The bulletin considers (1) issues of complexity in financial statements, (2) possible causes, and (3) provides suggestions to the conceptual framework that may reduce the complexity.

FEE agrees with the definition of complexity in the bulletin and also believes that there is a direct relationship between complexity, the costs to preparers and the benefits to users of financial statements. FEE also agrees that the standard-setting process could - to some extent - add to complexity. However, FEE does not support the statement that the standard-setting process contributes to the "avoidable" part of complexity whilst only the complex business environment leads to "unavoidable" complexity:

FEE considers that attempting to distinguish avoidable and unavoidable complexity is a judgmental exercise and we question whether this is necessary in order to address the issue.

FEE therefore comes to the conclusion that complexity should not be considered as a primary factor in standard-setting. Instead, FEE believes that assessing whether undue complexity was introduced in a standard should be considered as part of the field testing and the costs and benefits analysis of a standard.

Please click to access the full comment letter on the FEE website.

So far, only three of the five points in the ED have been redeliberated:

• Adjusting the unearned profit from insurance contracts.
• Presentation of insurance contract revenue and expenses.
• Presentation of interest expense between profit or loss and the other comprehensive income.

The staff paper is available on the IASB's website.

The draft SORP, which will replace the current 2007 SORP (“the 2007 SORP”), sets out proposals for accounting and reporting by pension schemes in the context of the new accounting framework introduced by Financial Reporting Standard (FRS) 102 applicable in the UK and Republic of Ireland for financial years beginning on or after 1 January 2015.  The draft SORP also updates the 2007 SORP to include the requirements of new regulations and changes in the pension industry since the 2007 SORP. 

Some of the most significant changes include: 

• Removal of the exemption available under the Audited Accounts Regulations and 2007 SORP to value annuity policies at nil as FRS 102 requires annuity policies to be valued at the amount of the related obligation.  PRAG comment that “this change will require many schemes to incur additional costs in obtaining valuations for annuities previously reported as nil”.  However the SORP highlights “if the value of the annuity is not considered significant to the Statement of Net Assets and the costs of obtaining a valuation outweigh the benefits then the current practice can continue”.
• Setting out a fair value hierarchy for valuation of financial instruments and introducing new disclosure requirements on the approach to determining fair value of financial instruments.  These disclosures are extended to all scheme investments including investment property.  PRAG comment that “the fair value hierarchy required by FRS 102 is not consistent with the fair value hierarchy under IFRS and this may require providers of investment accounting information to provide two different analyses of investment valuations” and will raise this with the Financial Reporting Council.
• The introduction of new disclosures on investment risks arising on financial instruments.  These disclosures are extended to all scheme investments including investment property.
• The requirement to report scheme investments in subsidiaries, associates and joint ventures at fair value in the Statement of Net Assets.
• Reducing and simplifying the existing guidance on accounting for DC arrangements.
• Incorporating a “pragmatic approach” to accounting for the first contribution due for auto-enrolled employees.  The SORP recommends that opt-out payments made by the scheme are reported as an item of expenditure in the Fund Account.
• Removing “outdated” statutory disclosures required by the Audited Accounts Regulations in relation to types of investment (for example equity, fixed interest public sector, fixed interest other and indexed linked securities analysed between quoted and unquoted and UK and overseas) and disclosure of pooled arrangements between property/other and unit trusts/managed funds.  PRAG are liaising with the Department for Work and Pensions over these changes. 

It is expected that the final SORP will be effective for accounting periods beginning on or after 1 January 2015, consistent with the effective date for FRS 102.  Early application is permitted. 

The ED can be obtained from the PRAG website, here.

In his speech, Mr Prada discussed the globalisation of IFRS; he promoted the IASB's heavily-researched jurisdiction profiles and provided insight into the transition to IFRS for several large economies such as Japan and the United States.

Mr Prada expressed his optimism for the eventual globalisation of IFRS, noting that "IFRS has only recently reached its teenage years." He pointed to the benefits of a single set of global accounting standards:

[F]undamentally it is a question of economics rather than accounting. The thing to remember is that differences in accounting standards add no economic value or benefit to anyone, unless you are involved in the business of reconciliation. . . . [E]xperience has shown that far from being a tool of national competitive advantage, different accounting requirements only serve to diminish the attractiveness of a jurisdiction in the global market for capital. . . . [A]ccounting standards are best thought of as a global good, not as a tool for national competitive advantage. They play an essential supporting role, facilitating growth and promoting a sustainable and prosperous global economy.

Mr Prada also discussed the areas of focus for the IFRS Foundation Trustees' third constitution review: (1) discussing the optimum size of the IASB, (2) reviewing the Accounting Standards Advisory Forum (ASAF), and (3) seeking feedback on further enhancements to the activities of the IFRS Foundation.

A transcript of Mr Prada's keynote speech is available on the IASB website. The stakeholder event also included an interactive panel discussion with senior financial reporting stakeholders. See our previous story on the panel discussion of complexity.

Solvency II is the new solvency regime for all EU insurers and reinsurers, which also covers the insurance operation of bancassurers. Due to come into effect on 1 January 2016, Solvency II aims to implement solvency requirements that better reflect the risks that companies face.

The purpose of the supervisory statement is to highlight to firms the areas (in respect of both the balance sheet recognition and the solvency capital requirement calculation) they need to pay particular attention to when considering whether they can recognise a deferred tax asset on their Solvency II balance sheet and to also clarify the PRA’s expectations in relation to evidence supporting the credibility of profit projections to support deferred tax asset recognition. 

The supervisory statement can be accessed from the PRA website.

