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New appointments to the FRC Conduct Committee and Audit Quality Review Committee

05 Nov 2019

The Financial Reporting Council (FRC) has appointed Andrew Johnston to the Conduct Committee and Colin McCarthy-Lille to the Audit Quality Review Committee.

Both Andrew and Colin's term begins on 1 November 2019.

The press release can be found on the FRC website here.

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IASB Chair discusses the future of financial reporting

05 Nov 2019

In a speech at the Eumedion Annual Symposium, IASB Chair Hans Hoogervorst discussed the Board’s projects on primary financial statements (PFS), management commentary and sustainability reporting.

Mr Hooger­vorst began with an overview of the PFS project and provided comments related to new subtotals, such as operating profit and profit before financing and tax. He also discussed the need for greater transparency and discipline in the use of non-GAAP measures.

Next, Mr Hooger­vorst commented on man­age­ment com­men­tary to provide broader financial in­for­ma­tion, such as the impact of in­tan­gi­ble assets. In addition, the project will revise the Practice Statement to accommodate the increase in interest in sustainability reporting.

Lastly, he agreed with the Eumedion’s green paper, Towards a global standard-setter for non-financial reporting, which called for the need for consolidation in non-financial reporting.

For more in­for­ma­tion, see the tran­script of his speech on the IASB’s website.

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FRC launches 'Horizons' project series

05 Nov 2019

The Financial Reporting Lab is inviting investors and companies to participate in a new project on the disclosure of business models, strategy and the longer-term. The project is part of a new series focused around integrating longer-term time horizons into reporting.

The first reporting topic project will consider what users want from business model and strategy disclosures and how companies might best communicate the longer-term.  The scope of the project is likely to: 

  • explore how companies develop, monitor and communicate their business model and strategy;
  • examine how companies include a longer-term focus in their reporting;
  • consider how companies communicate uncertainty in their disclosures;
  • analyse how investors use this information in their decision-making process and identify whether emerging reporting meets investor needs;
  • discuss which areas of reporting are most challenging for companies; 
  • consider the extent to which UK companies can learn lessons from emerging international reporting practice; and 
  • highlight best practice in current company reporting. 

A final report is likely to be published in autumn 2020.

Please click for more information on the FRC website.

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IASB (International Accounting Standards Board) (blue) Image

Recordings from the sixth IASB Research Forum

04 Nov 2019

The International Accounting Standards Board (IASB) hosted its sixth Research Forum on 28–29 October 2019 in Short Hills, New Jersey, with the Journal of International Accounting Research (JIAR). The IASB has now released audio recordings and slides from the presentations given at the forum.

The meeting saw the pre­sen­ta­tion on four academic papers, responses by academics and stan­dard-set­ters as well as a general dis­cus­sion with the audience. In addition, two case studies were discussed during breakout sessions.

For more information, see the press release and access the slides and audio recordings on the IASB’s website.

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Recent sustainability reporting developments

04 Nov 2019

A summary of recent developments at the European Commission, GRI, Deloitte, CFA Society Denmark, CDSB, and SSE.

The European Commission (EC) has published a final report on EU Climate Benchmarks and Benchmarks’ ESG Disclosures by its Technical Expert Group (TEG) on Sustainable Finance. The report recommends a set of Environmental, Social and Governance (ESG) disclosure requirements, including the standard format to be used for the reporting. The final report and supporting documents are available here.

The Global Reporting Initiative (GRI) is inviting companies and stakeholders to join a webinar on 5 December to discuss the future of reporting on responsible minerals sourcing. More information and access to the report Advancing Reporting on Responsible Minerals Sourcing the webinar builds on is available on the GRI website.

Deloitte's Annual report insights 2019, based on reports from 100 UK companies, reveals that companies are increasingly going beyond financial drivers and focusing on ‘success factors’ such as societal and environmental impacts. Please click to access the report here.

The CFA Society Denmark has published ESG key figures in the annual report that includes 15 proposals for standard ESG key figures for companies' environmental and climate impact and for their social and management commitment, which large Danish companies are invited to include in the annual report. The report is also available in an English language version and can be accessed here.

