In its letter, ESMA expresses the view that the objective of the proposed macro hedging model should be kept narrow, in order to address the issues that led to the current European carve-out of certain requirements of IAS 39.  In developing a macro-hedge model, ESMA considers that the IASB needs to find a balance between aligning accounting with risk management activities and the complexity and conceptual difficulties that arise from any proposals.

ESMA has several concerns about the Portfolio Revaluation Approach (PRA) proposed by the IASB, in particular the need to address:

• the issue of core demand deposits;
• treatment of prepayment risk at portfolio level;
• designation of sub-benchmark instruments; and
• the interaction of the scope of macro hedging with other standards, for example IAS 37 (in the context of pipeline transactions).

It is also concerned that any practical expedient in the PRA could only be used to the extent that it represents a faithful proxy to the managed exposures. In its view, neither of the proposed approaches in the discussion paper (dynamic risk management or risk mitigation) is fully satisfactory.

ESMA disagrees with the proposal that ineffectiveness as a result of the PRA should be deferred in other comprehensive income.  It is also concerned that application of PRA to risks other than interest rate risk as this may create a range of audit and enforcement challenges, as well as further conceptual issues and so does not support this.

In conjunction with its response to the IASB, ESMA has also submitted a response to the European Financial Reporting Advisory Group (EFRAG)'s consultation on its draft comment letter to the IASB on this discussion paper.

Both the response to the IASB and the response to EFRAG can be downloaded from the ESMA website.

IFRS 15, issued by the International Accounting Standards Board (IASB) on 28 May 2014, supersedes IAS 18 'Revenue', IAS 11 'Construction Contracts' and a number of revenue-related interpretations. Application of the standard is mandatory for all IFRS reporters and it applies to nearly all contracts with customers: the main exceptions are leases, financial instruments and insurance contracts.

The new standard provides a single, principles based five-step model to be applied to the recognition of revenue from contracts within its scope. The five steps are:

• Identify the contract with the customer,
• Identify the performance obligations in the contract,
• Determine the transaction price,
• Allocate the transaction price to the performance obligations in the contracts,
• Recognise revenue when (or as) the entity satisfies a performance obligation.

EFRAG supports the adoption of IFRS 15 and recommends its endorsement.  EFRAG’s initial assessment is that IFRS 15 meets the technical requirements of the Regulation (EC) No 1606/2002 of the European Parliament and of the Council on the application of international accounting standards.     

EFRAG’s conclusion is supported by an Effects Study Report which considers the costs and benefits of implementing IFRS 15. EFRAG’s assessment is that the benefits for preparers and users in implementing IFRS 15 outweigh the costs.

Comments are requested by 15 December 2014. 

Click for (all links to EFRAG website):

• Press release
• Draft endorsement advice and effects study report

The Sustainable Stock Exchanges initiative (SSEI) was founded in 2009 by the United Nations to exchange experience in the development and promotion of corporate social responsibility and responsible investment among investors, listed companies, regulators and capital market infrastructure institutions. The SSEI prepares biennial reports providing a periodic picture of sustainability initiatives implemented by stock exchanges and regulatory bodies around the world. The reports also highlight current best practices, trends, opportunities and challenges. Some key findings of the 2014 report are:

• Over forty per cent of the 55 exchanges reviewed offer at least one index integrating social and/or environmental issues;
• Over one-third of the exchanges provide either sustainability reporting guidance or training to the listed companies on their exchange;
• Twelve of the 55 exchanges require aspects of environmental and social reporting for at least some of their companies, with 7 of those exchanges requiring such reporting for all listed companies;
• 19 members of the G20 have at least one regulation in place requiring disclosure of some social and/or environmental metrics by companies;
• Of the 32 Securities regulators represented on the board of the International Organization of Securities Commissions (IOSCO), more than one-third have introduced a sustainability reporting initiative.

