 9 audit methodology, to ensure high quality auditing is performed over this critical and judgemental area.

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

The Code is voluntary and sets an aspirational standard beyond minimum regulatory requirements in the UK. The Code comprises 12 ‘apply and explain’ Principles for asset owners and asset managers, with reporting expectations relevant to their role. In addition, there are six, separate ‘apply and explain’ Principles for service providers with reporting expectations.

The total number of signatories is up to 254 from 235 in September 2022, with assets under management (AUM) of £46.4tn, up from £40.7tn. 

The FRC noted better reporting in this application cycle, which included disclosure of stewardship activity spanning multiple years, and encourages all signatories to use their report as an opportunity to demonstrate their ongoing progress.  For its assessment of reports received in 2023, the FRC will continue to place emphasis on reporting of activities and outcomes.

Further information is available on the FRC website. 

FRED 82 was issued in December 2022.

To support its review, the FRC will be holding a series of roundtables to discuss the proposals in more depth with stakeholders to help inform responses to the consultation.

The rountables will cover both general topics as well as subject specific topics related to revenue and lease accounting. 

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