The main conclusions of the roundtable were that businesses, investors and the audit profession have a desire for clarity from Member States on their choices of options, in order to allow for effective implementation that will ensure the main objective of the reform - improving audit quality - is reached.

The new audit reform package entered into force in June 2014 and will bring about the most far-reaching changes to auditing since the EU's formation over a century ago. Whether they will lead to the hoped-for changes in the market, however, will depend to a significant extent on how Member States will exercise the many options available in implementing the new legislation, together with the approach taken by audit committees and investors. In the UK, many of the requirements of the new directive have already been implemented by the Competition and Markets Authority.

A number of issues around the implementation of the new legislation were discussed at the roundtable. These ranged from the permitted extension of the mandatory rotation period in the event of public tendering or joint audit, the tendering process, the provision of non-audit services, to the possible future direction of SME audits. The event also provided an opportunity to hear the views of the European Parliament, of the European Commission, of institutional investors, of the business community, and of the auditing profession on the desired future shape of the audit market.

In concluding the debate, Jos van Huut, Chairman of EGIAN, said:

June 2014, after almost four years of  difficult - and even emotional at certain stages -  debate, marks the end of a political process at EU level. It took an enormous effort to get to agreed positions, reflecting different interests of different players, as well as different traditions across Europe. Today’s debate shows that implementation will not be easy either, there are many Member State options in both the Directive and the Regulation, creating the risk that measures will differ across Europe, and as a consequence jeopardise the concept of the single market. If the reform is to achieve its full potential, the EU, Member States, investors, boards, audit committees, and audit firms, all need to be actively involved. That is why we all need to cooperate and to continue the dialogue we started this afternoon.

The ACCA press release on this conference is available on their website.

Chairman Hoogervorst highlighted that in a recent IASB survey on the use of IFRS around the world, 114 out of 138 jurisdictions have adopted IFRS with another 12 allowing the use of IFRS. He noted that with the increasing use of IFRS globally, investors are better prepared to effectively evaluate and compare the performance of companies. However, he mentioned that additional work is necessary in order to provide investors a more accurate assessment of a company and used leases as an example to stress his point that accounting standards are key component of corporate governance.

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

The IFRS Foundation Constitution requires the IFRS Foundation Trustees to undertake a review of the entire structure of the IFRS Foundation and its effectiveness every five years. After Constitution reviews in 2003-2005 and 2008-2010, the IFRS Foundation Trustees announced in February 2014 that they intend to start their next review of the structure and effectiveness of the IFRS Foundation in 2015. Purpose of the session at the Advisory Council meeting is to update the Advisory Council members on the progress of preparatory work for the review and to seek initial views and suggestions from Advisory Council members.

The paper available on the IASB website details at length the outcomes of previous reviews. It also mentions, that the last strategy review (2010-2012) covered many issues that would be part of a Constitution review. The paper states: "Trustees do not propose to re-run whole of that review" and "Existing three-tier structure supported by constituents in the last Strategy Review: do not propose to revisit".

Among the suggested topics for the upcoming review are:

• Structure
  • operation of the current structure
  • effectiveness of the Interpretation Committee’s more prominent role since 2012
  • output of the 2013 self-assessment of the Advisory Council
• Remit
  • public sector accounting
  • relationship with wider reporting
  • relationship between purpose of financial reporting standards and other public policy objectives
• Other
  • funding
  • governance procedures
  • assessing how the IFRS Foundation matches up against other standard-setting and regulatory organisations

As communicated earlier, the review will also include a review of the optimal size of the International Accounting Standards Board (IASB).

Not mentioned among the topics for the upcoming Constitution review is a review of the Accounting Standards Advisory Forum (ASAF), even though the ASAF's Terms of Reference require such a review 'two years after the establishment of the group'.

Given this more limited set of topics, the Trustees believe that unlike during the earlier Constitution reviews only one round of public consultation will be needed this time. It is expected to take place in first half of 2015.

Please click for the agenda paper for the Advisory Council meeting on the IASB website.

Since 2010, ISAR has been developing an Accounting Development Tool for high-quality corporate reporting. The findings of pilot tests of the tool and discussions of the findings at ISAR sessions reflected that countries require further guidance on building efficient mechanisms for the monitoring of compliance and enforcement. At the last meeting, ISAR therefore proposed to focus its deliberations during the thirty-first session on such mechanisms.

In preparation for the meeting a paper Key foundations for high-quality corporate reporting: Good practices of monitoring and enforcement, and compliance mechanisms has been made available to facilitate the discussions on this topic. It describes the key elements that need to be considered when building efficient monitoring and enforcement systems for companies, audit firms and professional accountants, highlights standards and guidance issued by international and regional bodies and selected national good practices and discusses the main challenges faced by countries in their efforts to establish efficient mechanisms for the monitoring of compliance and enforcement.

