The topics discussed were as follows (click through to access detailed Deloitte observer notes for each topic):

TUESDAY, 11 NOVEMBER 2014

New issues

• IAS 32 — Classification of a liability for prepaid cards issued by a bank in the bank's financial statements
• IAS 21 — Revenue transaction denominated in foreign currency (date of transaction for the purpose of identifying the appropriate exchange rate for revenue recognition)
• IAS 12 — Selection of applicable tax rate for measurement of deferred tax relating to an investment in an associate
• IAS 28 — Applying the fair value option: an investment by investment choice, or consistent policy choice
• IAS 19 — Should longevity swaps held under a defined benefit scheme be measured at fair value as part of a plan asset or on another basis as a 'qualifying insurance contract'

Administrative session

• Work in progress
  

You can also access the preliminary and unofficial notes taken by Deloitte observers for the entire meeting.

Following the theme of his recent speeches made in Japan and China earlier this month, Mr Prada provided a case for global accounting standards and uses the actions taken in Korea to serve as “an exemplary role model in the region.” 

Mr Prada states that businesses in Korea benefit from full adoption of IFRS because they can report a set of financial statements that are familiar with investors around the world. According to a recent KASB review of the consequences of the move to IFRS, the introduction of IFRS has “led to an improvement in the quality of earnings, as well as improving comparability between different Korean companies as well as their international peers.” Mr Prada noted that other jurisdictions have experienced similar conclusions. He also states that the continued economic and financial globalisation has caused the G20, International Monetary Fund, World Bank and IOSCO to support the work of the IFRS Foundation (IFRSF) and the IASB.

In addition, Mr Prada commented on progress made in the development of high quality, global accounting standards, which included IFRSF study on the use of IFRS around the world and the requirement of 114 out of 138 countries to require the use of IFRS for all or most public companies. Significant progress has been made in jurisdictions that have not yet required the use of IFRS, such as China, India, Japan and United States.

Lastly, he reflected on the “evolution” of the IFRSF and IASB and how the upcoming public consultation on the structure and effectiveness of the organisation will provide stakeholders with an opportunity to voice their comments.

The full text of Mr Prada's speech is avail­able on the IASB's website. The KASB has published a press release on the seminar on its website.

According to the new Directive, which was approved by the Council of the European Union in September 2014, large public-interest companies with more than 500 employees are required to disclose relevant and material environmental and social information in their annual reports. Disclosures shall be provided at group level, rather than by each individual company within a group.

Large listed companies will also be required to provide information on their diversity policy, covering age, gender, geographical diversity, and educational and professional background. Disclosures shall set out the objectives of the policy, how it has been implemented, and results.

The Directive enters into force on the twentieth day after its publication. Member States have to transpose the Directive into national law by 6 December 2016. The new provisions have to be applied to all undertakings within the scope of the Directive for the financial year starting on 1 January 2017 or during the calendar year 2017.

Please click for access to the full text of the Directive in the Official Journal (available in all languages of the EU).

The IESBA consultation, published in August 2014, proposed a number of amendments to the Code.  In response to the proposed changes, the FRC's key points are:

• In relation to IESBA's proposals regarding the allowed period of 'time-on' as a key audit partner, the FRC believe that IESBA has reached the wrong conclusion that it is not appropriate to reduce the current period from seven years to five.  They strongly recommend that IESBA reconsider the proposed changes to the Code in relation to this.
• They support IESBA's proposal to increase the ‘time-off’ period for engagement partners to 5 years.  However, they do not agree that the 'time-off' period for other partners, such as the EQCR partner, should be shorter than this and recommend that the required 'time-off' period for all key audit partners should be 5 years.
• As regards involvement with the audit during the 'time-off' period, the FRC believe that, other than in exceptional cases, a partner should have no involvement at all with an audited entity.  In relation to the provision of technical or industry-specific advice, the FRC recommend that either a total prohibition or provisions requiring the establishment of further safeguards are necessary.  This contrasts with IESBA's proposal that an engagement partner who has been rotated off could, after two of the five years have elapsed, provide consultation to the engagement team or client on such matters. Notwithstanding this, the FRC do support the proposal that during the time-off period the rotated partner should not act as ‘relationship partner’ for the client, or undertake any other role, including the provision of non-audit services, that would result in significant or frequent interaction with senior management or those charged with governance or an ability to exert direct influence on the outcome of the audit engagement.  The FRC agree with IESBA that these provisions should not prevent an individual from assuming a senior leadership role in the firm.
• The FRC agree that if, in rare circumstances, it is considered appropriate to extend the total time-on period served this should require the approval of those charged with governance, ordinarily the audit committee or equivalent.

