More information about the issues is set out below:

Click to access all our comment letters to the IASB, IFRS Foundation, and IFRS Interpretations Committee.

Cash flow statement errors remain a recurring issue in Constructive Engagement cases.  The FRC indicates that cash flow statement cases made up 9% of the cases that it resolved through constructive engagement during 2019/20 and this rose to 17% in 2020/21.  The FRC highlights that whilst audit firms have taken appropriate steps where errors have been identified, this increase in cases suggests that further action is needed to prevent the need for restatements and errors occuring.

As indicated in the FRC's Annual Review of Corporate Reporting and latest cash flow thematic review, the FRC have frequently identified what it calls as 'basic' errors in cash flow statements.  Many of these relate to misclassification errors between operating, investing and financing activities. 

The Thematic Briefing indicates that a common root cause of these errors is that the internal consistency checks being performed by audit teams across the financial statements are not picking up the basic cash flow statement errors.  Other root causes identified include:

• The audit team may not have always adequately challenged management on the accounting policies applied and disclosures made affecting the cash flow statement.
• Guidance available to the audit team to deal with technical and complex judgements is not always sufficient or embedded through staff awareness methods and training.
• The review process does not always identify and adequately respond to matters identified in the audit.
• The use of spreadsheets and the manual nature of cash flow workings by companies increases the complexity of auditing the consolidated cash flow statement.

The Thematic Briefing contains case examples and enhancement actions taken by audit firms arising in cash flow statement cases.  The Thematic Briefing also includes a summary of how audit firms have enhanced the audit of cash flow statements.

A press release and the Thematic Briefing document are available on the FRC website.

The review, which was conducted against the backdrop of COVID-19, analysed the reports of 20 companies listed on the main market of the London Stock Exchange, whose interim period ended between June 2020 and September 2020.  The sample of companies selected was across a range of industries, consistent with the FRC’s priority areas.  The thematic review includes extracts from those reports and accounts sampled to highlight useful disclosures.  The key areas of focus for the review were:

• Management commentary and the use of APMs
• Going concern disclosures
• Impairments
• Cash flow information
• Significant judgements and estimates
• Financial instruments
• Fair value measurements
• Related parties
• Defined benefit obligations

Overall, the FRC was pleased with the quality of interim reports, with most companies taking into account the FRC COVID-19 recommendations to enhance their disclosures, particularly in relation to going concern and the statement of cash flows and related notes. However, an area of improvement was identified with regards to providing better explanations on balance sheet movements.

The thematic review’s key observations show that:

• Management commentaries provided an overview of the key events in the first half of the year and how these had affected operations and results. The best examples differentiated the impact that the various stages of the COVID-19 pandemic had on the financial statements.  However, explanations of significant balance sheet movements were not provided in all cases (for example, net pension obligations and lease liabilities). The FRC has noted this as an area of improvement for companies.
• Where necessary, companies provided an update of the risks and uncertainties for the remaining six months of the financial year.
• The majority of the companies in the sample provided detailed explanations for their use of Alternative Performance Measures (APMs) and reconciliations to GAAP measures.  However, whilst some companies gave such explanations, a number of companies had not updated their definitions from the annual report and did not explain why some items were treated as exceptional whilst other similar items were not, for example, the impairment of assets.  The FRC expects to see companies provide specific, rather than general, explanations for all material classes of adjusting or exceptional items.
• Better disclosures of impairments included reasons for the impairments and quantified the key assumptions used in the impairment assessments. In line with the expectation set out in the FRC’s COVID-19 thematic review, several companies considered COVID-19 to be an indicator of impairment at the half year because of the adverse effect it had had on their businesses, market capitalisation and the markets in which they operated within.  However the FRC indicated that in some companies’ interim accounts unclear information was provided around whether an impairment assessment had been conducted or the reason for the impairment.  The FRC expects companies to provide an explanation of material impairments or reversals of impairments recognised in the interim period.  Good explanations include sufficient information about the events and circumstances that lead to the impairment and its impact on the company’s financial position and performance. 
• The best examples of changes in estimates disclosures included an update of the IAS 1 ‘Presentation of Financial Statements’ estimation uncertainty disclosures where relevant, in addition to disclosing the nature and amount of the changes in estimate.
• Better disclosures of significant changes in current and deferred tax balances included a breakdown of the components of the tax charge and the deferred tax balance by category of temporary difference.  However, in some instances it was noted that explanations disclosed by companies of the treatment of tax events were unclear, in particular around annual expected tax credits, one-off tax events taking place during the interim period and the utilisation of unrecognised tax losses carried forward.
• When an event or transaction is significant to an understanding of the changes in financial position and performance of the company since the last annual reporting period, better disclosures followed the disclosure guidance of individual IFRSs to provide updated relevant information.
• Where directors and other members of senior management had waived fees, or agreed to a pay reduction in light of the COVID-19 pandemic, the impact of these was typically not disclosed in the related party section of the financial statements, despite directors and possibly senior management being classed as a related party by virtue of being key management personnel as defined in IAS 24 ‘Related Party Disclosures’.

