The new members of the Accounting Council are:

• Michael Gallagher, Chief Financial Officer of the Toronto and Falcon Oil & Gas Ltd;
• Mark Smith, independent financial reporting consultant; and
• Jeremy Townsend, Chief Financial Officer and Chief Information Officer at Rentokil Initial.

The new members of the Audit & Assurance Council are:

• Maggie McGhee, Director General responsible for Financial Audit at the National Audit Office;
• Jane Fuller Fellow of the CFA Society of the UK and Chair of its financial reporting and analysis committee;
• Robert Hingley, former Director General of the Takeover Panel and, following the merger of ABI’s Investment Affairs with the IMA, consultant to the enlarged Investment Association; and
• Conall O'Halloran, Head of Audit for KPMG in Ireland, and audit partner in a number of listed and large privately owned entities.

Liz Murrall, a member of the Accounting Council, has also been appointed to the FRC's Codes & Standards Committee.

The full press release, which includes detailed biographical information for all of the new appointees, is available from the FRC's website.

Mr Hoogervorst commented that the increase of the voluntary use of IFRSs in Japan was especially encouraging as Japanese companies have the choice of several sets of standards and would only choose to adopt IFRS if they thought it was a strong business case. He explained that IFRSs are a cost effective alternative for companies with subsidiaries as they can apply one single financial reporting language for both internal and external reporting. In addition, the use of IFRS would make it more attractive to foreign investors to invest in Japanese shares if the financial statements were prepared in a reporting language they understand.

Yet Mr Hoogervorst pointed out that following a recommendation by Japan's Business Accounting Council (BAC) regarding the use of IFRSs in Japan, a set of 'endorsed IFRSs' called JMIS that would offer an additional choice of accounting framework to Japanese companies has been developed and published as an Exposure Draft (ED) in July 2014. As JMIS in essence consist of most IFRSs as issued by the IASB combined with two major modifications relating to the treatment of Goodwill and recycling of some OCI-items, he connected the modifications to the IASB's project on the Conceptual Framework and especially the meaning of Profit or Loss and Other Comprehensive Income (OCI).

Mr Hoogervorst admitted that the IASB has so far not been able to draw a binary distinction between Profit or Loss and OCI and yet he also struggled with the ASBJ's definition in the JMIS ED that 'Profit or Loss represents an all-inclusive measure of irreversible outcomes of an entity's business activities in a certain period.' Although the IASB agrees that Profit or Loss should be as comprehensive as possible and has made tentative decisions supporting that understanding, the irreversibility criterion seemed to be "fraught with difficulties" to Mr Hoogervorst. He explained that a systematic relegation of unrealised income items to OCI could result in a lack of faithful presentation, especially as unrealised income does not only consist of gains, but also of losses. Mr Hoogervorst also added that this approach could be detrimental from a stewardship perspective as many problems would be confronted much earlier on if they are presented in Profit or Loss - he argued that postponement of recognition of losses until they have become irreversible has the big disadvantage that they become irreversible. He therefore concluded:

I would conclude that a systematic relegation of unrealised profits or losses to OCI is extremely problematical. Moreover, where OCI is used to capture short-term 'market volatility' of long-term assets or liabilities, the information it contains should not be ignored. While income in OCI may be of a less certain nature than income captured in Profit or Loss, OCI may contain indicators of risk that may materialise sooner than you think. Clearly, ignoring unrealised elements of income may be hazardous to your financial health.

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

The session is open to observers from 09.00.  Please click link for details of the registration on the EFRAG website.  The agenda can also be downloaded from the EFRAG website.

Annual improvements - 2010-2012 cycle and 2011-2013 cycle - were issued in December 2013 and have a stated effective date of annual periods beginning on or after 1 July 2014. The updated report indicates final endorsement is currently expected in the fourth quarter of 2014.

The endorsement status report, dated 2 September 2014, is available here.

The proposals in the exposure draft, entitled The Valuation of Equity Derivatives, would lead to the publication of a Technical Information Paper (TIP), which would be the first in a series of planned papers providing guidance on the valuation of derivatives in different asset classes, including fixed income, credit, foreign exchange, commodities, asset backed securities and hybrid products. TIPs support the application of the core International Valuation Standards (IVS) published by the IVSC, and are intended to provide information to assist experienced valuers decide which is the best valuation approach in specific situations.

The exposure draft discusses the equity derivatives market, various equity derivative products, and provides specific guidance on the valuation of forwards and futures, swaps and options. The valuation of options are discussed in in three widely used categories of valuation models, being the Black Scholes model and its extensions (assuming equity prices follow a Geometric Brownian Motion), alternative-diffusion models (which treat volatility differently to Black Scholes to more closely match real market volatility) and jump-diffusion models (introducing a 'jumps' in equity prices). It also includes specific sections on valuation sensitivities (the "Greeks"), model resolution, model calibration and input selection, implementation considerations and option valuation models and applicable products.

