The Climate Disclosure Standards Board (CDSB) and the CDP (previously the ' Carbon Disclosure Project') have commented on the Phase I report of the Task Force on Climate-related Financial Disclosures (TCFD) set up by the Financial Stability Board (FSB). In their joint response CDSB and CDP highlight among other things new accounting rules by the IASB, which may be relevant to reporting climate-related transition risks as well as IFRS 9 requires entities to measure expected credit losses of a financial instrument using factors that are specific to the entity, general economic conditions and an assessment of both the current and forecasted direction of conditions at the reporting date. Please click to access the full response on the CDSB website.

The Global Reporting Initiative (GRI) has published questions and answers about transitioning from the GRI G4 Guidelines to the modular, interrelated GRI Sustainability Reporting Standards (GRI Standards): the new format, the public comment process, and ultimately how the transition will benefit reporting organisations and report users. Please click to access the Q&A document on the GRI website.

Mike Suffield will lead the FRC’s Audit Quality Review (AQR) team in its work to monitor the quality of UK audit firms’ audits of Public Interest and large AIM entities.  He will join the FRC in July.

The press release is available on the FRC website.

Again, a large part of the meeting will be dedicated to the agenda consultation with over seven hours of discussion spread over all three days. Other major topics on the agenda are Insurance/IFRS 9 and financial instruments with characteristics of equity (both on Tuesday afternoon) and the Consceptual Framework (Wednesday morning).

The full agenda for the meeting and first pre-meeting summaries can be found here. We will post any updates to the agenda, as well as the remaining pre-meeting summaries as well as observer notes from the meeting, on this page as they become available.

The series, hosted by IASB member Darrel Scott, will discuss the following topics related to the upcoming insurance contracts standard:

• The need for change and the history of the project. (issued 1 April)
• What is an insurance contract? (issued 8 April)
• Initial mea­sure­ment of insurance contracts. (issued 15 April)
• Sub­se­quent mea­sure­ment of insurance contracts. (issued 22 April)
• Mod­i­fi­ca­tions to the general model: variable fee contracts. (issued 29 April)
• Other mod­i­fi­ca­tions to the general model. (issued 6 May)
• Pre­sen­ta­tion and dis­clo­sure.
• Applying the Standard for the first time.

For more in­for­ma­tion as well as pre­sen­ta­tion slides, see the webinar page on the IASB’s website.

The research exercise focuses on the Charities SORP (FRS 102) with the consultation period running until 11 December 2016. It is intended to inform the development of the next Exposure Draft of the SORP which itself is likely to be consulted upon in 2018.

In particular views are being sought on:

• the SORP’s structure, format and accessibility;
• implementation issues that require improvements to the SORP;
• SORP Committee members’ suggestions for changes to the SORP:
• charity regulator themes for making changes to the SORP; and
• ideas for items to remove, change or add to improve the SORP.

For the press release on the Charity Commission website see here.

Further information, including the consultation document itself, can be viewed via the dedicated SORP site (link to Charity Commission website).

Both the FRC and The Department for Business, Innovation and Skills (BIS) consulted on matters requiring changes to the Code, Guidance on Audit Committees, the standards for auditors and changes to legislation respectively during 2015. BIS is expected to lay updated legislation in Parliament soon.

Although the 2016 UK Corporate Governance Code, Guidance on Audit Committees, ISAs (UK & Ireland) and Ethical Standard are marked as “final draft”, no further changes other than minor errata are anticipated before they take final effect.

2016 UK Corporate Governance Code

There are few changes to the Code and those are restricted to the Preface and to section C.3 (Audit Committee and Auditors). There is now a provision indicating that the audit committee as a whole will need competence relevant to the sector in which the company operates. In addition, the audit committee report within the annual report is now required to provide advance notice of any plans to retender the external audit, whilst the previous provision on FTSE 350 companies tendering the external audit every ten years has been removed.

Guidance on Audit Committees

More extensive changes to the Guidance on Audit Committees bring the Guidance up to date, reflecting the updates to the Code since this Guidance was last published and the FRC’s Financial Reporting Lab’s work on the Reporting of Audit Committees.

The changes affect both the activities of the audit committee and the disclosure in the audit committee report within the annual report.

The key revisions affect: the role and composition of the audit committee; the interaction with internal audit; the relationship with the external auditor regarding the audit and non-audit services; the disclosures on areas relating to those changes and disclosures around the FRC’s interaction with the company’s financial reporting or external audit.

Ethical Standard

There is now one FRC Ethical Standard which covers the independence requirements for auditors as well as reporting accountants (previously in the Ethical Standard for Reporting Accountants) and for engagements to report to the Financial Conduct Authority (FCA) on client assets.

The Ethical Standard incorporates the EU reforms as well as certain areas where the FRC wanted to align more closely with the Code set by the International Ethics Standards Board for Accountants (IESBA) or where they felt changes were needed.

This is a principles-based standard, which nevertheless contains a lot of detailed rules. Auditors are required to consider the broad principles even if they think they have complied with all of the rules.