Whilst the FRC saw many examples of good disclosure, it highlights that there is still room for improvement.   For the 2021 interim reporting season, the FRC highlights that a good interim report should:

• Ensure that management commentaries detail important events that have occurred during the first six months of the financial year, and their impact on the financial statements.
• Provide a comprehensive update of the principal risks and uncertainties for the remaining six months of the financial year.
• Make sure APMs are explained, reconciled to IFRS measures and not given undue prominence.
• Give going concern disclosures that explain the basis of any significant judgements, including whether there are any associated material uncertainties, and the matters considered when confirming the preparation of the financial statements on a going concern basis.
• Detail changes to key judgements and estimates with reasons that enable users to understand management’s views about the future, and their impact on the interim financial statements.
• Explain in sufficient detail, events and transactions that have a material impact on the financial position and performance of the company, such as impairments. Better disclosures update relevant information disclosed in the last annual report by following the applicable disclosure guidance of individual IFRSs, such as IAS 36 for impairment disclosures.
• Focus on providing material disclosures that are clear and concise.

The press release and thematic review are on the FRC website.  A webinar on the thematic review will be held on 16 June.  Further information and details of how to register are available on the FRC website here.

The revised standard provides additional clarity on auditor responsibilities, strengthens the review procedures required on management’s going concern assessment and strengthens reporting requirements in relation to going concern. 

A press release, the revised standard and the feedback statement are available at FRC website.

Accounting for derecognised financial assets when insurers first apply IFRS 17: The Board will discuss an accounting mismatch between financial assets and insurance contract liabilities that could arise at the beginning of the comparative period on transition to IFRS 17 when financial assets have been derecognised during the comparative period. The staff recommend proposing a narrow-scope amendment to IFRS 17. The amendment would permit an entity, on initial application of IFRS 17, for the purpose of presenting comparative information, to elect to measure at fair value through profit or loss financial assets derecognised between the transition date and the date of initial application of IFRS 17. There would be some restrictions on when the election can be made.

Goodwill and Impairment: The Board will continue its discussion of feedback on particular aspects of the DP—feedback from users of financial statements and feedback on disclosing information about business combinations, the effectiveness of the impairment test and whether to reintroduce amortisation of goodwill. The staff propose that the Board reconsider the objective and scope of the project first to determine whether all of the topics covered in the DP should remain as one project. They recommend that the Board prioritise the redeliberations around reintroduction of amortisation of goodwill as this may impact other decisions.

Financial Instruments with Characteristics of Equity: The staff recommend that entities be required to categorise their claims that are financial instruments in a way that reflects differences in their nature and priority, and at a minimum, distinguish between secured and unsecured financial instruments; contractually subordinated and unsubordinated financial instruments; and those issued/owed by the parent and those issued/owed by subsidiaries. Furthermore, to provide information about the risks and returns of particular instruments in the event the entity is liquidated.

Primary Financial Statements: The staff recommend that the Board retain the proposal to introduce separate investing and financing categories in the statement of profit or loss. The staff recommend that all income and expenses from liabilities that arise from transactions that involve only the raising of finance and interest income and expenses from other liabilities to be classified in the financing category of profit or loss. They also recommended that the Board not proceed with either the proposed addition to the definition of financing activities in IAS 7 or the proposed definition of liabilities (in the new Standard).

Dynamic Risk Management: The staff will give the Board an overview of the challenges identified during the outreach and discussed during the April 2021 meeting that are key to the viability and operability of the Dynamic Risk Management (DRM) model, a proposal of the next steps and the indicative timeline to address each of the identified challenges. It is proposed that the Board will decide on the project direction in H1 2022. The staff is not looking for any decisions based on this paper. Instead they are asking only for comments in respect of the proposed next steps and indicative timeline.

Maintenance and Consistent Application:

IFRS Interpretations Committee Agenda Decisions

The Board will be asked if any members object to the publication of two agenda decisions:  Attributing Benefit to Periods of Service (IAS 19) and Hedging Variability in Cash Flows due to Real Interest Rates (IFRS 9).