Changes in the revised exposure draft include:

• New guidance on derivative strategies, which encompass a combination of derivatives and other assets to achieve a specific investment objective. Examples of such strategies included in the paper include butterflies, collars, covered calls, protective puts and straddles and strangles. The paper proposes that the value of a strategy is the sum of its parts
• Removal of formulae included in the original exposure draft, in favour of relying on descriptive narratives of concepts. This change reflects concern about the practical problems with formulae, including accounting for relationships that cannot be expressed through concise mathematical expressions, and the objective of TIPs being practical guides rather than academic or training materials
• New guidance on which derivative valuation models can be applied to different kinds of products, as well as some commonly used techniques of model resolution. Although analytical solutions are preferred, these can only be used for a limited range of products and accordingly other techniques such as Monte Carlo, trees and finite difference are discussed.

The exposure draft is open for comment until 30 November 2014. Click for access to the exposure draft on the IVSC website.

The European Union published the Directive on 26 June 2013, which amended Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC. The Directive aimed to simplify the accounting requirements for small companies and improves the clarity and comparability of companies' financial statements within the European Union.  The Directive must be incorporated into UK law no later than 20 July 2015, but permits that the changes may first apply for financial years beginning on or after 1 January 2016. 

The FRC consultation document, ‘Accounting standards for small entities - Implementation of the EU Accounting Directive’ sets out the FRC’s proposals to amend UK accounting standards as part of the implementation of the Directive.  As explained in the parallel consultation on implementation of the Directive by the Department of Business, Innovation and Skills (‘BIS’), change is necessary because the Directive prohibits member states from requiring more than a limited set of notes to the financial statements of small companies unless their inclusion is required to give a true and fair view. Member state requirements include both law and accounting standards; therefore the FRC has to revisit its standards for small companies. 

The FRC is proposing that:

• The existing Financial Reporting Standard for Smaller Entities (FRSSE) should be withdrawn. FRS 102 The Financial Reporting Standard Applicable in the UK and Ireland will replace the FRSSE for small companies (proposed in the BIS consultation as those earning less than £10.2 million), and will be amended to include a new section for the presentation and disclosure requirements for small entities. Small companies applying FRS 102 will not need to prepare a cash-flow statement or consolidated financial statements. There will, however, be some changes to the recognition and measurement criteria for small entities as a result of moving from the FRSSE to FRS 102:
  • financial instruments within the scope of section 12 of FRS 102 must be fair valued;
  • financial instruments at non-market rates of interests will be accounted for differently;
  • transactions and balances in foreign currency may no longer be recognised at contracted forward rates. Hedge accounting may be applied which may result in a similar outcome;
  • revaluation gains and losses on investment properties will be recognised in profit and loss rather than the statement of total recognised gains and losses;
  • deferred tax will be recognised on revaluations and business combinations;
  • holiday pay accruals will be needed; and
  • equity-based share-based payment transactions will need to be accounted for when goods or services are received.
• A new Financial Reporting Standard for Micro-Entities (FRSME) will be published. Currently the FRSSE covers the requirements for micro-entitieswith paragraphs 2.40-2.42 disapplying and simplifying other parts of the FRSSE. The FRSME will only contain the requirements applicable to micro-entities, making it simpler to navigate. It will include only those disclosures required by law for micro-entities. The recognition and measurement criteria of FRS 102 (from which the FRSME will be developed from), will be simplified such that:
  • all financial instruments are accounted for at historical cost or amortised cost, with the proviso that if a derivative contract becomes onerous a provision is required;
  • there is no requirement to account for deferred taxation, equity-based share-based payment schemes (apart from any eventual issue of shares);
  • defined benefit pension schemes can be accounted for as defined contribution schemes, provide that provision is made for any agreement to fund a deficit; and
  • borrowing costs may not be capitalised.

Sections covering areas unlikely to be relevant to micro-entities (e.g. business combinations, hyperinflation and specialised activities other than agriculture) will be removed. 

• FRS 102 as applicable to large and medium-sized companies will be updated to:
  • include up-to-date legal references;
  • remove references to extraordinary items;
  • prohibit reversal of impairment losses for goodwill (a similar change will be made to FRS 101 Reduced Disclosure Framework); and
  • subject to BIS changing the law, to amend FRS 102 such that, in the rare situations where the useful economic life cannot be reliably estimated, goodwill should be amortised over a maximum of ten years (the top end of the range permitted by the Directive) rather than five years as required by current FRS 102.
• The FRC is also proposing that a new section of FRS 102 (within Section 34 Specialised Activities) will be added based on FRED 50 Residential Management Companies’ Financial Statements. This means that no separate abstract will be developed. It will not, however, include new disclosure requirements as the majority of residential management companies are small companies or micro-entities for which the Directive restricts mandating of disclosures. 

