Specif­i­cally, the podcast discusses:

• ISSB’s first meeting at its Beijing office and the first Beijing International Sustainability Conference.
• GRI’s Sustainability Innovation Lab.
• Foundational work keeping technical staff busy.
• Technical discussions at November board week.

For more in­for­ma­tion and access to the podcast, see the press release on the IFRS Foun­da­tion’s website.

This second report complements the observations included in the first IFRS 9 monitoring report published in November 2021. It focuses on high default portfolios and aims to promote further improvements in the expected credit loss (ECL) model practices among EU institutions by providing transparency on the major areas of concern identified by the EBA.

The report states:

• ECL models now lead to timelier recognition of loss provisions. However, most findings confirm previously raised issues and some divergence with the EBA’s expectations on IFRS 9 implementation.
• Overlays are becoming an integral part of the ECL framework and therefore, more efforts are needed to reduce the high degree of judgment for their calibration. Their usage under robust methodological and sound governance frameworks needs to be better framed.
• Backtesting is a key area that requires further investments by institutions to enlarge scope and robustness of the analysis and to improve the use of the backtesting results for the periodic review of IFRS 9 models.

Please click to access the full report on the EBA website.

The Report, which which is based on a review of a sample of 100 companies drawn from the whole premium listed market, notes a general improvement in governance reporting especially relating to workforce and other stakeholder engagement and remuneration. However the Report also draws attention to improvement needed in areas such as monitoring and review of the risk management and internal control systems, avoiding boilerplate language in the application of the UK Corporate Governance Code ("the Code") and focussing on reporting the outcomes of governance processes and policies. 

The review highlights the continuing need for high quality governance which is linked to effective decision-making by boards and management, for greater clarity as to how a company is applying the Code’s principles, and for clearer explanations where there are departures from Code provisions so that shareholders and stakeholders have greater confidence in the quality of governance.

Across the Report, the FRC sets out a number of key messages to draw attention to areas recommended for further improvement, including:

• reporting on board considerations and decisions, the company’s activities and the associated outcomes will reduce boilerplate disclosure and provide more concise and meaningful disclosures to users;
• where there are departures from the Code, in addition to the timeline of anticipated compliance, reporting on how alternative arrangements provide benefits to shareholders and other stakeholders;
• reporting on intermediary outcomes or milestones from stakeholder engagement, which allows users to know the company is working on feedback received and explaining why companies consider stakeholder engagement mechanisms to be effective;
• demonstrating how diversity objectives and initiatives link to company strategy and how these initiatives have contributed to improving their diversity targets;
• discussing the specific internal and external safeguards used to protect the external auditor’s independence;
• highlighting how and why principal risks have changed from the previous year, together with any explanation of changes to the mitigation strategy; and
• explaining how the company’s purpose and values are linked to executive remuneration arrangements.

Monitoring and reviewing the effectiveness of the risk management and internal control systems

The FRC notes there has been ‘little year on year improvement’ in the quality of reporting of the assessment of risk management and internal controls systems and highlight the monitoring and review activities as an area for particular focus. Only 20 companies provided insightful information on how the monitoring and review activities were conducted or what areas were covered. With the increased focus on the UK’s approach to internal controls, the FRC notes that most companies need to do more work to demonstrate robust systems, governance, and oversight.

The Report sets out the FRC’s observations regarding what makes good reporting in this area:

• A clear statement describing the review undertaken: Avoid using general, boilerplate language such as “the board (or a relevant committee) reviews the effectiveness of risk management and internal control systems.” Instead, provide a definitive and clear statement of who performed the review and the scope of the review undertaken during the year.
• Process for the review: Good reporting on the process for the review includes details of how the board or its delegated committee have undertaken the review, who was consulted, what reports or evidence were received, and what areas were covered by the review.
• Reporting the outcomes of the review: Where the board has determined the risk management and internal controls systems to be effective, this should be clearly stated in the annual report together with how the board reached this conclusion. In addition, where material weaknesses or inefficiencies have been identified, the company should explain the nature of the weakness or inefficiency and include the future actions the Board has taken or will take to remediate these.

