Although the FRC did identify some examples of good disclosure it’s overall conclusion is that there is still significant scope for improvement.

In preparing their upcoming annual reports, the FRC expects companies to prepare viability and going concern disclosures which:

• Include sufficient company-specific qualitative and quantitative information to enable a reader to fully understand the assessment made. Such disclosures might usefully include; details of drawn and undrawn facilities in place and reliance upon such facilities; explanation of any reliance on any government support programmes; details of covenants including headroom; and information on post balance sheet changes to liquidity.
• Are proportionate to the uncertainties to which the company is exposed and to its financial position.
• Are based on assumptions which are clearly consistent with those used in other forward-looking areas of the financial statements such as impairment testing and the assessment of the recoverability of deferred tax assets.
• Clearly explain the inputs and assumptions used in forecast scenarios (providing quantitative as well as qualitative information).
• Explain the sensitivity analysis, stress and reverse stress tests carried out to support the assessment and provide details of the inputs (quantitative as well as qualitative detail) and outcomes of any such analysis.
• Disclose information on how they are resilient to risks which could threaten either their going concern status or longer-term viability including how they are resilient to principal risks and how the impact of such risks could be mitigated if they were to crystallise.

In addition to setting out its expectations of what better practice viability and going concern disclosures should contain, the FRC also provides its expectations with respect to each statement. It expects:

Viability statements to:

• Clearly justify the period of assessment taking into account, for example, debt repayment profiles, the nature of the business and its stage of development, planning and investment periods, strategy and business model and capital investment.
• Provide longer-term information and extend their period of assessment beyond the common period of three years.  
• Draw attention to any assumptions or qualifications on which the assessment is dependent.
• Clearly map principal risks considered to the viability scenarios tested.

Going concern disclosures to:

• Clearly identify any material uncertainties related to events or conditions which may cast significant doubt on an entity’s ability to continue as a going concern.
• Highlight the company-specific significant judgements made by management in determining whether or not the adoption of the going concern basis is appropriate and whether or not there are material uncertainties in respect of going concern to disclose.

A press release and the full report is available on the FRC website.  A webinar to discuss the report will be held on October 20.  A press release including details of how to register for the webinar is available on the FRC website. 

The Board will continue yesterday's discussion on Friday at 11:45. We have updated our agenda for the meeting accordingly.

The Committee discussed the comment letter analyses for two tentative agenda decisions, input on a Board project and two initial considerations.

IFRS 16 Leases—Non-refundable VAT on Lease Payments: In March 2021, the Committee discussed a submission about whether a lessee includes non-refundable VAT as part of the lease payments. In that meeting, the Committee members generally agreed with the accounting conclusion but some of them were not convinced that the matter is not material or widespread based on the limited outreach performed by the staff. The responses from the comment letters reflected similar views and some respondents requested an explanation of the accounting treatment of the non-refundable VAT in the agenda decision. The Committee decided to finalise the agenda decision.

IAS 32 Financial Instruments: Presentation—Accounting for Warrants that are Classified as Liabilities on Initial Recognition: In March 2021, the Committee discussed a submission asking whether the issuer reclassifies a warrant (which is classified as a financial liability at initial recognition) as equity when the exercise price is subsequently fixed. The staff concluded that the matter, in isolation, is too narrow to be answered and recommended publishing a tentative agenda decision to explain this. On the other hand, they believed that the broader issues of reclassifying financial instruments are better addressed as part of the Board’s Financial Instruments with Characteristics of Equity (FICE) project. In the meeting, the Committee members generally agreed with the staff's recommendations as did most respondents to the tentative agenda decision. The Committee decided to finalise the agenda decision.

Input on Board project

Proposed amendments to IFRS 16 Leases—Lease Liability in a Sale and Leaseback: In November 2020, the Board published ED/2020/4 Lease liability in a Sale and Leaseback, which proposed an amendment to IFRS 16. The comment period ended in March 2021 and the Board discussed the feedback on the ED at its meeting. The staff analysed the feedback and provided recommendations on the project direction in the agenda paper.

Most of the Committee members supported the ‘expected payment method’ as an interim provision but a number of them suggested to leave it open at this stage because none of the approaches is perfect.