However, the report also notes:

While a 'new mainstream' is emerging among policymakers, regulators and exchanges, the sustainability challenges the world faces remain enormous. Further progress by exchanges and their regulators is particularly important given the wider sustainable development context, and the expected introduction of the UN Sustainable Development Goals in 2015. At present, financial markets are not set up to channel sufficient funds towards sustainable development objectives.

Please click for access to the report and a press release on the SSEI's 2014 Global Dialogue (links to SSEI website). The SSEI currently counts 16 partner exchanges from every continent; most recently, Deutsche Börse joined the initiative (link to Deutsche Börse website).

This letter sets out the FRC's response to the IASB' discussion paper, which was published in April 2014.

The FRC believes that the paper is a helpful step in the IASB's macro hedge accounting project, as it clearly articulates the risk management approach adopted by some banks in practice and considers the difficult accounting issues raised by this. However, overall they believe that the IASB's proposed Portfolio Revaluation Approach is a step too far in aligning accounting requirements with an entity’s risk management activities.

The FRC encourages the IASB to continue to develop an improved macro hedge accounting model, as this is one of the weaknesses of IAS 39. However, they believe that the approach taken by the IASB is not the most appropriate one. Rather than developing a generally applicable model for macro hedge accounting in isolation from existing accounting principles, they believe that the IASB should identify the barriers that exist in the current framework that prevent more meaningful and flexible macro-hedge accounting. The Board could then consider which of these can be removed, whilst still retaining the overall integrity of the IFRS accounting framework and building on the principles in IFRS 9's general hedge accounting model.

The full comment letter can be downloaded from the FRC website.

The objective of the two consultations (one focused on preparers and one focused on users) was to obtain constituents' views on examples of transactions that would qualify as leases under the proposals, but that in the constituents view are in substance services, and the two alternative approaches proposed by the IASB and the FASB (particularly which is more appropriate and/or less costly to apply). The preliminary results of the consultations were discussed at the outreach event.

The main findings of the survey were:

• Respondents provided several examples of transactions that would qualify as leases under the 2013 ED proposals, but in the constituents' view should not be recognised on a lessee's balance sheet.
• Constituents noted that more work had to be done on the scope of application and/or on the definition of a lease.
• Of the two approaches that surfaced during the March 2014 joint meeting where the IASB and FASB did not reach a consensus regarding lessee accounting, users preferred the IASB approach while preparers' views were mixed and only a slight majority preferred the IASB model.

Please click for access to the reports on the EFRAG website:

• Feedback report from the public consultations
• Summary report on the outreach event

The new website was developed as a result of user feedback. The three-tiered subscription levels include:

• eIFRS Professional — Provides access to authoritative, annotated versions of IFRS and supporting materials. A new "standards comparison tool" allows users to view changes to a Standard between current, prior and subsequent years. Existing subscribers to eIFRS will automatically be upgraded to eIFRS Professional.
• eIFRS Comprehensive — Includes a subscription to eIFRS Professional as well as offline, print editions of the Standards and other materials.
• eIFRS Basic — Provides users with limited access to the basic IFRS Standards.

More information is available in the IASB's press release and on the eIFRS website.

Final endorsement of IFRS 15 is currently expected in the second quarter of 2015.

The report also reflects that vote of the Accounting Regulatory Committee (ARC) on three amendments to standards (bearer plants, acceptable methods of depreciation, and acquisitions of interests in joint operations) has been postponed to the first quarter of 2015.

The endorsement status report, dated 15 October 2014, is available here.

Mr Prada made the case for global reporting standards by stressing that these liberate companies from the burden of complying with different, and often incompatible, national accounting requirements, give investors access to revenue and profit numbers all calculated on the same basis regardless of the country they are calculated in, and provide market supervisors and government leaders around the world with a standardised set of performance metrics on which to build globally consistent regulatory initiatives. He noted: "[I]t is in everyone's interest to reduce friction in the global system. That is what IFRS does."