The FRC highlights that good reporting in this area will provide shareholders, markets, and other stakeholders with confidence in the systems companies have in place to identify, assess, and manage risk effectively and sustain their resilience.

Cyber and information technology

The Report also includes observations from cyber and information technology reporting. While the Code does not require reporting in these areas, the FRC commends companies which outlined the risks, opportunities, and importance of cyber security to their business. The FRC notes that boards should be comfortable with understanding the cyber risks in their business and how they are managed.

In addition, the FRC looked at the extent to which artificial intelligence (AI) was reported in the sample. Just under half of companies mentioned AI in their reports, however none of these companies disclosed the board’s involvement in their approach or oversight of AI. Once again, the FRC has encouraged boards to have a clear view on how AI is being used and developed in a responsible manner and ensure the necessary governance processes are implemented. This may warrant further training and education of boards.

The press release and the full FRC Review of corporate governance reporting are available on the FRC website.  A podcast discussing the key themes is available on the FRC website here.  The FRC will be hosting a webinar to discuss the findings of the review on 27 November.  Registration details are available on the FRC website.

These insights will guide the ISSB's two-year work plan, with plans to finalize both initiatives in the first half 2024. The week included engagements with key stakeholders, such as the World Resources Institute and the Association of Certified Chartered Accountants, exploring the implementation of ISSB standards in China. ISSB Chair, Emmanuel Faber, highlighted global progress at the China Listed Companies Sustainable Development Conference, emphasizing a global-baseline of sustainability-related financial disclosure. The week culminated in the inaugural Beijing International Sustainability Conference, where leaders underscored the need for concerted action to align with ISSB standards.

For more information, see the press release on the IFRS Foundation's website.

Whilst the FRC was pleased with the overall level of disclosures provided in the interim reports sampled, it does identify a number of areas for improvement including transition disclosures, specificity and clarity of accounting policies, judgements and estimates and disclosures of choices made in areas where the standard is not prescriptive (such as the choice of transition method, the determination of risk adjustment and discount rates). 

The FRC expects in-scope companies to consider the findings and better practice examples in the thematic review when preparing their forthcoming year-end disclosures. 

Specifically it expects companies to:

• Provide quantitative and qualitative disclosures, which are both decision-useful and company-specific, which meet the disclosure objective of IFRS 17 and enable users to understand how insurance contracts are measured and presented in the financial statements.
• Ensure that accounting policies are sufficiently granular and provide clear, consistent explanations of accounting policy choices, key judgements and methodologies, particularly where IFRS 17 is not prescriptive.
• Where sources of estimation uncertainty exist, provide information about the underlying methodology and assumptions made to determine the specific amount at risk of material adjustment and provide meaningful sensitivities and/or ranges of reasonably possible outcomes.
• Provide sufficiently disaggregated qualitative and quantitative information to allow users to understand the financial effects of material portfolios of insurance (and reinsurance) contracts.
• Clearly explain the impact of transition to IFRS 17, including details of underlying methodology to measure insurance contracts at the measurement date and disclosure of reconciliations of the contractual service margin (CSM) and revenue by transition method.
• Ensure alternative performance measures, and any changes to such measures, are adequately explained, not given undue prominence and reconciled to the most directly reconcilable line item in the financial statements

Whilst the thematic review is predominantly focused on preparers and auditors of insurance companies, the messages will also be relevant for those non-insurers who may also have insurance contracts within the scope of IFRS 17.  Deloitte's A Closer Look publication additionally provides guidance on aspects of IFRS 17 that such entities should consider when they assess whether contracts they issue are within the scope of IFRS 17.

The FRC intends to follow up this thematic review with a similar review of the first set of annual financial statements under IFRS 17 next year.

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

A summary of the agenda is set out below:

Agenda papers for the meeting are available on the IFRS Foun­da­tion website.

A summary of the agenda is set out below:

Agenda papers for the meeting are available on the IFRS Foundation website.

Please click to access the updated alignment dashboard prepared for the December 2023 IPSASB meeting on the IPSASB website.

Further information is available on the UKEB website.

Comments are requested by 31 December 2023.

The press release and the draft Conformance Suite for the UKSEF Taxonomy are available on the FRC Website.