GRI has signed a collaboration agreement with the Indonesian Government that commits to support and provide the reporting frameworks for the country’s commitments to the UN Sustainable Development Goals (SDGs). Aim of the agreement is to promote SDG reporting by publicly listed companies by using the GRI Standards. Please see the press release on the GRI website.

GRI also announces that the three universal standards and all 33 topic-specific standards have been published in Italian and are now freely available for any Italian speaking organisation to download and use. Please click for more information on the GRI website.

The Climate Disclosure Standards Board (CDSB) announces that its TCFD Implementation Guide is now also available in a Japanese translation. Please click for more information on the CDSB website.

The United Nations Sustainable Stock Exchanges (SSE) initiative and the World Federation of Exchanges (WFE) have signed an exchange of letters formalising how the two organisations will work together in the future. The exchange of letters also outlines potential areas of further collaboration including building capacity and providing technical assistance to stock exchanges on ESG disclosure. Please click for more information on the SSE website.

The SSE member Luxembourg Stock Exchange (LuxSE) has published a new set of guidelines for reporting ESG information to investors. Please click for more information on the SSE website.

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Presentations at ISAR 36

04 Nov 2019

The thirty-sixth session of the United Nations Conference on Trade and Development (UNCTAD) Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR) was held in Geneva on 30 October - 1 November 2019. Presentations from the meeting are now available on the ISAR website.

The two main topics for the meeting were:

  • Practical implementation, including measurement, of core indicators for entity reporting on the contribution towards the attainment of the Sustainable Development Goals
  • Review of current developments in international standards of accounting and reporting in the public and private sectors

The background papers for these two topics are available in Arabic, Chinese, English, French, Spanish, and Russian and can be accessed here (please click on the "Documents" tab).

Speakers at ISAR 36 included Chungwoo Suh, IASB member as well as representatives of AOSSG, EFRAG, PAFA, IPSASB, SASB, UNCTAD, and ACCA. All 42 presentations from the meeting are available here (please click on the "Presentations" tab).

The workshop before the ISAR meeting this year focused on "Practical implementation of climate-related financial disclosures and their relationship to the SDGs“. Speakers included representatives of CDSB, SASB, the European Commission, EFRAG, ACCA, WBCSD, and UNCTAD. All presentations from the workshop are available here (please click on the "Presentations" tab).

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Charity SORP Committee seeks views on charity accounting framework

01 Nov 2019

The Charity SORP Committee is looking for engagement partners to form key stakeholder groups with the goal of gathering feedback on the charity accounting framework and ideas for change.

The committee would like to hear from individuals or organisations with an interest in charity financial reporting. These engagement partners will be put into stakeholder groups based on their main areas of work. Stakeholder groups will be asked to consider:

  • the information needs of users of charity annual reports and accounts;
  • how far the Charity SORP needs to change to meet those needs;
  • what information is needed in order to prepare a good quality set of charity accounts; and
  • opportunities to simplify and remove unnecessary requirements while maintaining compliance with UK GAAP.

The views of the stakeholder groups will help inform the future and content of the SORP.  The closing date for applications is 31 January 2020.

Further information is available on the Charity Commission website.

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December 2019 meeting of the ICAEW FRDG

01 Nov 2019

The next meeting of the Institute of Chartered Accountants in England and Wales (ICAEW) Financial Reporting Discussion Group (FRDG) will be held on 2 December 2019 in London.

The meeting will cover key findings from the work of the Financial Reporting Council's (FRCs) Corporate Reporting Review team for the year.  The meeting will cover current themes, areas of focus for the coming reporting season and the topics for future thematic reviews.

Click here for information and details of how to register.

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IASB issues podcast on latest Board developments (October 2019)

31 Oct 2019

The IASB has released a podcast, featuring IASB Chair Hans Hoogervorst and Vice-Chair Sue Lloyd as well as communications team member Kasia Gilewska, to discuss the deliberations at the October 2019 IASB meeting and other developments.

