Every year, the FRC's Conduct Committee ("the Committee") reviews the reports and accounts of a sample of public and large private companies to determine whether they comply with the Companies Act 2006 and other reporting requirements. Where it appears that those requirements have not been complied with, the Conduct Committee investigates the position and determines the action to be taken to address any non-compliance.  Since FTSE 350 companies represent the major part of investment in UK listed companies, the Committee reviews their reports on a regular basis, with FTSE 100 companies reviewed every three years and FTSE 250 companies every four years.

This year, the Committee reviewed 271 sets of reports and accounts, with 100 of these reviews resulting in the opening of correspondence with the company. The committee also closed four long-standing Review Groups set up in 2013, three involving interests held by pension funds in Scottish Limited Partnerships and on in relation to revenue recognition.

Key messages

The key messages from this year's report are as follows:

• Overall the level of corporate reporting by large public companies, particularly FTSE 350 companies, has been good, with the issues raised by the Committee usually involving unusual or complex transactions rather than straightforward issues.
• A higher number of poorer quality accounts continue to be produced by smaller listed and AIM companies. In response to this the FRC has set up a project aimed at improving the quality of these companies.
• In the light of the FRC's 'Clear & Concise' initiative, the Committee emphasises that their letters of enquiry discourage boards from including immaterial matters in their reports and explain that only disclosures that are material or relevant should be included. The Financial Reporting Lab's report 'Towards Clear & Concise Reporting' provides information on the practical steps that companies can take to make their reports clearer and more concise.

The report includes some advice for companies on how they should respond to communication from the Committee, with a number of good practices that they believe tend to result in earlier closure of the matters under review.

Emerging issues

The report identifies four emerging issues, prompted either by recent changes to legislation or accounting standards or where the Committee has had an early indication that they will be particularly relevant in the near future. These are:

• Pensions - this is an area of change, with the introduction of the revised IAS 19 and the requirement for disclosures in relation to the governance of pension plans and the impact of the applicable regulatory framework, such as the level of any minimum funding requirement. The Committee has not yet identified any substantive issues with the application of revised accounting policies in this area, however they have seen variable practice regarding disclosures around minimum funding requirements.
• De facto control of subsidiaries - with the majority of UK companies applying IFRS 10 for the first time in 2014, companies must now consider whether they exert 'de facto control' over an entity and, if so, include it in their consolidated results. As this is a substantive change from the previous standard, the Committee encourages boards to consider this area carefully.
• Acquired intangibles - with an improving economic outlook in the UK, the Committee expects to see more merger and acquisition activity. They would expect most business combinations to result in the recognition of some separate intangible assets and will look to challenge companies where business combinations result in the recognition of material goodwill but few or no intangible assets.
• Other legislation or regulation - although the Committee does not have a statutory remit to monitor compliance with legislation or regulations beyond the financial reporting requirements of the Companies Act, they will draw failures to comply with other regulations to the attention of companies. An example of this is the requirements of the Large and Medium-Sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 in relation to disparities between the remuneration of senior executives and other employees of a company.

Common areas of challenge in 2013/14

The report identifies 10 areas that were commonly raised with companies during the year:

• Business reviews / Strategic Reports - particularly where this focussed only on good news or where non-recurring items were not adequately explained;
• Pensions - in particular where there was a lack of clarity around whether a pension fund surplus results in a recognisable asset, whether a company should recognise a liability for its minimum funding requirements and where pension schemes were structured to achieve a particular accounting effect;
• Exceptional and other similar items - in particular the use of additional columns or lines on the face of the income statement, poor description or inconsistent application of policies for identifying exceptional items, identification of recurring items as exceptional, lack of symmetry in the treatment of debits and credits and lack of comparative information;
• Critical judgements - where the precise nature of the judgement was insufficiently clear, for example where it simply repeated the relevant accounting policy, and where disclosures did not sufficiently differentiate between critical judgements and areas of estimation uncertainty;
• Clear & Concise (Cutting Clutter) - for example inclusion of immaterial accounting policies, presentation of income statement lines that were nil or clearly trivial, unnecessary repetition of disclosures and unnecessary detail about new accounting standards that would not have a significant impact on the company;
• Principal risks and uncertainties - in particular where companies present a voluminous list of possible risks without emphasising those they believe are most important;
• Accounting policies (particularly revenue) - where these are 'boiler plate' and not tailored to the facts and circumstances of the company's business. This is something that the Financial Reporting Lab produced a report on in July 2014.
• Impairment - where disclosures were of poor quality or apparently inconsistent with other areas of the report, or where the assumptions supporting a lack of impairment appeared to be overly aggressive;
• Taxation - including failure to recognise deferred tax on business combinations, failure to disclose the basis for recoverability of deferred tax assets and unclear tax reconciliations; and
• Cash flow statements - although these continue to improve, the Committee nevertheless still identified misclassified cash flows, inappropriately netted cash flows and non-cash movements reported as cash flows.

