The role of the Financial Reporting Advisory Board (FRAB) is “to ensure that government financial reporting meets the best possible standards of financial reporting by following Generally Accepted Accounting Practice (GAAP) as far as possible”.  The FRAB includes representatives from the accountancy profession in the private and public sectors, academia and government bodies.  The board meets regularly to consider proposed changes to policy and practice.

Key topics discussed during the meeting included:

• The revised Financial Reporting Manual (FReM) 2015-16 and the draft FRem 2016-17.  The Board was presented with the revised FReM and the FReM 2016-17 was also presented to the Board for consideration.  No further changes to the FReM 2016-17 were proposed from the 2015-16 version.
• An update on International Financial Reporting Standard (IFRS) 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers implementation progress against the work plans.
• An update to the IASB’s work on the Conceptual Framework and consideration of the potential implication for the public sector.
• A proposition from the Department for Business, Innovation and Skills (BIS) of a pilot project for the rationalisation of financial reporting among Research Council bodies.  These proposals follow the implementation of the first phase of the Simplification and Streamlining Accounts project in 2015-16.
• An update on the Chartered Institute of Public Finance and Accountancy (CIPFA) and the Local Authority (Scotland) Accounts Advisory Committee (LASAAC) Code 2016-17; a draft of which was published in July 2015.  It was noted that responses to the consultation were “mostly supportive”.

Click here for detailed minutes and other supporting documents on HM Treasury website.

SORPs issued by the Charity Commission and OSCR apply to charities preparing accounts under UK GAAP to present a ‘true and fair view’ and are intended to supplement accounting standards and other legal and regulatory requirements to reflect transactions or circumstances that are unique within the charities sector. 

In June 2014, the Financial Reporting Council (FRC) approved two new Charities SORPs for publication; one set out the accounting and reporting requirements of charities in the context of Financial Reporting Standard (FRS) 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland (“Charities SORP (FRS 102)) and the other was a separate SORP based upon the Financial Reporting Standard for Smaller Entities (FRSSE) (“Charities SORP (FRSSE)).

As a result the UK implementation of the EU Accounting Directive, the FRC, in July 2015, published changes to the existing UK financial reporting framework to take effect for accounting periods beginning on or after 1 January 2016.  As SORPs are required to be updated to comply with changes to accounting Standards, these changes had a direct impact on the Charities SORPS and the Charity Commission and the OSCR have reflected these amendments (included with Amendments to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland – Small entities and other minor amendments) in the Update Bulletin.  These amendments were consulted on in June 2015.

The Update Bulletin amends the Charities SORP (FRS 102), that was issued in July 2014, in the following key areas:

• The Scope and application module of the Charities SORP (FRS 102) is amended to state that the amendments are effective for accounting periods beginning on or after 1 January 2016 with earlier application permitted for accounting periods beginning on or after 1 January 2015 if not prohibited by regulations, charity or company law.  Should the amendments be adopted early, then the Update Bulletin is clear that all of the amendments must be adopted together in the charity’s trustees’ annual report and accounts.  The amendments also confirm that the Charities SORP (FRSSE) will be withdrawn for such accounting periods and, from 1 January 2016 all charities will be required to follow the Charities SORP (FRS 102).
• Module 10: Balance sheet and Module 24: Accounting for Groups and the Preparation of Consolidated Accounts have been amended to revise the maximum period over which goodwill and other intangible assets may be amortised in those exceptional cases where an entity in unable to make a reliable estimate of the asset’s useful economic life.
• Module 12: Impairment of assets has been amended to prohibit the reversal of impairment losses for goodwill.
• Module 14: Statement of cash flows has been amended to require only those larger charities to prepare a cash flow statement.  
• Module 17: Charity mergers has been amended to prohibit merger accounting for charities that are companies and enter into a business combination with a third party. 