Initial consideration

IAS 7 Statement of Cash Flows—Demand Deposits with Restrictions on Use: The Committee received a submission asking whether an entity includes demand deposits with restrictions on use as a component of cash and cash equivalents ("C&CE"). The terms and conditions of the demand deposit do not prevent the entity from accessing amounts held in the demand deposit, but the entity cannot use the cash other than for the purpose specified in the agreement. The staff analysed that such demand deposits should be included in C&CE in the statement of cash flows and could be presented as C&CE in the statement of financial position, unless presenting it separately in an additional line item is relevant to an understanding of the entity's financial position. The information about the restrictions is required to be disclosed under various IFRS Standards.

The Committee decided not to add the matter to the standard-setting agenda and instead to publish a tentative agenda decision with edits that were suggested during the meeting.

IFRS 9 Financial Instruments—Cash Received via Electronic Transfer as Settlement for a Financial Asset: The Committee received a submission asking the timing of recognition of cash received via Bacs, a formal automated settlement process, as settlement for a financial asset. The submitter asked whether it is acceptable for the entity to derecognise the trade receivable and recognise the cash on transfer initiation date, rather than the transfer settlement date. The staff concluded that the trade receivable is generally derecognised on the settlement date, the date when the contractual right to the cash flows from the trade receivable expires. Also, cash should be recognised on the transfer settlement date because the entity has a right to obtain cash from the bank only when cash is deposited in its bank account.

The Committee decided not to add the matter to the standard-setting agenda and instead to publish a tentative agenda decision with edits that were suggested during the meeting.

Work in progress: The staff are in the process of analysing three matters:

• Principal versus agent—IT resellers (IFRS 15)
• Deficits in low/new energy vehicle credits (IAS 37)
• Rent Concessions—lessors and lessees (IFRS 16 and IFRS 9)

More In­for­ma­tion

Please click to access the detailed notes taken by Deloitte observers.

Specifically, this issue features insight into the proposed approach and discusses some of the changes that investors would see in the financial statements since investors have been calling for better disclosures in financial statements.

For more information, see the press release and Investor Perspectives article on the IASB’s website.

The study includes the analysis of the 2020 annual report and accounts of 107 companies, including 94 that are part of the Climate Action 100+ focus companies. The study covered a range of sectors, including Oil and Gas, Transportation, Utilities, Cement, Consumer Goods and Services, and Other industrials (including mining, chemicals and steel).  The objective of the study was to examine whether the 107 publicly-listed companies (and their auditors) had considered material climate-related risks in their financial reports.  The report also assessed whether investor concerns about Paris-alignment of assumptions and estimates have been addressed.

The key conclusions of the study are:

• over 70% of some of the world’s biggest corporate emitters failed to disclose the effects of climate risk in their 2020 financial statements or any indication as to why such matters might not be significant to their businesses; and
• 80% of their auditors showed no evidence of assessing climate risk when reporting.

The study highlights that there is inconsistency in annual reports between the disclosures in the front-half narrative and the back-half financial statements.  72% of companies showed no evidence of follow-through from other discussions of climate risks or emissions targets to their treatment in the financial statements, or explained any differences.

Companies in UK/Europe led in the transparency of consideration of climate in the financial statements. Furthermore, compared to other sectors profiled, energy companies provided the most evidence of, and transparency around, consideration of climate-related matters in their financial statements.

The report underlines that companies, and their auditors, continue to be in the spotlight on climate-related reporting, which is also an area of focus for investors and regulators.

In order to address problems highlighted in the report, researchers recommend the following changes : 

• Companies disclose climate-related forward-looking estimates and assumptions, such as remaining useful lives and projected carbon or commodity prices, to show how they are taking climate-related risks (and their own climate targets) into account. This also gives investors a starting point for their analyses;
• Auditors ensure that the financial statements are consistent with other company disclosures about climate-related matters, that climate-impacted assumptions and estimates are adequately scrutinized in the audits and transparently disclosed in company reports, and that investor demands for downside sensitivities are satisfied;
• Regulators should, as part of their supervisory/enforcement reviews, identify inconsistencies and audit failures, and ensure that they are addressed; and
• Investors should engage with companies on these issues and consider them in voting and investment decisions.

A press release and the full report is available on the Carbon Tracker website.

The following topics are on the agenda:

Board work plan update: In this session, the staff will provide an overview of the Board’s technical projects to support decisions about whether to add or remove projects and assessments of overall progress on the work plan, including project prioritisation and timing.

