The report is based on the review of IFRS 3 disclosures in the 2012 annual IFRS financial statements of a sample of 56 issuers in the European Union, covering 66 businesses combinations reported in these statements.

For the review ESMA selected the following topics that according to ESMA's experience most frequently result in enforcement issues or lead to diversity in practice:

• intangible assets and contingent liabilities;
• disclosure of fair value measurement techniques;
• recognition and measurement of goodwill and bargain purchases;
• mandatory tender offers;
• contingent consideration;
• definition of a business; and
• adjustments to fair value amounts during the measurement period.

The report details the findings on each item and concludes each point with recommendations for issuers. Although ESMA found that some good business combination disclosures were provided, there were also areas where improvement is needed. Most significantly this was the case regarding the following items:

• Recognition and measurement of goodwill and bargain purchase gains. Descriptions of the factors making up goodwill were often 'boiler plate', and in 24% of the business combinations analysed no intangibles were recognised separately from goodwill. One third of the issuers reporting a bargain purchase did not disclose an explanation of why the transaction resulted in a gain.
• Intangible assets and contingent liabilities. In the summaries of the fair values of major assets and liabilities acquired, the level of aggregation of certain assets and liabilities often limited the usefulness of the information provided. Only 11% of the issuers reviewed recognised contingent liabilities arising from business combinations. Of these, very few gave the required IFRS 3 disclosures.
• Disclosure of fair value measurement techniques. Some issuers referred to external valuations of intangible assets without providing details of the techniques and assumptions used to determine their fair value. Only 35% of the issuers reviewed disclosed how fair values were determined but even of these most disclosed the valuation technique but not the key assumptions.
• General observations on disclosures. While IFRS 3 disclosures were generally provided, in some cases their understandability was impaired as the disclosures were not tailored to the specific circumstances of a transaction or were insubstantial. Some disclosures were also presented outside the financial statements.

ESMA urges national competent authorities to take action where material breaches of the IFRS requirements were identified during the review. In addition, ESMA hopes that the IASB will consider the findings of the report in its post-implementation review of IFRS 3 Business Combinations as ESMA believes that it will assist the IASB in identifying areas where the standard leads to divergence in practice or lack of comparability and where additional clarification or guidance would be helpful. ESMA has sent the IASB a letter to this effect.

Please click for access to the full report and a corresponding press release on the ESMA website.

IFRIC 21 is effective in the EU for annual periods beginning on or after 17 June 2014, however, earlier application is permitted so EU companies can adopt in accordance with the IASB effective date (1 January 2014).

The endorsement status report, dated 16 June 2014, is available here.

Commission Regulation (EC) No 634/2014 of 13 June 2014 amending Regulation (EC) No 1126/2008 adopting certain international accounting standards in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council published in the Official Journal on 14 June 2014 adopts IFRIC 21 Levies issued by the IASB in May 2013.

IFRIC 21 provides guidance on when to recognise a liability for a levy imposed by a government, both for levies that are accounted for in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets and those where the timing and amount of the levy is certain.

IFRIC 21 is effective in the EU for annual periods beginning on or after 17 June 2014, however, earlier application is permitted so EU companies can adopt in accordance with the IASB effective date (1 January 2014).

During the event, selected case studies on business combination transactions taken from published IFRS financial statements were presented and discussed. The key messages provided by participants included the following:

• Timeliness of information received through the annual accounts is a concern given that markets react on the day an acquisition is announced;
• it would be relevant to understand the reasons for a business combination from the perspective of both the seller and the buyer;
• there is a need for more transparency regarding expected synergies;
• adjustments to contingent consideration are not considered part of performance and result in counter-intuitive accounting;
• there is a need for improved transparency on fair value measurement of acquired intangible assets with no active market; and
• book values of assets acquired and liabilities assumed would be useful to better understand the "step-ups" to fair value.

Please click for access to the full feedback statement on the EFRAG website.

The FRC state that outreach by the Interpretations Committee and IASB staff has highlighted that there is significant diversity in applying paragraph 25 of IAS 1. They go on to state that staff papers have noted that some consider disclosure of material uncertainties are only required when it is no longer to appropriate to adopt the going concern basis of accounting. However, others consider that the trigger for making such disclosures is the identification of possible future events and conditions that may cast significant doubt upon an entity’s ability to continue as a going concern. The FRC believe that only the latter interpretation could result in relevant and timely disclosures that provide useful information.