The Glossary to the Update Bulletin also reflects a revised definition of ‘larger’ charity.  The Charities Act 2011 (Accounts and Audit) Order 2015 increased the charity audit income threshold from £500,000 to £1 million in England and Wales.  Larger charities are required to make more disclosures in the Trustees’ Annual Report.  The Charity Commission and the OSCR have ‘delinked’ the definition of larger charities in Appendix 1: Glossary of Terms in Update Bulletin from the new statutory audit threshold with effect for reporting periods ending on or after 31 March 2015.  This means that ‘larger charities’ are those as defined in Appendix 1: Glossary of Terms in the Update Bulletin (those charities with a gross income of £500,000 (UK) or 500,000 Euros (Republic of Ireland)) rather than as newly defined for statutory audit purposes when preparing the Trustees’ Annual Report. 

As these changes are included within an Update Bulletin to the Charities SORP (FRS 102) rather than reissuing the Charities SORP (FRS 102), charities following the Charities SORP (FRS 102) will have to refer both to the Update Bulletin and the Charities SORP (FRS 102) when preparing their accounts and reports. 

Click for:

• Update Bulletin 1 (link to Charities Commission website)
• Our previous UK Accounting Plus news item on the Charity Commission and OSCR consultation on amendments to the Charities SORP (FRS 102)
• Our previous UK Accounting Plus news item on the FRC changes to accounting standards for small and micro entities.

The IASB released its Exposure Draft in October 2015, with the objective of explaining and illustrating the concept of materiality and at helping preparers of financial statements in applying the concept. It covers three main areas:

• characteristics of materiality;
• presentation and disclosure in the financial statements; and
• omissions and misstatements.

It also contains a short section on applying materiality when considering the recognition and measurement requirements of IFRSs.

In its response, the FRC express the view that to achieve this objective, the PS would need to be significantly more practical in approach, more accessible to the intended audience and provide guidance on additional matters with greater focus on the application of materiality to disclosures. They believe that the PS will be more successful in changing behaviour if it provides practical guidance, focussing on the thought processes and steps that preparers could follow when making materiality judgements, rather than reiterating and explaining the concept of materiality set out in existing IFRS literature. More detailed examples demonstrating how companies have applied this process in practice would also assist in this.

The FRC highlight a number of areas where, in their view, applying materiality is particularly challenging and it would be helpful for the PS to provide more guidance. They also express the view that it would be helpful if, as well as preparers, the PS also addresses stakeholders such as auditors, regulators and enforcers in its approach.

The FRC does agree with the IASB that a practice statement, rather than mandatory guidance, is the appropriate vehicle for a pronouncement on materiality, and also supports the IASB's intention to issue the PS as soon as possible and not to wait until the wider Principles of Disclosure project is completed.

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

ESMA highlights that IAS 39 Financial Instruments: Recognition and Measurement and IFRS 9 Financial Instruments “do not provide sufficient guidance on accounting for the exchange or modification of financial assets” and is of the view that “more guidance is necessary in order to avoid diversity in accounting for this type of transactions, especially in relation to equity instruments”. 

ESMA therefor recommends that this project is added to the IASB’s active research agenda.

The full comment letter is available on the ESMA website.

Key findings

In their report Comply or explain: A review of FTSE 350 companies’ environmental reporting in annual reports, the CDSB identify four key characteristics of best practice in corporate environmental reporting. The best reports exhibit the following qualities.