Goodwill and Impairment: At the July meeting, the Board said they would like additional information about the disclosures about business combinations to be proposed, and further analysis of the feedback received on the subsequent accounting for goodwill, to help them make their decisions. In response to this, the staff have updated the project plan to provide this information to the Board and will now present the updated project plan for comments from Board members.

Post-implementation review of IFRS 9: In this session, the staff will ask the Board to approve the publication of the Request for Information (RFI), which if approved will be published in the last week of September 2021. The staff will also ask the Board if they agree with a 120-day comment period for the RFI.

Primary Financial Statements: At this meeting, the Board will continue its deliberations of the comments received on ED/2019/7, particularly on management performance measures (MPMs), principles of aggregation and disaggregation, analysis of operating expenses, and associates and joint ventures. The Board will be asked to make decisions with regard to all these topics.

Dynamic Risk Management: In this session, the staff will present its preliminary views on potential refinements to the DRM model which aim to closer align the DRM model to entities’ risk management practices by incorporating the concept of risk limits into the target profile. The Board will not be asked to make a decision. Instead, the staff is seeking feedback from the Board on the potential refinements, which will be taken back to draft the refinements and present them to the Board at a future meeting.

Extractive Activities: The Board will continue its discussions on extractive activities. The staff will present their further analysis on matters relating to exploration and evaluation (E&E) expenditure and activities, matters primarily relating to development and production activities, and reserve and resource information. Based on this analysis, the staff recommend that the focus of the Extractive Activities project should be the development of requirements or guidance to improve the disclosure objectives and requirements in IFRS 6 about an entity’s E&E expenditures and activities. Furthermore, the staff recommend amending the Basis for Conclusions of IFRS 6 to remove the temporary status of the Standard.

Financial Instruments with Characteristics of Equity: In this session, the Board will discuss the accounting for financial instruments that contain contingent settlement provisions and the effects of laws on contractual terms. At this meeting, the staff does not have recommendations for the Board and will instead ask Board members’ views on these two practice issues. The staff will

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

In order to achieve the goal of a more sustainable, inclusive, and prosperous economy and society, IFAC describes four areas the G20 should focus on:

1. Accelerate sustainability and inclusiveness
2. Recommit to global collaboration
3. Resist regulatory fragmentation
4. Focus on public sector transparency and integrity

IFAC comments that delivering on these will take a concerted effort from policymakers, businesses, other organisations, investors and individuals.

IFAC believes these priorities require two actions to be taken urgently:

• Support the IFRS Foundation initiative on sustainability standards and
• Champion public financial management.

On the first point, the press release states:

Momentum is growing around developing a global baseline of sustainability standards, with the IFRS Foundation poised to deliver. IFAC strongly supports this crucial work.

Please click to access the Call to Action on the IFAC website.

The topics for discussion are:

• IFRS 17 – Project plan update
• IFRS 17 – Technical paper: with-profits inherited estates
• IFRS 17 – Technical paper: annual cohorts
• IFRS 17 – Technical paper: CSM allocation
• IFRS 17 – Technical paper: other significant issues
• Endorsement of 2020 Narrow Scope Amendments – Approve draft endorsement criteria assessment (DECA)
• Rate-Regulated Activities – Approve feedback statement
• IASB Agenda Consultation – Approve final comment letter and feedback statement  
• IFRS 17 Narrow Scope Amendment – Approval final comment letter
• Disclosure Requirements in IFRS Standards – A Pilot Approach - Updated project implementation plan 
• Lack of Exchangeability Feedback Statement

The meeting, agenda papers and details of how to register are available on the UKEB website.  A recording of the meeting is available on the UKEB website.

In order to support public discussion on this topic, the IVSC is publishing a multi-part article series exploring certain fundamental questions in this area. the first part The Case for Realigning Reporting Standards with Modern Value Creation can now be accessed through the press release on the IVSC website.

The first webinar will be co-hosted with the Confederation of Danish Industry and FSR — Danish Auditors and will discuss both exposure drafts. This event will take place on 5 October 2021.

The second webinar will be co-hosted with the Accounting Standards Committee of Germany and will focus on the amendments in the ED ‘Dis­clo­sure Re­quire­ments in IFRS Standards — A Pilot Approach’. This event will take place on 7 October 2021.

For more in­for­ma­tion, see the press release on the EFRAG’s website.