However, Mr Prada also warned that these benefits can only fully be realised when IFRSs are adopted as issued by the IASB:

Of course, global standards only function properly if everyone adheres to them. As tempting as it may be for jurisdictions to pick and choose those standards that appeal and omit those that do not, doing so would undermine the very essence of what we are aiming to achieve. The reality is that if you want to reap the benefits of global standards, then everyone must commit themselves to adopt the same, single set of high quality standards.

Turning to the ISAR meeting's overall topic of monitoring of compliance and enforcement of international corporate reporting standards and codes he admitted that although IFRSs are a success story, adoption of them can only be part of the package. As a next step, it must ensure that the standards are being used correctly and consistently within a strong regulatory and legal framework. In this connection he mentioned that the IASB does not have the mandate nor the resources to enforce and monitor application of the standards that it creates. That would be up to governments, financial regulators, and auditors in individual jurisdictions.

Nevertheless, as Mr Prada pointed out, the IFRS Foundation has undertaken a number of initiatives aimed at promoting the correct use and application of IFRSs. In September 2013 for example, the IFRS Foundation and the International Organization of Securities Commissions (IOSCO) announced that the two organisations will deepen their cooperation in the development and implementation of IFRS on a globally consistent basis. And in July 2014 this was followed by similar agreement with the European Securities and Markets Authority (ESMA). Mr Prada also highlighted the efforts of the IFRS Foundation Education Initiative that produces freely available training material that is also translated into all of the world's most widely spoken languages and offers regional multi-day IFRS teaching workshops, especially in the emerging markets.

Summing up the initiatives of the IFRS Foundation, Mr Prada expressed the hope that these efforts should bring great long-term benefits to the global financial reporting community:

By improving the quality of accounting in every jurisdiction, we are not only working to the benefit of those individual countries. We are also contributing to the overall health of the global financial system.

Please click for access to the full text of Mr Prada's speech on the UNCTAD website.

Today's morning session also saw a keynote adress by Gonzalo Ramos, Secretary-General of the Public Interest Oversight Board (PIOB), and presentations by Richard Thorpe, Head of Accounting and Auditing Issues and Policy of the  Financial Stability Board (FSB), Gert Luiting, Advisor at the International Forum of Independent Audit Regulators (IFIAR), Mike Hathorn, Board Member of the International Federation of Accountants (IFAC), Teresa Fogelberg, Deputy Chief Executive of the Global Reporting Initiative (GRI), and Neil Stevenson, Brand Director of the International Integrated Reporting Council (IIRC). All speeches are available on the general homepage of the thirty-first ISAR meeting (under the tab "Presentations").

The meeting will consider the recently published Financial Reporting Council (FRC) consultation document, 'Accounting standards for small entities - implementation of the EU Accounting Directive'.

Click for more information, including registration details on the ICAEW website.

Every year, the FRC's Conduct Committee ("the Committee") reviews the reports and accounts of a sample of public and large private companies to determine whether they comply with the Companies Act 2006 and other reporting requirements. Where it appears that those requirements have not been complied with, the Conduct Committee investigates the position and determines the action to be taken to address any non-compliance.  Since FTSE 350 companies represent the major part of investment in UK listed companies, the Committee reviews their reports on a regular basis, with FTSE 100 companies reviewed every three years and FTSE 250 companies every four years.

This year, the Committee reviewed 271 sets of reports and accounts, with 100 of these reviews resulting in the opening of correspondence with the company. The committee also closed four long-standing Review Groups set up in 2013, three involving interests held by pension funds in Scottish Limited Partnerships and on in relation to revenue recognition.

Key messages

The key messages from this year's report are as follows:

• Overall the level of corporate reporting by large public companies, particularly FTSE 350 companies, has been good, with the issues raised by the Committee usually involving unusual or complex transactions rather than straightforward issues.
• A higher number of poorer quality accounts continue to be produced by smaller listed and AIM companies. In response to this the FRC has set up a project aimed at improving the quality of these companies.
• In the light of the FRC's 'Clear & Concise' initiative, the Committee emphasises that their letters of enquiry discourage boards from including immaterial matters in their reports and explain that only disclosures that are material or relevant should be included. The Financial Reporting Lab's report 'Towards Clear & Concise Reporting' provides information on the practical steps that companies can take to make their reports clearer and more concise.