Lease Liability in a Sale and Leaseback

The Board will consider the feedback received on Exposure Draft ED/2020/4 Lease Liability in a Sale and Leaseback, which proposes to amend IFRS 16. The Board received 87 comment letters. While a few respondents agreed with the proposed amendment, most respondents disagreed with, or expressed concerns about, aspects of the proposals. Nevertheless, most respondents agreed that there is a need to amend IFRS 16 and enhance the measurement requirements for sale and leaseback transactions. Many respondents suggested possible ways forward, including alternative solutions to account for sale and leaseback transactions. The staff plan to submit a paper to a future Board meeting analysing the feedback and providing recommendations on the project direction. No decisions will be required on this month’s papers.

IFRIC Update April 2021

The staff will present the April 2021 IFRIC Update to the Board and will ask whether Board members have any questions or comments.

Disclosure Initiative—Subsidiaries that are SMEs: The staff are drafting the proposal and recommend that it refer to material rather than significant accounting policies. They also propose that a description of resulting changes to the entity’s risk management strategy be included.

Second Comprehensive Review of the IFRS for SMEs Standard: The staff recommend that the status of Section 2 of the IFRS for SMEs Standard will remain unchanged but that it be aligned with the 2018 Conceptual Framework. The Board will assess if there are potential inconsistencies between a revised Section 2 and any other section of the IFRS for SMEs Standard. The staff also recommend the retention of the concept of ‘undue cost or effort’. In relation to IFRS 9, the staff recommend the Board propose an amendment to the IFRS for SMEs Standard to supplement the list of examples in Section 11 with a principle for classifying financial assets based on their contractual cash flow characteristics.

Our pre-meeting summaries is available on our May meeting notes page and will be supplemented with our popular meeting notes after the meeting.

The sessions on Insurance contracts (now Thursday) and on Dynamic risk management (now Monday) have been swapped. We have updated our agenda for the meeting accordingly.

The field-test­ing will help ‘identify potential implementation and application concerns, to determine whether there is a need for additional guidance, and to estimate the cost and effort required to implement and apply the proposals on a recurring basis’.

For more in­for­ma­tion, see the press release on the EFRAG’s website. There is also a ten minute podcast on the field testing. Please note that the deadline for expressing interest in participating has been extended to 20 July 2021.

Update: On 23 July 2021, the EFRAG has extending the deadline for those interested in participating in the field test to 10 September 2021 and extend the period to conduct the field test to 25 October 2021.

The webinar will:

• Provide an overview of the FRC’s Climate thematic review with emphasis on corporate reporting.
• Identify aspects of good practice together with areas that represent an opportunity for enhanced disclosure in the future.
• Offer insights and tips on how better reporting and disclosure can be achieved in practice.

The webinar will be the first of two to be held, with a second webinar focused on how auditors are taking account of climate-related challenges.

Further information and details of how to register for both webinars is available on the ICAEW website.

In the draft comment letter, EFRAG considers that the priorities for the IASB should be to finalise the projects on its active work plan and conduct on a timely basis the planned post-implementation reviews of major standards. 

EFRAG considered the 22 projects described in the request for information and also identified a number of additional possible projects. Overall, EFRAG believes that the following six projects should be given the highest priority by the IASB:

• Connecting financial and sustainability reporting, starting from climate-related financial implications;
• Crypto-assets and related transactions;
• Discontinued operations and disposal groups;
• Intangible assets;
• Statement of cash flows and related matters; and
• Variable and contingent consideration.​

Comments on EFRAG's draft comment letter are requested by 17 September 2021. For more information, see the press release on the EFRAG website. The consultation document EFRAG has published also includes a consultation on EFRAG's own proactive research agenda. A podcast released on 27 July 2021 provides additional insights on EFRAG’s joint consultation on the IASB’s future agenda and EFRAG’s proactive research agenda.

The subject of discussion will be an accounting mismatch between financial assets and insurance contract liabilities that could arise at the beginning of the comparative period when financial assets have been derecognised during the comparative period. The mismatch arises because entities are not permitted to restate comparative information for those assets.

As explaining this mismatch to users of financial statements would be difficult and would not provide useful information because it does not represent an economic mismatch, the staff is asking the Board whether it wants to develop a narrow-scope amendment that would reduce the accounting mismatch, without having a wider effect and creating a risk of unintended consequences.

The amendment the staff is proposing would permit an entity, on initial application of IFRS 17, for the purpose of presenting comparative information, to elect to measure at fair value through profit or loss financial assets derecognised between the transition date and date of initial application of IFRS 17. The transition requirements in IFRS 9 would remain unchanged.

Please click to access the paper for the session (scheduled for Monday 24 May 2021, 13:15-14:15) on the IASB website. A summary of the paper is available here.

Update: The session has been moved to Thursday 27 May 2021, 13:30-14:30.

Update: The original paper has been withdrawn and has been replaced with an updated version of the agenda paper (link to IASB website).