The FRC has also published a slide deck of technical findings (see link below) from the Conduct Committee's Financial Reporting Review Panel during the year, which gives more detail on the areas challenged by the Panel.

We have produced a need to know publication discussing the report and technical findings. In addition, the following resources can be found on the FRC's website:

• The FRC's press release on this topic
• The Corporate Reporting Review Annual Report 2014 

EFRAG's comment letter on the IOSCO proposals is based on the consultation process that it undertook to develop its response to ESMA’s Consultation Paper - Guidelines on Alternative Performance Measures.

In its response letter, EFRAG notes that, in its view, non-GAAP measures can provide useful information to users when properly used and presented, and can assist investors in gaining a better understanding of a company's financial performance and position. It therefore supports the idea that non-GAAP financial measures should be clearly defined and explained by preparers, unbiased and presented consistently over time to improve the understanding of the performance by users of financial statements.

However, EFRAG does not believe that the proposed statement articulates clearly enough the underlying principle behind its proposals, and that this could result in lengthy disclosures that contain relatively little valuable information. While it welcomes the fact that the proposed statement would not apply to non-GAAP measures reported in the financial statements, it believes that the scope of the proposed statement should exclude further items, including:

• measures which are derived from the primary financial statements but presented outside those statements and either:
• the definition of which is self-evident from the name used; or
• are merely totals or subtotals of measures contained directly within the financial statements;
• the contents of prospectuses; and
• other documents containing regulated information required by a regulator other than a securities regulator, for example a bank or insurance regulator.

While IOSCO proposes that non-GAAP measures should be given 'equal or less' prominence than GAAP measures, EFRAG believes that this may effectively impose a 'ceiling' on the amount of voluntary information that an entity may disclose, regardless of whether such information is useful to users. EFRAG recommends that instead the final statement should focus on ensuring that non-GAAP measures are not given undue prominence.

Proposed disclosures

In relation to the disclosure requirements that are proposed by IOSCO, EFRAG welcomes the fact that the proposals are not overly prescriptive, in particular that they allow incorporation of disclosures by reference, helping to avoid unnecessary repetition. However, they are concerned by the proposed requirement that a quantitative reconciliation must be given from each non-GAAP measure to the most directly comparable GAAP measure, as some non-GAAP measures are based on sources other than conventional accounting, or may be forward-looking. In these situations EFRAG does not believe that it will be practicable to provide a quantitative reconciliation and that a qualitative disclosure may be more appropriate.

The full comment letter can be downloaded from the EFRAG website.

Highlights included approval of the following documents by EFRAG TEG:

• an invitation to comment relating to the endorsement for use in the European Union and European Economic Area of IFRS 15 Revenue from Contracts with Customers (not published yet);
• final endorsement advice on bearer plants;
• a final comment letter in response to ED/2014/2 Investment Entities: Applying the Consolidation Exception (Proposed amendments to IFRS 10 and IAS 28);
• a final comment letter in response to IOSCO's proposed guidance on the presentation of non-GAAP financial measures.

Additional topics discussed in the newsletter are:

• IFRS 3 - Post-implementation review
• Discount rates
• Disclosure initiative
• Financial instruments with characteristics of equity
• Leases
• Conceptual framework
• IFRS 9
• IASB’s annual improvements to IFRS (2012-2014 cycle)
• Equity Method in Separate Financial Statements (Amendments to IAS 27)
• Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28)
• Insurance contracts
• ED/2014/4 Measuring Quoted Investments in Subsidiaries, Joint Ventures and Associates at Fair Value (Proposed amendments to IFRS 10, IFRS 12, IAS 27, IAS 28 and IAS 36 and Illustrative Examples for IFRS 13)
• IASB Discussion Paper on Macro Hedging

Please click for the new issue of the EFRAG Update (link to EFRAG website).

The full agenda for the meeting, dated 13 October 2014, can be found here.  We will post any updates to the agenda, and our Deloitte observer notes from the meeting, on this page as they are available.

PIEs as presently defined in EU legislation are:

• entities whose transferable securities are admitted to trading on a regulated market,
• credit institutions,
• insurance undertakings, and
• entities designated by Member States as public-interest entities.

Therefore, Member States have the option to designate undertakings that are of significant public relevance because of the nature of their business, their size or the number of their employees as PIEs and thus expand the number of companies falling under the Accounting Directive or the Audit Directive.

FEE has surveyed PIE definitions in all EU Member States, Iceland, and Norway. The survey showed that

• there is a wide diversity of definitions of PIEs applicable across European countries with some countries having implemented the minimum requirements and others having included a number of other entities to their applicable PIE definition;
• as a consequence, the number of PIEs per European country is very variable;
• in most countries the PIE definition has not changed significantly over recent years; and
• in the context of implementing the 2013 Accounting Directive and the 2014 Audit Directive, Belgium, Germany, the Netherlands, Slovenia, Sweden and the UK are considering extending the definition while Spain and Denmark might see a reduction in scope.

The FEE survey offers several tables and charts showing PIE definitions and the number of PIEs, describes changes that can be anticipated and contains an appendix with the exact definition of a PIE for each of the countries surveyed.