Please click for the following information on the UNCTAD website:

• Key foundations for high-quality corporate reporting: Good practices of monitoring and enforcement, and compliance mechanisms
• detailed agenda for the discussion of the points in the paper

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

•  Exemption from preparing consolidated financial statements. The suggested amendments confirm that an entity can apply the consolidation exemption even if its parent entity measures its subsidiaries at fair value in accordance with IFRS 10.

EFRAG supports this proposal but notes that the possible interaction between the proposed amendment and the EU Accounting Directive needs to be investigated further.

• A subsidiary providing services that relate to the parent's investment activities. The requirement for an investment entity to consolidate a subsidiary, instead of measuring it at fair value, would apply only to those subsidiaries that act as an extension of the operations of the investment entity parent, and do not themselves qualify as investment entities.

EFRAG supports the IASB’s efforts to clarify the application of IFRS 10, but disagrees with the proposal to limit the situations where an investment entity parent should consolidate a subsidiary to those subsidiaries that are not investment entities.

• Application of the equity method by a non-investment entity investor to an investment entity investee. When applying the equity method, a non-investment entity investor in an investment entity retains the fair value measurement applied by the associate to its interests in subsidiaries, unless the non-investment entity investor is a joint venturer where the joint venture is an investment entity.

EFRAG considers that fair value measurement of an investment entity’s investments provides the most useful information and should be retained by a non-investment entity investor when applying the equity method to its investment entity investees, regardless of whether the investee is an associate or a joint venture.

Please click for:

• The final comment letter issued by EFRAG (link to EFRAG website)
• Our previous news story on the draft comment letter

Whilst UK companies may already be aware of the BIS proposals in this area, companies incorporated outside the UK but with securities (debt or equity) admitted to trading on the Main Market of the London Stock Exchange may not be aware of the FCA’s plan for early adoption.

The full comment letter can be downloaded from our publications page.

The IASB at times uses the tool of fatal flaw reviews, however, membership of the review teams is restricted. EFRAG believes that a public fatal flaw review should be included as a formal step in the IASB's due process including discussion of the fatal flaw results in a public meeting of the IASB based on a public summary report of these results before the final text of a standard or major amendment is approved by the IASB. EFRAG had made a similar suggestion in its comment letter on the proposed IFRS Foundation Due Process Handbook, which was published in its final version in February 2013 without the change EFRAG suggested.

Please click for access to the letter to the IASB on the EFRAG website.

Update: Subsequently, the EFRAG published on its website a feedback statement summarising comments in response to the EFRAG Draft Letter and showing how those comments were considered. The feedback statement is available on the EFRAG website.

The new Directive, which amends the Accounting Directive (Directive 2013/34/EU), applies to large public-interest entities with more than 500 employees.  Public-interest entities include listed companies as well as some unlisted companies, such as banks, insurance companies and other companies that are so designated by Member States because of their activities, size or number of employees.  

Such companies will be required to disclose information in their annual reports on environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters.  The disclosure will need to include a description of the policy pursued by the company related to these matters, the results of these policies and the risks related to these matters and how the company manages those risks.   

Welcoming the adoption of the Directive, the European Commission highlighted: 

Companies in the scope of the Directive will disclose relevant, useful information necessary for an understanding of their development, performance, position and impact of their activity, rather than detailed reports. Furthermore, the Directive provides companies with significant flexibility to disclose relevant information in the way that they consider most useful, or in a separate report. Companies may use international, European or national guidelines which they consider appropriate.

The EU Commission proposed amendments in this area in April 2013.  These were subsequently approved by the Legal Affairs Committee (JURI) of the European Parliament in December 2013.­ In April 2014 the Directive was adopted by the EU Parliament.  The Directive will enter into force 20 days after its publication in the Official Journal of the European Union.  The Directive must be adopted by EU member states within 2 years of that date.  Therefore, companies concerned will start reporting under the new Directive as of their financial year 2017.

The new rules complement the narrative reporting regulations in the UK which apply for periods ending on or after 30 September 2013.  Through complying with the narrative reporting regulations UK quoted companies will already be disclosing specific information on the company’s strategy, business model, human rights and gender diversity in their strategic report and disclosing information on greenhouse gas emissions in their Directors’ report.  The new Directive will extend the level of disclosures required on diversity (for example policies on age, gender, educational and professional background and professional background) and will specifically require reporting on bribery and corruption matters for the first time.  However, for some large non-quoted UK companies that fall within the definition of a Public-interest entity, the Directive may bring about significant new disclosures in their annual reports that were previously not required by regulation.

Click for:

• Press release on the website of the Council of the European Union
• Statement on the European Commission's website
• Our previous UK Accounting Plus news item on ESG disclosure Directive for large companies and groups.