The FRC is also seeking views as to whether the increased flexibility in accounting formats offered by the Directive could allow companies adopting FRS 101 Reduced Disclosure Framework to use IAS 1 when presenting their primary statements rather than the existing Companies Act formats. If this is possible, it would remove one more complexity for the adoption of FRS 101 by subsidiaries of IFRS reporting groups. 

No draft standards are included in the consultation document. The FRC expects to issue exposure drafts of FRS 102, the FRSME and FRS 101 following considerations of responses to this consultation in time for the amended FRS 101 and 102 to be adopted from 1 January 2016 when the changes to the Companies Act will take effect; the FRSME may be adopted as soon as it is issued as there is no need to wait for a change to the law. 

Click for:

• Press release (link to FRC website).
• The FRC consultation document (link to FRC website).
• Our UK Accounting Plus news story on the BIS consultation paper
• Our UK Accounting Plus project page on FRED 50
• Our Need to Know newsletter on the consultation

In June 2002, the European Union adopted the IAS Regulation requiring European companies listed in an EU securities market to prepare their consolidated financial statements in accordance with IFRSs starting with financial statements for financial year 2005 onwards. In addition EU countries were given several options regarding the use of IFRSs in unconsolidated financial statements, therefore, EU member states have the option to permit or require companies to prepare separate financial statements in conformity with IFRS.

As the focus of IFRS is, generally, on the preparation of consolidated financial statements, is some cases it is sometimes unclear how some accounting issues in separate financial statements should be dealt with and a number of practical concerns have arisen in the application of IFRS to the separate financial statements.

The discussion paper published today aims to address these concerns by considering how separate financial statements are used in Europe for economic decision-making and analyses the technical financial reporting issues that arise under IFRS when preparing such financial statements. The paper also proposes solutions to the issues identified and suggestions on how to consider separate financial statements in the future. The following points are identified as being especially important to address:

• clarification of the objective of separate financial statements,
• development of guidance on how to account for transaction costs and contingent consideration in separate financial statements,
• initiation of a comprehensive debate on common control transactions as the method of accounting for such transactions may impair the usefulness of separate financial statements,
• consideration of the accounting for business combinations under common control in the acquirer's separate financial statements, and
• strengthening of the disclosures on distributions to equity holders.

Comments on the discussion paper are requested by 31 December 2014. Please click for the following additional information:

• press release on the EFRAG website
• discussion paper on the EFRAG website
• European Commission (EC) document summarising the use of options of the IAS Regulation by European Union Member States (link to EC website)

The European Union published the EU Accounting Directive 2013/34/EU (‘the Directive’) on 26 June 2013, which amended Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC. The Directive aimed to simplify the accounting requirements for small companies and improves the clarity and comparability of companies' financial statements within the Union. The UK government is now seeking views on the proposed implementation of the accounting and auditing provisions of the Directive into UK law.

The consultation:

• proposes to increase the thresholds for small and medium-sized companies. The thresholds for determining what is a small company will be raised to the top end of the range permitted by the Directive. A company will be small if it meets at least two of: total assets <£5.1m (up from £3.26m), turnover <£10.2m (up from £6.5m), <50 employees (unchanged). A company will be medium-sized if it meets at least two of: total assets<£18m (up from £12.9m), turnover <£36m (up from £25.9m), <250 employees (unchanged). BIS consider that this would allow approximately 11,000 additional companies to access the small company accounting regime;
• implements changes to comply with the new largely harmonised small company regime whereby the Directive prevents member states from requiring more than a minimal set of mandatory notes to the financial statements unless additional disclosure is necessary for a true and fair view. In practice, this means that many small companies will present fewer notes in future;
• asks whether small companies should be allowed to only prepare abbreviated accounts for shareholders; currently they must prepare full accounts for shareholders and may file abbreviated accounts. The government believes the question of the level of detail should be one for shareholders;
• asks whether the existing restrictions - whereby the small and medium-sized company regimes cannot be adopted by ineligible companies and members of ineligible groups - should be amended. The Directive will continue to require that public companies (in the UK a PLC) with securities admitted to trading, credit institutions and insurance companies are ineligible. BIS are asking whether they should maintain the other classes of ineligibility including being an unlisted public company (in the UK a PLC), MiFID investment firm, UCITS management company, or e-money issuer and, in the case of the medium-sized limits, the majority of other regulated UK financial services companies;
• explores the opportunities offered by the option to provide greater flexibility in the layout of the profit and loss account and balance sheet. In particular, BIS is seeking views as to whether it would be possible to adopt International Financial Reporting Standards (IFRS) formats, removing a further complexity for companies adopting Financial Reporting Standard (FRS) 101;
• amends the approach in relation to the writing off of goodwill and development costs. In the rare situations where the useful economic life cannot be reliably estimated, the government is proposing that they should be amortised over a maximum of ten years (the top end of the range permitted by the Directive) – assuming this change is made, the FRC will consider amending Financial Reporting Standard (FRS)102 which currently includes a limit of five years;
• proposes removing the option whereby a company preparing consolidated financial statements has a choice to only list the principal subsidiaries in the notes to the financial statements and provide a full list with the annual return. Problems with compliance for companies taking this option have been identified by BIS as part of the Red Tape Challenge (link to UK government website); and
• proposes that micro-entity companies should no longer have to prepare a Directors’ Report; they are already exempt from filing this.

