The publication is based on similar educational material regarding full IFRSs published by the IFRS Foundation in November 2020 and also considers feedback received on the September 2022 Exposure Draft IASB/ED/2022/1 Third edition of the IFRS for SMEs Accounting Standard. 

The publication mainly consists of a non-exhaustive list of examples illustrating when the IFRS for SMEs may require companies to consider the effects of climate-related matters in applying the principles in a number of sections.

The examples in the list refer to the following sections:

• Section 3 Financial Statement Presentation
• Section 8 Notes to the Financial Statements
• Section 11 Basic Financial Instruments
• Section 17 Property, Plant and Equipment and Section 18 Intangible Assets other than Goodwill
• Section 21 Provisions and Contingencies
• Section 27 Impairment of Assets
• Section 29 Income Tax

The publication also notes that in addition to the specific requirements outlined in the table, Section 3 contains some overarching requirements that could be relevant when considering climate-related matters.

Please click to access Effects of climate-related matters on financial statements prepared in accordance with the 'IFRS for SMEs' Accounting Standard on the IFRS Foundation website.

At the joint outreach event, EFRAG will present its preliminary views to the below consultations as developed in its comment letters:

• ISSB’s Request for Information (RFI) on its Agenda consultation 
• International Applicability of SASB Standards 

This will be a hybrid event, taking place in EFRAG offices in Brussels or online.

The EFRAG is urging the IASB to prioritise the publication of the proposed clarifications to SPPI requirements, given the increasing number of financial assets with ESG-linked features in Europe. However, the EFRAG suggests amending the proposed amendments in certain areas, such as adding a requirement to disclosure the policy used by an entity to recognise and derecognise cash. EFRAG also suggests that the IASB provides additional examples to better illustrate the concepts underlying the amendments and address potential application questions. 

Comments on the EFRAG’s draft comment letter are request by 30 June 2023. For more information, see the press release and draft comment letter on the EFRAG’s website.

The update reports on the EFRAG Administrative Board webcast meeting on 25 April 2023, the EFRAG Financial Reporting Board (EFRAG FRB) webcast meeting on 24 April 2023, the EFRAG Financial Reporting Technical Expert Group (EFRAG FR TEG) webcast meetings on 13 April 2023 and 24 April 2023, and the International Forum of Accounting Standard Setters (IFASS) meeting on 19-21 April 2023.

The update also lists EFRAG publications issued in April including: 

• EFRAG's Endorsement Advice Letter regarding three Amendments to IAS 1 Presentation of Financial Statements
• EFRAG's preparatory draft of its Endorsement Advice letter relating to the endorsement for use in the EU of International Tax Reform—Pillar Two Model Rules (Amendments to IAS 12)
• EFRAG's Recommendations and Feedback Statement summarising the main comments received on its Discussion Paper Better Information on Intangibles – Which is the best way to go

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

Please click to download the April 2023 EFRAG Update from the EFRAG website.

This decision is in part due to the limited changes in the 2023 update to the International Financial Reporting Standards (IFRS) Taxonomy.

Please click for the announcement on the ESMA website.

The plans propose replacing the existing standard and premium listing share categories with a single listing category for commercial company issuers of equity shares. The aim is that this new framework should be more straightforward and allow sufficient flexibility to cater for a diverse range of companies, while maintaining transparency for investors to support market integrity and oversight.

From the perspective of good corporate governance, the focus is on ensuring that investors continue to have the information they need to make initial and ongoing investment decisions. This would be supported by retaining the annual reporting requirements in relation to the UK Corporate Governance Code that exists for premium listed companies for this new equity shares in commercial companies (ESCC) listing category. This means that existing standard listed commercial companies will need to ready themselves for reporting against the UK Corporate Governance Code (both in terms of their appliance of the Code principles and their level of compliance with the Code’s provisions).

At present overseas companies with a premium listing are still required to report against the UK Corporate Governance Code regardless of other codes which may apply in their jurisdictions. The paper acknowledges that consideration may need to be given to any potential barriers or frictions this would generate if applied to the new ESCC listing category going forward. Views are sought on what approach might best promote corporate governance standards, for example, should overseas issuers be asked to explain their approach compared to the UK Code provisions, or should they be able to disclose that an alternative code is followed with a link to the relevant code?

The consultation paper makes clear that the FCA plans to continue to lead the way in ongoing disclosures on sustainability matters and the rules already implemented in relation to climate change and diversity for both premium and standard listed issuers would be retained for the new ESCC category. It also notes that the FCA has made a clear commitment to working closely with global bodies to develop further international sustainability standards in the future.