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

Mr Prada's overview of the success of IFRSs around the world was similar to his explanations in Tokyo earlier this week. He praised IFRSs as global standards for financial information that can help to power the global economy, which would be especially important today, "because every major jurisdiction seeks to maintain a level of economic growth, to provide further time to heal the wounds from the global financial crisis and to facilitate a continued economic recovery".

From the world economy Mr Prada turned to the role of efficient markets in China in connection with the 2020 reform programme that identifies the decisive role of markets and the need to facilitate overseas companies' entry to China and Chinese companies' expansion abroad. He stressed that the IFRS Foundation is very willing to work with the Chinese authorities to achieve this goal and he also included the hope, that a funding mechanism might be found that allows China to fully contribute to the costs of the IFRS Foundation and would see increased Chinese support for the Asia-Oceania office of the IFRS Foundation in Tokyo.

However, Mr Prada identified the modification of IFRSs as the major challenge China is facing. He noted the efforts China made in modernising its accounting systems and called them a "considerable undertaking for a country the size of China". He also mentioned that is was very impressive that the new Chinese standards are required for use by all large and medium-sized Chinese companies, not just listed ones. Yet similar to the point about familiarity he made in Japan, Mr Prada pointed out that international investors are wary when the IASB's standards are modified, even if only in small ways. He commented:

China has not fully received the international recognition it deserves by your efforts to move to global accounting standards. It is the same problem faced by any jurisdiction that chooses to adjust IFRS to meet local requirements. Other jurisdictions that have adopted IFRS in full and without modification often assume that the adjustments must be substantial to warrant such a change. So, the question for China is whether the relatively minor deviations from IFRS warrant the lack of international recognition that results from those changes? This is a question that China alone can answer.

The full text of Mr Prada's speech is available on the IASB's website.

When the FRC was developing FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland', it was decided that FRS 102 would not contain guidance on interim reporting and that instead the FRC would undertake a separate project to review the existing ASB Statement 'Half-yearly financial reports'.

The FRC has now published the results of this project. Rather than update the existing Statement, the FRC is proposing to withdraw it and replace it with a new standard based on IAS 34 'Interim Financial Reporting', adapted for use by entities that apply FRS 102.  The new standard will not impose an obligation on entities to produce interim financial reports. However, entities that make a statement of compliance with it will be required to apply all of its provisions. The new standard will, for example, apply to those listed investment trusts which report under UK GAAP.

The FRC is proposing that entities which apply FRS 101 'Reduced Disclosure Framework' and are subject to a requirement to prepare interim financial statements should also apply FRS 104, but with references to FRS 102 read as the equivalent requirements in EU-adopted IFRS as amended by paragraph AG1 of FRS 101.

As well as withdrawing the ASB statement on half-yearly reporting, the FRC is also proposing to withdraw the existing ASB Statement 'Preliminary announcements'. This statement was issued in 1998 and in the FRC's view it is now obsolete, given developments in the requirements and practice around preliminary announcements since then.

The new standard is proposed to be effective from 1 January 2015, with the ASB statements withdrawn from that date. The FRC has requested comments by 12 January 2015 with the expectation that a final standard will be published by the end of the first quarter of 2015.

The press release and full consultation document can be obtained from the FRC website.

'Who should be covered by codes?' is the fifth and last paper in the ICAEW's corporate governance thought leadership series.  It concludes that the current cornerstone of the UK corporate governance regime, the UK Corporate Governance Code, is too narrow and prescriptive to deal effectively with all of the factors that affect business behaviour. In response to this, the ICAEW proposes that an overarching framework for business behaviour should be developed, setting out broad principles by which the companies of today can be guided. This framework can then be supplemented by more detailed codes, such as the UK Corporate Governance Code and Stewardship Code, which are designed specifically for particular groups.