The 19-minute podcast features discussions related to financial instruments on the following topics:

  • Amendments to IFRS Standards as a result of the second phase of the IBOR project.
  • Work on the accounting model that will enable investors to understand a company’s dynamic risk management.
  • Timeline for the financial instruments with characteristics of equity project.
  • Developments in the management commentary project.
  • The predecessor approach being considered by the Board for the accounting for combinations of businesses under common control.

The podcast can be accessed through the press release on the IASB website. More information on the topics discussed is available through our comprehensive notes taken by Deloitte observers at the October IASB meeting.

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FRC publishes findings on the quality of corporate reporting in 2018/2019

30 Oct 2019

The Financial Reporting Council (FRC) has published its Annual Review of Corporate Reporting 2018/2019, which provides the FRC's assessment of corporate reporting in the UK based on evidence from a variety of sources, including the work of the FRC's own Corporate Reporting Review (CRR) team.

In announcing the publication, the FRC commented:

The FRC expects companies to improve the quality reporting of forward-looking information, the potential impact of emerging risks on future business strategy, the carrying value of assets and the recognition of liabilities. Failure to report on these crucial areas undermines trust in business and can lead to the conclusion that management is either unaware of their potential impact, is being opaque, or is not managing them effectively. 

In times of uncertainty, investors and other stakeholders expect greater transparency of the risks to which companies are exposed and the actions they are taking to mitigate the impact of those uncertainties. The FRC expects companies to think beyond the period covered by their viability statement and identify those keys risks that challenge their business models in the medium to longer term and have a particular focus on environmental issues.

The report is structured around the FRC’s overall assessment of corporate reporting and in particular focuses on those areas which fall within the remit of the FRC’s reviews: the financial statements and the strategic report. It provides findings for the year, highlights where the FRC see room for improvement and sets out the FRC’s expectations for the coming reporting season.

Alongside the Annual Review the FRC has also published a letter to Audit Committee Chairs and Finance Directors in advance of the 2019/20 reporting season on key areas that need to be considered in the preparation of forthcoming annual reports and accounts. Those key areas are drawn from, and are consistent with, the findings included in the FRC’s Annual Review of Corporate Governance and Reporting.

Financial Statements

The FRC observes that the frequently raised issues this year were very similar to those raised last year; in particular questions continued to be raised with respect to the adequacy of key accounting judgements and estimates disclosures, aspects of the strategic report, alternative performance measures and cash flow reporting. Whilst the FRC highlights that “…generally reporting has improved” and that “more companies appear to be getting more of the basics right” it does suggest that there is still “scope for improvement”. The most significant findings of the FRC relating to financial statements include:

  • Judgements and estimates companies make in the preparation of their accounts.   The FRC indicates that this is “still the most frequent area of questioning”. Most companies are now clearly distinguishing between judgements and estimates and there were fewer instances of boilerplate disclosure. The FRC also found that there were fewer cases where matters were not disclosed as key judgements or areas of significant estimation uncertainty in the financial statements despite indicators to the contrary elsewhere in the annual report.

However, similar to last year, the area of most frequent challenge was in relation to lack of, or inadequate, sensitivity analysis or information about the range of possible outcomes for areas of estimation uncertainty. Specific areas of estimation uncertainty where there was a lack of sensitivity analysis included impairment reviews, pension assets and liabilities, uncertain tax positions and onerous contracts.

The FRC also questioned estimation uncertainties “which did not appear to give rise to a significant risk of material adjustment to the related balances within the next year”. The FRC encourages “companies to be mindful that the judgements and estimates disclosed are those with the greatest potential effect on the financial statements”.  

  • Consolidation adjustments. The FRC questioned consolidation judgements, specifically the question of control over another entity. Questions focused around:
    • The control of trusts;
    • the determination of joint control in a situation where one party holds a majority of voting rights;
    • de facto control, in a situation where a company and its associate have several directors in common; and
    • the point at which control passed with a “locked box” arrangement.