Other proposals in relation to equity listing reform are as follows:

• The removal of eligibility rules requiring a three-year financial and revenue earning track record as a condition for listing, and no longer requiring a ‘clean’ working capital statement.
• Modified and simplified eligibility and ongoing rules requiring that a company has an independent business and has operational control over its main activities, to create a more permissive approach to accommodate a range of business models and corporate structures.
• Modified rules requiring listed companies to conclude a shareholder agreement with a controlling shareholder to ensure flexibility by moving to a comply or explain and disclosure-based approach, again to create a more permissive approach for a wider range of business models and corporate structures.
• A more permissive approach to dual class share structures.
• The removal of compulsory shareholder votes and shareholder circulars for significant transactions.
• The removal of compulsory shareholder votes and shareholder circulars for related party transactions, including where a controlling shareholder is involved and a controlling shareholder agreement is not in place.
• The potential merger of the rules for Sovereign Controlled Commercial Companies into the single category for equity shares, subject to modifications if required.
• A single set of Listing Principles and related provisions.

There is an eight week consultation period closing on 28^th June 2023. This consultation is being done in advance of specific rule-making so there will be a second, more detailed, consultation which the FCA say will run on an accelerated timetable aiming to be complete by the end of 2023. At this stage the implementation timetable and any transition arrangements are not specified.

A press release and the full consultation are available on the FCA website.

No amendments have been made to FRS 101 as a result of this review.

Click for (all links to the FRC website):

• Press release
• Amendments to Basis for Conclusions FRS 101 Reduced Disclosure Framework – 2022/23 cycle
• Feedback Statement and Impact Assessment – Amendments to Basis for Conclusions FRS 101 Reduced Disclosure Framework – 2022/23 cycle
• FRS 101 Reduced Disclosure Framework 

In 2022 the Government Response to the BEIS White Paper asked the FRC to use a Code-based approach to strengthen boardroom focus on internal control matters rather than introducing a legislative requirement and that represents one of the most significant changes proposed. Other proposals are:

• Inclusion of wider responsibilities and considerations for the Board and Audit Committee in relation to Environmental, Social and Governance (ESG) objectives and other sustainability matters
• Incorporation of forthcoming new requirements for an Audit & Assurance Policy (AAP) and the Resilience Statement
• Reflecting the publication of ‘Audit committees and the external audit: Minimum Standard’
• Strengthened reporting on malus and clawback remuneration arrangements
• Some other areas of reporting on governance arrangements identified as being weaker

Declaration on the effectiveness of the risk management and internal control systems

With the ultimate aim of strengthening board accountability for the effectiveness of the risk and internal control frameworks, the first proposed amendment is to the relevant Principle: “The board should establish a framework of prudent and effective controls, which enable risk to be assessed and managed” is replaced by “The board should establish and maintain an effective risk management and internal control framework”.

This amended Principle is reinforced by an extension of the existing Code provision (Provision 29) in relation to the board’s responsibility to monitor the company’s risk management and internal control systems and, at least annually, carry out a review of their effectiveness. Building on this review and monitoring activity, it is proposed that the board provides the following disclosure in the annual report:

• A declaration of whether the board can reasonably conclude that the company’s risk management and internal control systems have been effective throughout the reporting period and up to the date of the annual report;
• An explanation of the basis for its declaration, including how it has monitored and reviewed the effectiveness of these systems; and
• A description of any material weaknesses or failures identified and the remedial action being taken, and over what timeframe.

There is also a proposal to amend what was previously considered to make up “all material controls” from “financial, operational and compliance” to “operational, reporting and compliance”. So replacing “financial” with a wider “reporting” control consideration. The paper explains that this has been done because FRC engagement with stakeholders has made clear that narrative reporting increasingly includes materially important information, in the context of each company, which is used by investors for capital allocation decisions. So this change is intended to recognise the importance of narrative reporting on for example strategy, principal risks, corporate governance and environmental and social matters in addition to financial reporting.

In relation to a description of material weaknesses or failures identified, the consultation paper states that the FRC does not envisage that companies will report on all weaknesses identified during the reporting period but that they will be transparent about those weaknesses considered by the company to be material, such as those events which could have a significant impact on a company’s strategy, operations, reporting or compliance objectives. The revised Guidance which will follow will discuss what may constitute a material weakness, but the FRC says that it will ultimately be for the board to determine which weaknesses are material to their specific situation and should be reported in the annual report.

On internal controls, the paper states that the revised Code will not ask for reporting on whether the board intends to obtain external assurance over the effectiveness of the company’s risk management and internal control framework. That will be a matter for companies to determine when setting their Audit and Assurance Policy.