* Update 20 February 2015.  The PRA has updated SS2/14.  The updated version is available on the PRA website.  Update 2 December 2016 - the PRA has issued an updated SS2/14 which is available on the PRA website.*

The EU Commission proposed amendments in this area in April 2013.  These were subsequently approved by the Legal Affairs Committee (JURI) of the European Parliament in December 2013.­ 

The new Directive, which amends the Accounting Directive (Directive 2013/34/EU), applies to large public-interest entities with more than 500 employees.  Public-interest entities include listed companies as well as some unlisted companies, such as banks, insurance companies and other companies that are so designated by Member States because of their activities, size or number of employees. 

Such companies will be required to disclose information in their annual reports on environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters.  The disclosure will need to include a description of the policy pursued by the company related to these matters, the results of these policies and the risks related to these matters and how the company manages those risks.  

The European Commission highlight: 

Companies will be required to disclose concise, useful information necessary for an understanding of their development, performance, position and impact of their activity, rather than a fully-fledged and detailed report.  Furthermore, disclosures may be provided at group level, rather than by each affiliate within the group. 

The European Commission clarify that “this Directive does not require companies to comply with Integrated Reporting”.  The requirements in the Directive also need not be applied where a company already includes in its annual report a comprehensive report relying on prescribed frameworks (such as the UN Global Compact, ISO 26000, the German Sustainability Code, or GRI guidelines) covering the information required.

The new rules complement the narrative reporting regulations in the UK which apply for periods ending on or after 30 September 2013.  Through complying with the narrative reporting regulations UK quoted companies will already be disclosing specific information on the company’s strategy, business model, human rights and gender diversity in their strategic report and disclosing information on greenhouse gas emissions in their Directors’ report.  The new Directive will extend the level of disclosures required on diversity (for example policies on age, gender, educational and professional background and professional background) and will specifically require reporting on bribery and corruption matters for the first time.

The Financial Reporting Council comment:

The approval by the European Parliament of the new non-financial disclosure requirements for EU companies is a positive move for investors and complements the FRC’s work on UK Guidance on the Strategic Report.

The Department for Business, Innovation and Skills (BIS) provide further support for the Directive commenting that it strikes “the right balance between ensuring companies report useful information whilst avoiding imposing unnecessary burdens on business”. 

The rules must still be formally adopted by the Council of Ministers which the European Commission expects to happen “in the coming weeks”.  BIS indicate that the rules will likely be brought into force in the UK by 2016. 

Click for:

• European Commission press release (link to European Commission website).
• Full text adopted by the Parliament (link to Parliament's website - please refer to Part 5, pp 312-346).
• FRC press release (link to FRC website).
• BIS press release (link to BIS website).
• Our previous UK Accounting Plus news item the Directive.

The stakeholder event, which also featured a keynote speech by Michel Prada, Chairman of the IFRS Foundation Trustees, included an interactive panel discussion with senior financial reporting stakeholders. Ian Mackintosh, Vice Chairman of the IASB, was a member of the panel.

The panel discussion was titled Global Accounting Standards: Are they fit for purpose? For the largest part the panel members discussed complexity and materiality.

On the question of what introduces complexity into financial reporting, Mr Mackintosh commented users also "assist" in bringing about complexity by asking for more and more information and for interpretations: "Interpretations make the whole system more complex," he stated and added on the frequent requests regarding implementation guidance:

You need to push back when you hear problems and say: 'Are they really problems at all or are they something, if you went away and thought about it properly, you could solve for yourself?'

After the discussion touched briefly on other topics such as the Conceptual Framework project, the leases project, and integrated reporting, it concluded on the topic of public sector accounting. Hans Hoogervorst, Chairman of the IASB, who had already earlier contributed to the discussion from the audience, commented on the IPSASB governance consultation and the question whether the monitoring and oversight of the IPSASB should be given to the IFRS Foundation's Monitoring Board and Trustees:

I would love to do the job – setting financial standards for the public sector – […] but the big danger would be that it would politicise our work even further than is already the case and we would like to retain our independence and if we get thrown into that sea, we might sink.

Please click to access a video recording of the panel discussion on the IASB's website.

At the December meeting of ASAF, the IASB confirmed that in its redeliberations it would explore how to provide relief and and alleviate complexities associated with the proposed guidance for leases. The European delegation offered to consult with European constituents to which areas needed to be simplified the most.

Due to time constraints, the standard-setters did not conduct a public survey but contacted respondents to the prior field-test and other preparers directly. 44 respondents from 10 countries took part in the survey; the majority of which were European listed groups. The industries mostly represented were retail, automotive, telecommunication; and transport and logistics:

• A majority of respondents supported additional recognition exemptions beyond the current short-term exemption; and
• a majority of respondents indicated their preference for a single type A model for all leases. However, some respondents would support a single model only if the distinction between leases and services was improved in the forthcoming standard.

The Financial Reporting Council (FRC) has recently published a letter to the IASB outlining the results of outreach they performed on a number of UK preparers regarding simplifications to the leases proposals.  The results of the FRC outreach support the view for a single Type A model for lessee accounting.  

Please click to access the full report of the EFRAG website.

In addition to discussing IASB Exposure drafts, recent EFRAG publications and stakeholder liaison, the new issue highlights two topical issues:

• EFRAG reform - in the beginning of April, the EFRAG Supervisory Board approved the proposed amendments to the EFRAG Statutes and the EFRAG Internal Rules for submission to EFRAG's current Member Organisations and EFRAG's additional future members; it is intended that in the first half of June the EFRAG General Assembly will be called to approve the amendments.
• Separate financial statements - EFRAG, OIC, ICAC and DASB are conducting a joint project aimed at addressing a number of potential problems that have been revealed by the IAS Regulation option enabling Member States to permit or require non-listed companies to prepare their annual accounts in conformity with IFRS; the publication of a discussion paper is expected in the third quarter of 2014.

The April 2014 edition of EFRAG Insider is available on the EFRAG website.