The FRC believes that this perceived diversity will remain if the tentative agenda decision is finalised as currently drafted and that in the absence of a narrow scope amendment to address more fully the disclosure requirements, the need for an interpretation that directly addresses the diversity remains. In particular, the FRC considers that the Interpretations Committee should clarify that the hurdle for making disclosures on material uncertainties must be lower than the hurdle for not adopting the going concern basis of accounting, if such disclosures are to be relevant and timely and thereby useful.

Click for the FRC's comment letter (link to FRC website).

The disclosure projects covered in this update include:

• Principles of disclosure — held discussions during the April 2014 IASB meeting on the scope of the project and will research areas where improvements to disclosures requirements can be issued more quickly.
• Targeted improvements to disclosure requirements:
  • Amendments to IAS 1 — issued exposure draft in March 2014 and will deliberate the feedback received in the third quarter of 2014.
  • Reconciliation of liabilities arising from financing activities — held discussions during March 2014 IASB meeting on results of a survey and will be performing outreach activities and deliberate the outcomes from those activities in the third quarter of 2014.
  • Accounting policies — anticipate the issuance of a paper in September 2014, which will detail how entities can determine which accounting policies are important.
  • Other — a review of all Standards is being conduct to see if there are ways to simplify the disclosure requirements without reducing the usefulness.
• Materiality — held discussions during March 2014 IASB meeting on the application of materiality to assess whether it should be disclosed in financial statements and a study of how to define, interpret, and apply materiality in different jurisdictions and for different purposes is underway. Results of this study will be discussed in September 2014 with a paper soon to follow.

For more information, see the IASB's press release and our disclosure initiative project pages:

• Amendments to IAS 1.
• Reconciliation of liabilities from financing activities.
• Materiality.
• Principles of disclosure.
• General disclosure review.

The publication provides key data on the accountancy profession, its member bodies and practising firms.  The publication illustrates the size and shape of the accountancy profession and shows how it has evolved over recent years.  It brings together information about the major audit firms and seven accountancy bodies including both those who offer audit qualifications and those who register and supervise audit firms.

The publication includes:

• information related to membership, students, income, costs and staffing of the seven accountancy bodies;
• information related to the supervision of statutory auditors; and
• information on 32 of the largest registered audit firms which collectively audit the “vast majority” of UK listed companies and other public interest entities.  This information was provided voluntarily by such firms.

The FRC press release and full publication can be obtained from the FRC website.

The changes which are largely administrative in nature are as follows:

Rule 11 Disclosure of price sensitive information

AIM Rule 11 implements the UK market abuse regime for companies admitted to trading on AIM (AIM companies). The rule and associated guidance have been amended as follows:

• The rule has been changed to require disclosure of information which, if made public, would be likely to lead to a “significant” rather than a “substantive” movement in share price, aligning more closely with the wording of the Financial Services and Markets Act 2000. The Guidance Notes in part 2 of the AIM Rules make clear that this means information a reasonable investor would be likely to use as part of an investment decision. AIM Notice 39 explains that the LSE do not believe this changes the standard of disclosure.
• The revised Rule 11 makes clear that the list of factors set out in Rule 11 are examples rather than a prescriptive list.
• The Guidance Notes for Rule 11 continue to allow companies not to notify information about impending developments in certain circumstances, provided that this information is kept confidential. New guidance has been added setting out the expectation that companies choosing not to make such information public will have effective procedures and controls in place to ensure confidentiality and minimise the risks of a leak.

Rule 18 Half-yearly reports

AIM Rule 18 previously required a half-yearly financial report to include a comparative balance sheet as at the corresponding date in the preceding financial year. Adoption of IAS 34 by AIM companies is not mandatory, but an AIM company that chooses to do so must include both the comparative balance sheets as at the equivalent date in the preceding financial year (to satisfy Rule 18) and as at the preceding year end (to satisfy IAS 34). Rule 18 has now been updated to remove this problem by permitting companies to present the comparative balance sheet either as at the corresponding date in the preceding financial year or as at the last balance sheet date notified. Companies that wish to continue including both comparative balance sheets may continue to do so.