The FRC indicates that “companies need to have a full understanding of the rights and obligations – both contractual and constructive – arising from their arrangements, in order to assess the criteria for control of another entity and determine correctly whether or not it should be consolidated. This may be particularly relevant in situations such as a joint arrangement where the rights arise from contractual, rather than voting, rights”. The FRC encourages companies to disclose the nature of these judgements made in accordance with IAS1:122 where material.

  • Cash flow statements. A “significant number of questions” were raised in this area. The FRC notes that many of the errors identified were basic commenting that “it remains a concern that companies’ own quality control procedures and those of their auditors are failing to spot such matters”.  The most common errors were in relation to misclassification of cash flows between operating, investing and financing activities:
    • Examples of cash flows incorrectly included within investing included:
      • Fees received from associates and joint ventures
      • Restructuring and post-acquisition integration costs
      • Purchase and sale of rental fleet assets
    • Examples of cash flows incorrectly included within operating included:
      • Disposal of investments in joint ventures
      • Non-trading advances to joint ventures
    • Examples of cash flows incorrectly included within financing included:
      • Repayments of loans to joint ventures
  • Additionally the FRC challenged companies where:
    • additions and disposals of assets held under finance leases were presented as cash flows;
    • dividends from associates and joint ventures were not presented separately;
    • there were unclear captions providing insufficient explanation of cash flows presented;
    • basis for inclusion or exclusion of amounts such as overdrafts and current asset investments within cash and cash equivalents was not clear; and
    • there was difficulty in reconciling movements in working capital balances to the amounts shown in the reconciliation of cash flows from operating activities.

The FRC draws attention to its recent Lab report Disclosures on the Sources and Uses of Cash which companies should use to help them improve disclosures as to how cash is generated and used linking to strategy and priorities for that cash.

  • Supplier financing arrangements. The FRC continues to raise concerns about the adequacy of disclosures provided to explain supplier financing arrangements although it does indicate that there has been “an increase in both the number and quality of disclosures”.   The FRC expects disclosures in this area to contain:
    • An explicit statement to confirm reverse debt factoring is not used;
    • The accounting policy applied;
    • Whether the liability to suppliers is derecognised;
    • Whether the liability is included within KPIs such as net debt;
    • The cash flows generated by such arrangements; and
    • The existence of any concentrations of liquidity risk which could arise from losing access to the facility.
  • Income taxes. There were fewer cases where the FRC challenged whether there should have been a tax effect reported in the financial statements for matters such as provisions and share-based payments. There were also fewer instances where companies were challenged on the allocation of tax effects between profit or loss and equity. However, the FRC did challenge companies whose descriptions of adjusting items in the tax reconciliation were not specific enough to enable a reader to understand their nature.
  • Provisions and contingencies. The FRC challenged companies’ disclosures relating to provisions – either they were missing or unclear or were not consistent with information disclosed elsewhere in the annual report. There were a number of instances of “inadequate disclosure” including:
    • Releases of provisions netted against increases in provisions;
    • Movement due to change in discount rate inconsistent with discount rates disclosed; and
    • Lack of disclosure of the uncertainties about the amount and timing of cash flows.
  • Fair value measurement. The FRC raised concerns about the application of IFRS 13 especially regarding the disclosure of the valuation techniques and inputs used for fair value measurements categorised within levels 2 and 3 of the fair value hierarchy, including quantitative information about the significant unobservable inputs used. Companies were also challenged where fair value hierarchy disclosures were not provided for all fair values disclosed or, where they were provided, companies were challenged if they were inconsistent with disclosure elsewhere. These challenges were predominantly in relation to the fair value measurement of financial instruments including derivatives.
  • Thematic reviews. The FRC published the results of three thematic reviews in relation to IFRS 9 Financial Instruments, IFRS 15 Revenue from Contracts with Customers and the impairment of non-financial assets on 10 October 2019. The FRC draws attention to the messages from these reviews. A thematic review looking at the initial application of IFRS 16 Leases will also be published shortly. The report, published today, includes preliminary findings of the areas of common weaknesses identified from that review.