The consultation paper also:

• asks whether the small company audit exemption thresholds should be changed at the same time as the small company accounting regime thresholds. The government’s current view is that they should not, and are likely to be consulted on as part of implementing the EU Audit Reform regime;
• proposes making a change to the statutory contents of the audit report from the amended EU Statutory Audit Directive at the same time as these accounting changes. Auditors must state whether, based on the knowledge obtained during their audit, the directors’ report and any strategic report (a) comply with applicable law and (b) contain any material misstatements; and
• asks questions about the application of the small companies regime to charitable companies. The government is proposing that, as such companies are outside the scope of the Directive, they will not be subject to the restriction on which notes to the financial statements may be required by law. This would allow the law to continue to require companies with the Charities Statement Of Recommended Practice (SORP).

The Accounting Directive must be incorporated into UK law no later than 20 July 2015, but permits that the changes may first apply for financial years beginning on or after 1 January 2016.

The Financial Reporting Council is expected to consult in due course on the changes to UK financial reporting standards that will be required as a result of the implementation of the EU Accounting Directive in the UK.

Comments are invited by 24 October 2014.

Please click for:

• Press release (link to BIS website).
• The consultation issued by BIS (link to BIS website)
• The EU Accounting Directive 2013/34/EU (link to European Commission website)
• Our news story on the publication of the EU Accounting Directive 2013/34/EU
• Our Need to Know newsletter on the consultation

The Government Financial Reporting Manual (FReM) Exposure Draft (14)01 (link to HM Treasury site) proposes amendments to the FReM to reflect the application of IFRS 13 ‘Fair Value Measurement’ in the public sector. This exposure draft follows two previous exposure drafts on the application of IFRS 13 for the public sector (exposure drafts (13)01 and (12)03). Each of these consultations has informed the development of financial reporting policy and HM Treasury’s final proposals as set out in this exposure draft.

The Exposure Draft includes a new “principles based approach” to determining the use of IFRS 13 in the public sector.  It considers how IFRS 13 may be applied in the public sector context by distinguishing between those assets which are held for their service potential (i.e. operational assets) and those that not held for their service potential or that are surplus assets that can be disposed of. HM Treasury proposes that only assets in this second group are valued at fair value in accordance with IFRS 13, and then only if the entity holding those assets is not restricted from accessing the market. IAS 16 will continue to be adapted to ensure that assets in use that are held for their service potential are held at current value.

The Government Financial Reporting Manual (FReM) Exposure Draft (14)02 (link to HM Treasury site) proposes amendments to the FReM with the aim of simplifying and streamlining the presentation of the statutory annual reports and accounts produced by central government entities so as to better meet the needs of users. HM Treasury launched the simplifying and streamlining accounts project in April 2013 (link to HM Treasury website) and issued a consultation (part of that project) setting out proposals to restructure the format of the Annual Report and Accounts (ARA) produced by central government entities in July 2014.  This exposure draft details the proposed changes to the 2015 to 2016 FReM as a result of the project.

The Exposure Draft proposes to restructure the traditional ‘front-half’ annual report and ‘back-half’ financial statements into three integrated sections: performance, accountability and the financial statements. The purpose of the performance section is to “tell the story” of the reporting entity, providing information on the entity, its main objectives and strategies and the principal risks it faces. The accountability section contains the Governance Statement, remuneration report and information on parliamentary accountability including the Statement of Parliamentary Supply. The final integrated section will comprise the audited financial statements.  HM Treasury proposes that notes to the accounts will only be required in respect of material balances.

The comment deadline for both exposure drafts is 13 October 2014.

Please click for:

• Government Financial Reporting Manual (FReM) Exposure Draft (14)01 (link to HM Treasury website).
• Government Financial Reporting Manual (FReM) Exposure Draft (14)02 (link to HM Treasury website).
• Our previous news story on HM Treasury’s simplifying and streamlining accounts project