ESG and sustainability matters

Recognising that the Code should reflect the importance of ESG and sustainability matters and that good governance will play an essential role in assessing sustainability-related risks, opportunities and impacts, setting targets, using appropriate internal controls and commissioning assurance where necessary, the following additions to the Code are being proposed:

• An expansion of Provision 1 to make clear that environmental and social matters (including climate ambitions and transitions plans) should be considered in assessing the basis on which the company generates and preserves value over the long-term.
• The addition of “monitoring the integrity of narrative reporting, including sustainability matters, and reviewing any significant reporting judgements” in the list of audit committee responsibilities.
• A requirement for the audit committee to report in the annual report on the significant issues that it considered relating to narrative reporting, including sustainability matters, and how these issues were addressed and, where commissioned by the board, the assurance of environmental, social and governance metrics and other sustainability matters.
• A requirement that consideration of whether remuneration outcomes are clearly aligned to the successful delivery of the company’s long-term strategy includes consideration of environmental, social and governance objectives.

The Audit & Assurance Policy and the Resilience Statement

The FRC has reached the view that all companies reporting against the Code should consider producing an AAP on a ‘comply or explain’ basis, using the future legislation as a guide to what should be included. This reflects the fact that not all companies reporting against the Code will be within the scope of the new legislative requirement (UK companies with annual turnover greater than £750m and 750 or more employees).

To achieve this the FRC have added “developing, implementing, and maintaining the audit and assurance policy” to the list of audit committee responsibilities and have cross-referenced to the future legislative requirement. In addition, the audit committee reporting requirement has been expanded to include the “approach to developing the triennial audit and assurance policy and the annual implementation report”.

In relation to the new Resilience Statement, which will also only be a legislative requirement for some companies reporting against the Code due to the size criteria, the proposed approach is to make clear that compliance with the new reporting requirement for a Resilience Statement will also mean compliance with the relevant Code provisions. The existing Code provision on going concern is retained unamended but the viability statement provision has been amended to just call for an explanation of how the board has assessed the future prospects of the company including its ability to meet its liabilities as they fall due.

Presentation of a Resilience Statement would remove the need to present separate disclosures to meet the Code provisions on going concern and future prospects. Conversely, companies below the size threshold for the Resilience Statement will still, under the Code, be required to report on an assessment of going concern and future prospects in order to meet those remaining Code provisions.

Audit committees and the external audit: Minimum Standard

A new Standard for audit committees in relation to external audit was issued in May 2023. The Standard contains several sections which are identical to existing Code Provisions, specifically where these Provisions cover the work of the audit committee in relation to external audit, and the requirement for the audit committee to report on this. To avoid duplication, the FRC is proposing that these aspects are removed, and that the new Code instead refers companies to the Standard.

The paper recognises that, as the Standard was intended to apply to FTSE 350 companies only, there will be some non-FTSE 350 companies who will be brought into the scope of the Standard because of this proposal. However, the FRC notes that non-FTSE 350 companies can approach implementation of the Standard on a ‘comply or explain’ basis.

Reporting on malus and clawback arrangements

It is proposed that the following new reporting is required in relation to malus and clawback arrangements:

• the minimum circumstances in which malus and clawback provisions could be used;
• a description of the minimum period for malus and clawback and why the selected period is best suited to the organisation;
• whether the provisions have been used in the last reporting period and, if provisions have been used, a clear explanation of the reason; and
• the use of malus and clawback provisions in the last five years.

The intention is to include further guidance on the suggested format for this disclosure in an update to the Guidance on Board Effectiveness.

Other proposed changes

The consultation includes a number of other proposed changes designed to enhance and/or clarify existing disclosure requirements where the FRC has observed weak reporting in past reviews. These include:

• Activities and outcomes - when reporting on its governance activity the board should focus on outcomes in order to demonstrate the impact of governance practices and how the Code has been applied
• Culture – an additional requirement to report on how effectively the desired culture has been embedded
• Shareholder engagement – the Chair to report on the outcomes of engagement with shareholders
• Director appointments – all significant director appointments to be listed in the annual report together with an explanation of how able to meet those commitments
• The remuneration policy – a replacement of the existing Provision 40 characteristics with a more focused requirement that “the policy should be clear, identify and mitigate risks associated with remuneration, and ensure outcomes are proportionate and do not reward poor performance”

Supporting guidance

The revised Code will be supported by updated guidance, and the paper notes that work is currently underway to revise the Guidance on Audit Committees and Guidance on Board Effectiveness so that these can be aligned with the revised Code and Audit Committee Standard. The FRC will also be amending the Guidance on Risk Management, Internal Control and Related Financial and Business Reporting specifically to take account of changes to the principles and provisions on risk management and internal control.