Please click to access the survey on the FEE website.

The IASB proposed in ED/2014/2 Investment Entities: Applying the Consolidation Exception (Proposed amendments to IFRS 10 and IAS 28) amendments aimed at clarifying certain aspects of IFRS 10 and IAS 28.

EFRAG published its draft comment letter in July 2014 and the final comment letter was published earlier in October 2014.  

The feedback statement (link to EFRAG website) provides an analysis of the EFRAG tentative position expressed in the draft comment letter, describes the comments received from constituents and then highlight how these comments were considered by the EFRAG Technical Group (EFRAG TEG) in reaching their final position on the IASB ED set out in their final comment letter to the International Accounting Standards Board (IASB). 

Click for:

• EFRAG press release (link to EFRAG website).
• Feedback statement in full (link to EFRAG website).
• UK Accounting Plus story on ED/2014/2.

In the response to the questionnaire, FEE states that the adoption of IFRSs has made companies' financial statements in the EU "significantly more transparent" due to increased disclosure, reduced divergence and increased comparability. As a consequence of increased transparency, comparability and reliability, FEE also sees significantly increased investor protection.

Given all these benefits, FEE believes that the scope of the IAS Regulation should be expanded by making IFRS compulsory for the individual accounts of listed companies on regulated markets and by allowing any company to opt for reporting under IFRS.

FEE also warns that the endorsement criteria for the EU adoption of IFRSs should remain as they are and that moving towards flexible endorsement of IFRSs would in fact be detrimental to Europe: "FEE fundamentally disagrees with 'opening a door' towards more flexibility for the EU in endorsing IFRSs as this would not bring flexibility, but would defeat the very purpose of having global standards."

FEE also warns that any implementation guidance on IFRSs should only come from the IASB and not from the EU or the national level.

Please click to download the full response (link to FEE website).

Note: On 30 October 2014, FEE supplemented its response to the questionnaire with a comment letter stressing once more and elaborating on FEE's views in relation to the endorsement and the enforcement of IFRSs in the EU. The comment letter can be accessed on the FEE website.

Statistics released by the Department for Business, Innovation and Skills (BIS) highlight that women made up 22.8 per-cent of FTSE 100 directors (as of 2 October 2014), up from 20.7 per-cent as of March 2014 and 12.5 per-cent as of February 2011 when Lord Davies reported.  The figures also highlight that 31.8 per-cent of all board appointments in the last six months have been women, down from 35.5 per-cent in the previous six months. To achieve the target set by Lord Davies, 24 more board seats on FTSE 100 companies are required to be held by women.  

FTSE 250 companies are also reporting an increase with 17.4 per-cent of women directors on their boards, up from 15.6 per-cent as of March 2014 and 7.8 per-cent as of February 2011.  24.3 per-cent of all board appointments to FTSE 250 companies in the last six months have been women, down from 33.3 per-cent in the previous six months. 

There are now no all-male boards in the FTSE 100, while the number of all-male boards for FTSE 250 companies has decreased from 48 in March 2014 to 28 in October 2014. 

The government acknowledges that the 25 per-cent target is "in sight" but cautions that "businesses must keep up the momentum" in order to reach that target by 2015.

Click for:

• Press release (Link to BIS website)
• Latest women on boards statistics (Link to BIS website)
• Latest annual progress report (March 2014) from Lord Davies into Women on Boards (Link to BIS website)
• The original Lord Davies Women on Boards report from 2011 (Link to BIS website)

The IFAC classified each recommendation within one of three categories: (1) global consistency for sound financial regulation, (2) financial management, reporting, transparency, and accountability by governments, and (3) effective taxation systems.

Global consistency for sound financial regulation

In this category, the IFAC provides recommendations that will assist in providing a consistent global framework when addressing issues. These recommendations to the G-20 include:

• Continue its momentum for regulatory reform and convergence.
• Governments and regulators adhere to principles of high-quality regulation.
• Strengthening international regulatory organizations’ resourcing and governance arrangements, including a clarification of expectations and responsibilities of standard setters.
• Adoption and implementation of IFRSs, ISAs, IPSASs and the Code of Ethics for Professional Accountants’ requirements for auditor independence.
  
  

Financial management, reporting, transparency, and accountability by governments

In this category, the IFAC provides recommendations that may enhance a government and/or public sector’s financial management practices. These recommendations to the G-20 include:

• Adoption of accrual-based accounting by governments and public sector institutions.
• Increase transparency and accountability in public sector financial management to protect the public and investors in government bonds.
• Require the FSB to encompass public sector arrangements; create a working group within the FSB that examines public sector financial reporting, transparency (including deficit spending), and accountability; direct the FSB to include IPSASs.
  
  

Effective taxation system

In this category, the IFAC recommends an enhancement to the taxation system that applies to all organizations, regardless of size. In addition, the G-20 should support the OECD in its work concerning the transparency and integrity of the taxation system and reporting.

For more information, see the letter to the G-20 on the IFAC’s website.