The report includes some advice for companies on how they should respond to communication from the Committee, with a number of good practices that they believe tend to result in earlier closure of the matters under review.

Emerging issues

The report identifies four emerging issues, prompted either by recent changes to legislation or accounting standards or where the Committee has had an early indication that they will be particularly relevant in the near future. These are:

• Pensions - this is an area of change, with the introduction of the revised IAS 19 and the requirement for disclosures in relation to the governance of pension plans and the impact of the applicable regulatory framework, such as the level of any minimum funding requirement. The Committee has not yet identified any substantive issues with the application of revised accounting policies in this area, however they have seen variable practice regarding disclosures around minimum funding requirements.
• De facto control of subsidiaries - with the majority of UK companies applying IFRS 10 for the first time in 2014, companies must now consider whether they exert 'de facto control' over an entity and, if so, include it in their consolidated results. As this is a substantive change from the previous standard, the Committee encourages boards to consider this area carefully.
• Acquired intangibles - with an improving economic outlook in the UK, the Committee expects to see more merger and acquisition activity. They would expect most business combinations to result in the recognition of some separate intangible assets and will look to challenge companies where business combinations result in the recognition of material goodwill but few or no intangible assets.
• Other legislation or regulation - although the Committee does not have a statutory remit to monitor compliance with legislation or regulations beyond the financial reporting requirements of the Companies Act, they will draw failures to comply with other regulations to the attention of companies. An example of this is the requirements of the Large and Medium-Sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 in relation to disparities between the remuneration of senior executives and other employees of a company.

Common areas of challenge in 2013/14

The report identifies 10 areas that were commonly raised with companies during the year:

• Business reviews / Strategic Reports - particularly where this focussed only on good news or where non-recurring items were not adequately explained;
• Pensions - in particular where there was a lack of clarity around whether a pension fund surplus results in a recognisable asset, whether a company should recognise a liability for its minimum funding requirements and where pension schemes were structured to achieve a particular accounting effect;
• Exceptional and other similar items - in particular the use of additional columns or lines on the face of the income statement, poor description or inconsistent application of policies for identifying exceptional items, identification of recurring items as exceptional, lack of symmetry in the treatment of debits and credits and lack of comparative information;
• Critical judgements - where the precise nature of the judgement was insufficiently clear, for example where it simply repeated the relevant accounting policy, and where disclosures did not sufficiently differentiate between critical judgements and areas of estimation uncertainty;
• Clear & Concise (Cutting Clutter) - for example inclusion of immaterial accounting policies, presentation of income statement lines that were nil or clearly trivial, unnecessary repetition of disclosures and unnecessary detail about new accounting standards that would not have a significant impact on the company;
• Principal risks and uncertainties - in particular where companies present a voluminous list of possible risks without emphasising those they believe are most important;
• Accounting policies (particularly revenue) - where these are 'boiler plate' and not tailored to the facts and circumstances of the company's business. This is something that the Financial Reporting Lab produced a report on in July 2014.
• Impairment - where disclosures were of poor quality or apparently inconsistent with other areas of the report, or where the assumptions supporting a lack of impairment appeared to be overly aggressive;
• Taxation - including failure to recognise deferred tax on business combinations, failure to disclose the basis for recoverability of deferred tax assets and unclear tax reconciliations; and
• Cash flow statements - although these continue to improve, the Committee nevertheless still identified misclassified cash flows, inappropriately netted cash flows and non-cash movements reported as cash flows.

The FRC has also published a slide deck of technical findings (see link below) from the Conduct Committee's Financial Reporting Review Panel during the year, which gives more detail on the areas challenged by the Panel.

We have produced a need to know publication discussing the report and technical findings. In addition, the following resources can be found on the FRC's website:

• The FRC's press release on this topic
• The Corporate Reporting Review Annual Report 2014