1. They demonstrate a strong relationship between environmental matters and overall corporate strategy, performance and prospects. Applying the concept of connectivity in this manner helps to show a holistic picture of the factors that affect the organisation’s ability to create value over time, including the interrelatedness and dependencies between them. One common disconnect identified by the CDSB in their survey is that a much higher proportion of companies identify one or more environmental matters as a principal risk (41%) than identify at least one environmental measure as a key performance indicator (KPI) (27%).
2. They clearly set out the purpose of KPIs and consider the characteristics necessary for these measures to be useful to users. The report identifies five common characteristics that could be applied to KPIs to enhance the consistency and comparability of disclosures, recommending that they should be:
1. connected with financial information;
2. consistent over successive periods and with internal indicators;
3. focused on material matters;
4. presented with qualitative information to provide context; and
5. consistent with accepted industry benchmarks.
3. They recognise that environmental reporting is more than emissions reporting. Leading companies are also considering wider natural capital impacts and dependencies, such as risks and opportunities associated with waste, biodiversity, air pollutants, water security and soft commodities.
4. They consider the environmental impact of the business throughout its value chain, not just within its legal boundaries. One example of this is reporting 'Scope 3' greenhouse gas emissions (those which arise from sources outside the entity's control but are a consequence of their activities, other than purchases of electricity, heat, steam or cooling - for example, emissions from business travel). This is not required by law but doing so can help readers to understand the actions a company has taken to minimise its environmental impacts. The CDSB found that only 26% of reports currently include this information.

Enhancing regulation

The report also sets out four ideas for regulators as to how the enabling environment for disclosure could be enhanced. These are as follows.

1. Building on emerging practice. Regulators should agree shared definitions of terms (such as business model) to encourage reporting on the same content to develop consistently across different jurisdictions.
2. Balancing flexibility, consistency and comparability. Currently there is considerable variation in reporting practice within and between sectors that is not wholly explained by the unique nature of businesses - further guidance that describes the expectations of reporting companies might help to reduce this.
3. Establishing and strengthening mandatory reporting requirements. Where information is measurable, objective, auditable, capable of standardisation across companies and widely used for decision-making, the CDSB believes that the case for mandatory reporting of material activities is strong.
4. Understanding the international landscape and opportunities for alignment. The structure provided by the existing strategic report requirements means that the UK is well positioned to lead the development of non-financial reporting and the implementation of the EU Non-Financial Reporting Directive.

Mr Haddrill's speech

In his speech, Mr Haddrill congratulated the CDSB for its contribution and the quality of its report. He also commended its timeliness, noting that:

"Most major companies now recognise that the environment presents risks to and opportunities for their business that they and their investors need to understand.  So the willingness to report is growing rapidly and the question is how best to do it."

He welcomed the report's recognition that materiality should be applied in environmental reporting, as in other areas, ensuring that disclosures made are relevant to shareholders. However, he also acknowledged that the public, including shareholders, want to know that environmental matters have been properly considered and so, where directors have concluded that environment matters are not material, they should include disclosures in the annual report explaining why.

Finally, he sounded a note of caution regarding the report's calls to action for regulators, expressing the view that while this is an area in which regulators should work together, it is too early for standardisation of reporting requirements. He noted that:

"Standardistaion helps comparability but it also encourages boiler plate reporting and that undermines the exercise of judgement.  Narrative reporting is in transition and at the FRC we are keen within legal requirements to let the best ideas emerge."

Find out more

The press release and full report are available from the CDSB website. The full text of Mr Haddrill's speech is available from the FRC website.

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

So far, the report had stated that endorsement of IFRS 9 is expected in the first half of 2016. The deferral is a result of deadlines within the European endorsement process and is not primarily technically motivated.

Please click to access the updated status report.

While business and finance are increasingly global, the report warns that important regulation is not. Instead, it is frequently focused on national interests, which can create barriers and impediments to inclusive growth and jeopardise global financial stability. It states:

In the years since the financial crisis, regulation — and, as a result, the work required to manage global investment, finance, and financial reporting — has increased exponentially. Recent reforms [...] have often taken a prescriptive approach, focusing on detailed procedures, processes, and compliance rather than outcomes — and uniformly applying sometimes inappropriate solutions to a broad range of companies.

The ten principles for high quality financial regulation state that regulation needs to be evidence-based, proportionate, appropriately resourced, collaboratively developed/implemented, consistent, subject to active oversight, systematically reviewed, have clear objectives, and be properly targeted and enforced to address intended issues.

Please click to access the report From Crisis to Confidence: A Call for Consistent, High-Quality Global Regulation and a corresponding press release on the IFAC website.

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