Comments on the consultation are requested by 13 September 2023.  The intention is that the revised Code will apply to accounting years commencing on or after 1 January 2025 to allow sufficient time for implementation.

The FRC will also be hosting a webinar and a series of roundtables related to this topic.

A press release and the consultation are available on the FRC website.

The FRC is aware that smaller businesses or those who are new to the PIE sector frequently struggle to meet regulatory requirements.  As a result it has launched the Scalebox initiative to support firms in developing and maintaining audit quality as they grow or start out in the PIE audit market.  

A separate, independent team within the FRC's Audit Firm Supervision (AFS) division will oversee the Scalebox.  The team will focus its work in areas where there are common findings, where requirements are changing, or where firms need to focus as they grow.

The Scalebox may undertake activities such as:

• reviewing aspects of completed audits to provide feedback on good practice and areas for improvement.
• reviewing a particular element of a firm's system of quality control, including specific areas of audit methodology and audit approach.
• reviewing a firm's actual or proposed governance processes if it has chosen or is planning to adopt the Audit Firm Governance Code.

All firms currently in Tier 2 and Tier 3 for FRC Supervision purposes are eligible to join the Scalebox as well as firms intending to enter the PIE audit market.

At the same time the FRC has published the latest report in its 'What Makes a Good' series' which focuses on smaller PIE audit firms.  The publication includes an overview of what the FRC expects firms to focus on to ensure that their audit practice is capable of performing high quality audits and a guide to how the FRC regulates PIE audit firms.  

A press release, more information about the Scalebox initiative, the 'What makes a good smaller PIE audit firm' publication and a podcast on supervising audit quality are available on the FRC website.

This follows the Government's Response to its ‘Restoring Trust in Audit and Corporate Governance’ consultation, and was driven by a specific recommendation from the Competition & Markets Authority’s Statutory Audit Services Market Study that the FRC “should have the power and a requirement to mandate minimum standards for both the appointment and oversight of auditors”.

A consultation process took place earlier this year and just a small number of changes have been made to the final version of the Standard. The title has been changed to reflect the focus on the audit committee’s role in relation to external audit only and the section on oversight of auditors has been expanded to include more guidance on how the audit committee should undertake an assessment of the effectiveness of the audit process.

The Standard is applicable to the FTSE350 only (although is noted as representing good practice for more general application). Companies within scope are encouraged to begin to apply the Standard as soon as they are able.  Additionally until the establishment of the Audit Reporting and Governance Authority (ARGA), the FRC does not have powers to enforce the Standard and so until that time, the intention is that the Standard is adopted on a 'comply or explain' basis by FTSE350 audit committees.  The FRC states that the majority of the text in the Standard is taken from existing publications including the UK Corporate Governance Code, Guidance on Audit Committees and Audit Tenders: Notes on Best Practice. The key new aspect is primarily to reflect the Government’s focus on diversity in the audit market.

In addition to an initial section on ‘Scope & Authority’, the Standard comprises the following sections:

• Responsibilities
• Tendering
• Oversight of auditors and audit
• Reporting

Responsibilities

This section reflects the audit committee responsibilities set out in the UK Corporate Governance Code in relation to the external audit but also includes some additional responsibilities:

• requiring that the company manages its non-audit relationships with audit firms to ensure that it has a fair choice of suitable external auditors at the next tender and in light of the need for greater market diversity and any market opening measures which may be introduced
• engaging with shareholders on the scope of the external audit (where appropriate)
• inviting challenge by the external auditor, giving due consideration to points raised and making changes to financial statements in response where appropriate

Tendering

This section of the Standard includes the recommendations from the FRC’s ‘Audit Tenders: Notes on Best Practice’ but also incorporates considerations of the need to expand audit market diversity and challenges to those firms eligible to participate in a tender process but who choose not to and how that is in the public interest. In particular, the Standard states “The Audit Committee should remind eligible firms that refuse to tender that they may as a result be ineligible to bid for non-audit services work.”

Oversight of auditors and audit

This section emphasises the need for the audit committee to create a culture which recognises the work of and encourages challenge by the auditor. The Standard also notes that engagement level Audit Quality Indicators can be used as evidence of the effectiveness of the external audit and the auditor.

This is the section of the final Standard to receive the most significant amendment further to the consultation process. Reflecting the importance of the audit committee’s assessment of the effectiveness of the external audit process, this section has been expanded to include elements from the ‘Guidance on audit committees’ in relation to that assessment.

Reporting

The audit committee will be required to report on the activities it has undertaken to meet the requirements of the Standard. Where, in line with the new responsibility to engage with shareholders on the scope of the audit, shareholders have requested that certain matters be covered in an audit and that request has been rejected, an explanation of the reasons why should be provided.

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