Strategic reports

The FRC’s specific challenges to companies in this area were principally on:

  • the identification, description and mitigating actions taken to manage principal risks and uncertainties;
  • the comprehensiveness of business reviews; and
  • disclosures relating to alternative performance measures (APMs).

In relation to business reviews the FRC “frequently identified instances where significant balances or transactions had not been discussed or adequately explained in the strategic report”. The report includes a number of examples of areas that the FRC would expect to see discussion in the business review such as significant impairment charges or bad debts, performance of businesses acquired in the year, significant changes in working capital balances including trade receivables, trade payables and accruals, movements in provisions. Significantly, the FRC expects to see significant cash flows or changes in cash flows discussed.

In relation to APMs the FRC encourages all companies to comply with the European Securities and Markets Authority’s (ESMA’s) Guidelines on Alternative Performance Measures. The FRC notes improvements in:

  • the labelling of APMs with fewer adjusted measures given potentially misleading titles
  • fewer instances of undue prominence of APMs compared with IFRS compliant performance measures; and
  • explanations as to why APMs are used.

However, notwithstanding the improvements, the FRC continues to see:

  • Absent or unclear definitions of APMs and/or reconciliations to the closest equivalent IFRS line item;
  • Unclear reasons as to why certain amounts are excluded from adjusted measures that seemed to be part of normal business;
  • Instances of companies describing activities as non-recurring which had been reported for a number of years.

The FRC also commented that an “apparent reluctance to identify and highlight the audited IFRS numbers from which APMs are derived is a cause for concern.”

Other key areas of FRC focus include

  • Climate change – The FRC draws attention to its recently issued statement setting out its expectations of companies in relation to reporting on climate change and also the Lab report in this area. Companies should, where relevant, report on the effects of climate change on their business (both direct and indirect). Challenges were made of companies where the business model appeared to give rise to significant climate risk but no disclosures were made to that effect in the annual report. The FRC highlight that boilerplate disclosure should be avoided, commenting that companies who make such disclosures can expect “cursory or boilerplate disclosures to be challenged”.
  • Brexit – in previous years the FRC had reported that development of focused disclosures in this area has been “patchy”. The FRC is encouraged that companies now appear to be providing specific risks related to Brexit in the their annual reports along with mitigating actions that they have been able to take to address them. Almost all companies reviewed by the FRC with UK or EU operations referred to the risks of Brexit in their viability statements.
  • Non-financial information statement – the FRC found that whilst most companies reviewed made references to non-financial reporting matters in their annual report, the disclosures were “sometimes generic”. The FRC will continue to challenge companies where it feels that disclosures “fall short of the requirements” including the requirement to present the information in a separately identifiable non-financial information statement (although cross-referencing to the strategic report is acceptable). The FRC letter to Audit Committee Chairs and Finance Directors indicates that the statement should contain:
    • A clear description of the company’s policies.
    • Any due diligence processes implemented in pursuance of those policies and their outcomes in respect of environmental, social, anti-corruption and anti-bribery matters, employees and respect for human rights.
  • Section 172 reporting – the FRC encourages Board to disclose:
    • the issues, factors and stakeholders that they consider relevant in complying with s172(1) and the basis on which they came to that view;
    • the main methods they have used to engage with stakeholders and to understand the issues to which they must have regard; and
    • information about the effect of that regard on the company’s decisions and strategies during the financial year.
  • Dividends and distributable reserves – the FRC challenged companies that had paid interim dividends in excess of the distributable profits shown in their latest published financial statements. It reminds public companies of the need to file interim financial statements prior to a distribution being made if the most recent annual accounts do not show sufficient profits.

A slide deck of technical findings (see link below) from the CRR during the year has also been published, which gives more detail on the areas challenged by the Panel. The Annual Review of Corporate Reporting does not cover an assessment of corporate governance. Later this year, a separate report will be published which will assess early adoption of the new UK Corporate Governance Code, reporting on the 2016 Code and expectations for reporting in 2020.

The press release, full report, Technical findings 2017/18 and the letter to Audit Committee Chairs and Finance Directors can be obtained from the FRC website.  Our related Governance in brief publication is available here.

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