Key revisions to the Ethical Standard relate to incorporating the EU reforms for public interest entities (PIEs) for non-audit services. A “PIE” is a public interest entity, defined in EU law as being an entity governed by Member State law with securities (debt or equity) admitted to trading on an EEA regulated market (including those with a Premium or Standard Listing on the main market of the London Stock Exchange but excluding those traded on AIM), a credit institution (in the UK, a bank or building society) or insurance undertaking (those insurance companies, friendly societies and Lloyd’s syndicates that apply the Solvency II regime). There are additional changes over and above the EU changes affecting existing rules on providing tax services to listed entities on a contingent fee basis – a term covering a listing on any exchange worldwide – as well as a general clarification of the principles relating to advocacy in respect of tax.

In addition, the new EU rules on applying a cap of 70% cap on fees for non-audit services when compared to a three year history of statutory audit fees are explained in detail.Care will be needed in applying the Ethical Standard to multi-jurisdictional group situations as the rules around extraterritoriality are complex.

In addition to changes relating to non-audit services, there are also changes for auditors relating to personal independence – a broadening in scope of “covered persons” and persons connected to engagement team members who cannot have certain prohibited financial, business or employment relationships, and a clarified rule on gifts and hospitality offered to or accepted by the auditor. .

ISAs (UK & Ireland)

The FRC has made changes to reflect the EU reforms throughout their standards and has also implemented three major IAASB projects – the disclosures project (which stresses the importance of the audit of disclosures), auditor reporting, and the auditor’s responsibilities for other information accompanying financial statements.

Key changes include the requirement for enhanced auditor reporting for all PIEs and all listed companies; this is a change from the existing UK enhanced auditor reporting regime which only applied to those companies required to or choosing to comply with the Code. The change will affect UK and Irish companies with listings outside the UK and Ireland, including entities with listed debt, together with unlisted banks, building societies and insurance undertakings.

There will also be some changes to the contents of the enhanced audit report which may add to the length of reports, including:

• An expansion of the auditor’s description of significant risks and their response to include key observations, where necessary;
• a description of the extent to which the audit was considered capable of detecting irregularities including fraud;
• disclosure of the auditor’s tenure, including previous reappointments and renewals; and
• a declaration of the auditor’s independence including confirmation that no prohibited services were provided.

Some changes are also made to auditor’s reports on all entities, whether listed, PIE and/or neither:

• an amendment to the auditor’s reporting on the going concern basis of accounting;
• a revised description of the scope of an audit; and
• for statutory audits, an opinion as to whether the directors’ report and any strategic report have been prepared in accordance with the legal requirements. This is not an audit of the content of these reports and is limited to confirming that the relevant information has been produced.

Click for:

• Press release (link to FRC website)
• Feedback Statement and Impact Assessment: Consultation - enhancing confidence in audit (link to FRC website)
• Revised Auditing Standards 2016 (link to FRC website)
• Revised Ethical Standard 2016 (link to FRC website)
• Final Draft: UK Corporate Governance Code 2016 (link to FRC website)
• Final Draft: Guidance on Audit Committees 2016 (link to FRC website)
• Investor Briefing Note: Implementation of the Audit Regulation Directive (link to FRC website)
• Our previous UK Accounting Plus news item on the FRC consultation in September 2015
• Our previous UK Accounting Plus news item on the BIS consultation in October 2015
• Our UK Accounting Plus project page on audit reform
• Our related Governance in brief publication

The report examines the evidence as to whether financial reporting encourages short-termism and questions whether financial reporting could provide better information to its users on long-term performance. It looks in particular at five areas in which current financial reporting has been accused of encouraging short-termism;

• through the effects of using fair values;
• by not providing information on long-term performance;
• through excessive frequency of reporting;
• by writing off rather than capitalising spending on long-term assets such as intangibles; and
• by ignoring long-run effects on the natural world or on society as a whole.

The paper concludes that current evidence does not suggest that current financial reporting practices impedes long-term investment, except in relation to the frequency of reporting where there can be a trade-off between the benefits of transparency and the costs of ensuring that investors’ expectations of performance are met at the frequent intervals required.

An executive summary and the full research paper are available from the ICAEW website.

The FRC welcome the steps taken by the TCFD to ensure that adequate consideration is given to the assessment of and reporting on the impacts of climate change. The FRC believes that the disclosure recommendations should apply to both financial and non-financial companies and stress that any disclosure recommendations made should be flexible to enable a company “to tell its story”. In order to not detract from the key messages in the annual report, the FRC encourage the TCFD to consider the placement of information outside the annual report when recommending disclosures that “might go beyond the needs of the annual report’s intended audience.”

Despite welcoming the steps taken by the TCFD, the FRC expresses concerns about the length of the consultation period and the ability of stakeholders to respond in a “considered and meaningful way”. This is particularly important given the fact that consideration of climate risks is still at the stage of breaking into mainstream business dialogue with few examples of good practice to date.

 The full comment letter is available on the FRC website.

The Update reports on the EFRAG Technical Expert Group (EFRAG TEG) meeting on 28 - 29 April.  The Update also lists EFRAG publications issued in April:

• EFRAG’s draft endorsement advice on Disclosure Initiative – Amendments to IAS 7;
• EFRAG’s draft endorsement advice on Deferred Tax Assets for Unrealised Losses – Amendments to IAS 12; and
• EFRAG’s paper related to the Measurement Chapter of the IFRS Conceptual Framework (link to EFRAG website). 

Please click to download the April EFRAG Update from the EFRAG website.

An agenda with supporting papers and details on how to register for the public meeting can be found on the EFRAG website.