Rule 26 Company information

AIM Rule 26 requires AIM companies to bring key company information together in one place on the company’s website. Four key changes have been made:

• Three years (or, if shorter, the period since admission to AIM) of annual reports must be kept on the website; previously only the most recent set had to be kept available.
• Rule 26 continues to require information about the number of securities in issue, treasury shares, and significant shareholdings, updated at least every six months. This disclosure must now explicitly give the date on which it was last updated.
• There is a new requirement to indicate within the Rule 26 disclosure whether the AIM company is subject to the UK City Code on Takeovers and Mergers (the Takeover Code), or any other such legislation or code in its country of incorporation or operation, or any other similar provisions it has voluntarily adopted.
• Finally, there is a new requirement to give details of any corporate governance code that the company has decided to apply and how it complies with that code. If no code has been adopted, this fact should be stated together with details of the company’s current corporate governance arrangements.

AIM Notice 39, announcing the change in rules, can be found on the London Stock Exchange website here. The London Stock Exchange website also contains copies of the final AIM Rules for Companies and a marked-up version showing the changes.

Our 'Need to know' newsletter on the changes can be found here.

The proposed changes include:

• a proposal that for financial years ending on or after 31 December 2014, FCA regulated entities should be required to submit their accounts electronically to the FCA, rather than in paper form as at present; and
• proposed amendments to the financial reporting requirements for unit trusts and open-ended investment companies (OEICs).  These proposed amendments include:
  • Updating the glossary to require compliance with the 2014 Investment Management Association Statement of Recommended Practice (IMA SORP) rather than the 2010 SORP. This will apply for accounting periods ending on or after 31 December 2015, with early adoption permissible.
  • Updating the requirements for comparative tables of highest and lowest unit prices and net amount of income distributed or retained. The current rule requires the long annual report and accounts include comparative information for the most recent five calendar years; the proposals change this to the most recent three financial years, and also that this information go in the short reports sent to unit holders. This will apply to reports and accounts published on or after 1 April 2015.
  • Abolishing the existing requirement for unaudited aggregated accounts to be prepared by an umbrella fund. In its place the annual report of an umbrella fund will contain either a table indicating the number and value of units in each sub-fund held by another sub-fund at the balance sheet date, or a statement that there are no such interests. This will also apply to reports and accounts published on or after 1 April 2015. 

The CP also explains the FCA’s proposed next steps on transparency of costs and charges. The IMA SORP consultation included proposals but some responses to that consultation said the proposals did not go far enough. The requirements in the SORP on costs and charges will be introduced, and the FCA will work with stakeholders to consider further enhancements to this reporting. 

Comments on the above proposals are requested by 6 August 2014. 

Click for:

• Press release (link to FCA website).
• CP14/8 Quarterly consultation No 5 (link to FCA website).
• UK Accounting Plus Story on the IMA SORP.

Background

In October 2012, the IASB issued Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27) providing an exemption from consolidation of subsidiaries under IFRS 10 Consolidated Financial Statements for entities which meet the definition of an 'investment entity'. Subsequently, the IFRS Interpretations Committee received several submissions regarding the implementation of the exemption. The Committee recommended to the IASB to address the issues in a narrow-scope project, and in March 2014 the IASB formally added a project on IFRS 10/IAS 28 — Investment entity amendments to its work programme.

Suggested changes

The IASB proposes in ED/2014/2 Investment Entities: Applying the Consolidation Exception (Proposed amendments to IFRS 10 and IAS 28) amendments aimed at clarifying the following aspects:

• Exemption from preparing consolidated financial statements. The suggested amendments confirm that an entity can apply the consolidation exemption even if its parent entity measures its subsidiaries at fair value in accordance with IFRS 10.
• A subsidiary providing services that relate to the parent's investment activities. A subsidiary that provides services related to the parent's investment activities should not be consolidated if the subsidiary itself is an investment entity.
• Application of the equity method by a non-investment entity investor to an investment entity investee. When applying the equity method, a non-investment entity investor in an investment entity retains the fair value measurement applied by the associate to its interests in subsidiaries, unless the non-investment entity investor is a joint venturer where the joint venture is an investment entity.

Transition requirements and effective date

The ED does not contain a proposed effective date. Also, no specific transition provisions are included in the ED.

Additional information

Please click for:

• IASB press release (link to IASB website)
• Access to the exposure draft on the IASB website
• Deloitte's Need to Know newsletter explaining the amendments
• Our UK Accounting Plus project page on IFRS 10/IAS 28 — Investment entity amendments