Michael Izza, ICAEW chief executive, said:

"Codes are typically more effective than prescriptive rules in dealing with human behaviour so this approach has the potential to change business behaviour without creating new legislation. A framework could help promote consistency between group specific codes, encouraging a shared sense of accountability and would also allow us to maintain key benefits of a code-based regime, such as innovation and long-term learning.”

The press release and the paper itself can be downloaded from the ICAEW website.

The interim release provides additional taxonomy concepts that support the consistent adoption and implementation of IFRS.

More details (and a link to the interim release) are available in the press release on the IASB website. Our dedicated XBRL page is here.

The ACCA believes that the limits of a smaller company’s size should be increased to the maximum permitted by EU law for accounting purposes, but that the size limits for audit purposes should remain at the levels currently set by UK law. It comments that "many interested parties, including ACCA, would be cautious about an increase in the audit exemption limit to the same extent as the small company accounting limit. The value often perceived to be added by an external audit indicates that an impact assessment would, at least, be needed."

It also expresses concern over the reduction in notes to the financial statements for smaller companies, commenting:

ACCA does not believe that this is a good idea, as important information may be lost from the financial statements that stakeholders such as creditors and shareholders may want to see. The UK, however, has limited room for manoeuvre given what is in the EU Directive. We agree with the notes that BIS intend to require and understand that the overriding obligation for the accounts to show a true and fair view remains. But this combination is not going to make life easier for small companies. Directors, and in some cases auditors, will have to consider whether the few disclosures mandated by the law will be sufficient for their accounts to show a true and fair view. We think in many cases, more will be needed.

The ACCA supports the extension of small company relaxations to public limited companies  which would otherwise qualify as small if they were private, regarding this as "appropriate for the size and ownership profile of these companies". The response is not in favour of the proposals to permit small companies to prepare only abbreviated accounts, however, noting that it considers "...the stewardship responsibilities of directors to the company’s shareholders to be very important and transparency via the annual report and accounts are an important element in their discharge." It suggests that, as a minimum, shareholder approval should be required.

Click for:

• Press release (link to ACCA website)
• Full comment letter (link to ACCA website)
• Our previous UK Accounting Plus news story on the BIS consultation

Mr Prada commented on the ever growing number of jurisdictions adopting IFRS and explained that for most industry sectors in the world, IFRS is now the predominant basis on which companies' financial statements are prepared. As part of the reason for this success he made out that "investors have a clear bias for the familiar" and that IFRS have by now become the means to provide that familiarity to international investors. Jurisdictions or companies that decide not to apply IFRSs would need to be aware of becoming increasingly isolated and that the "costs of being outside the familiarity of the IFRS system" would rise.

Mr Prada then looked at the large economies that still have not adopted IFRS (China, India, the US, and Japan) and made out encouraging developments in all of them although he admitted that in the case of the US "progress has been slower than anticipated". Among these jurisdictions, he especially noted Japan and the careful and considered approach to the use of IFRS in Japan that has been chosen. He claimed that the option of voluntary adoption of IFRS was being watched carefully by other jurisdictions as it would allow larger, multinational companies to benefit from IFRS without immediately forcing smaller, more domestically focused companies to adopt a new system.

Among the Japanese encouraging developments, Mr Prada also looked at the introduction of Japanese Modified International Standards (JMIS) where an exposure draft has been published in July 2014. He commented:

I have no strong views on JMIS, and it is up to the Japanese authorities to determine what transitional steps to IFRS are required. However, if investor familiarity is the goal then this can only come from the full use of IFRS.

Mr Prada concluded his speech by underlining that the IFRS Foundation and the IASB have evolved into a global accounting standard-setter, willing and able to take on the resulting responsibilities but also willing to always keep and open mind and listen to and learn from the stakeholders.

The full text of Mr Prada's speech is available on the IASB's website.