The ED sets out proposals for accounting and reporting by pension schemes in the context of the new accounting framework introduced by Financial Reporting Standard (FRS) 102 applicable in the UK and Republic of Ireland for financial years beginning on or after 1 January 2015.  The ED also updates the 2007 SORP to include the requirements of new regulations and changes in the pension industry since the 2007 SORP. 

The ICAEW have raised concern over the level of investment risk disclosures for pooled investment vehicles set out in section 3.16 of the ED.  The ICAEW comments that they have “concerns that the depth of detail proposed for investment risk disclosures for pooled investment vehicles set out in section 3.16 of the draft SORP could be expensive to provide with little or no increase in usefulness for the members of many schemes”.  Concerns are also expressed over the “cost of obtaining and making” these disclosures with the ICAEW indicating that “it is important that the SORP does not gold plate the requirements of FRS 102 itself”.  Another major point identified by the ICAEW is that they do not agree with the approach in the ED to be used to assess the risks attached to a pooled investment vehicle.  The ED states that this should depend on the trustees’ intentions in holding the investment; however the ICAEW comments that “we do not agree that the purpose of an investment affects the actual risks that the investor is exposed to simply by holding that investment”. 

Other significant comments of the ICAEW are made in response to particular issues raised in the invitation to comment and include:

• Concerns over paragraph 3.12.22 of the ED.  This states that, if an annuity value determined in accordance with FRS 102 is considered insignificant in relation to the Statement of Net Assets of the scheme and the costs of obtaining it outweigh the benefits of including the value, the annuity is not valued in the Statement, and a note to this effect is included in the financial statements.  The ICAEW comments that “we are not convinced that it is appropriate for the SORP to use cost/benefit considerations as a basis for non-disclosure of ‘insignificant’ amounts”.  The ICAEW highlights that “this statement is meaningless and should be omitted” unless further guidance to allow trustees to assess what the ‘benefits’ are is provided in the SORP.
• Commenting that the SORP should not prescribe how to calculate the fair value of annuities which is the present value of the related obligation.  The ICAEW indicates that the SORP should “allow trustees to exercise their judgement as to the most suitable basis”.
• A recommendation for additional illustrative examples in the SORP “to avoid inappropriate boilerplate presentations or the assumption that other formats are not allowed”.

The ACCA “mainly concurs with the content in the proposed SORP” and are of the view that the proposed SORP, “on the whole”, “meets PRAG’s objectives of not extending reporting and disclosure requirements beyond those required by FRS 102 and best practice”.  The ACCA also comments that although the SORP reproduces parts of FRS 102, “this may be welcomed by preparers and users who find some disadvantages in the brevity of content in FRS 102”.  ACCA would like greater clarity in the proposed SORP by highlighting its recommended accounting practice and encourages PRAG “to finalise the revised SORP as soon as is practicable”. 

Other significant comments of the ACCA, some of which are similar to those raised by the ICAEW, are made in response to particular issues raised in the invitation to comment including:

• Concerns over paragraph 3.12.22.  The ACCA indicates that “we have doubts that para 3.12.22 of the proposed SORP contains guidance sufficient to achieve consistency between reporting schemes”.  
• That the level of disclosure required by paragraphs 3.16 “will consequently require additional information to be obtained, resulting in extra time and costs”.
• That, in respect of the illustrative financial statements in Appendix 1, it would be helpful “to indicate the level of materiality applied in the illustrative financial statements and how it is applied”.

Click for:

• ICAEW full comment letter (link to ICAEW website).
• ACCA press release (link to ACCA website).
• ACCA full comment letter (link to ACCA website).
• UK Accounting Plus news item on the new draft SORP for pension schemes.
• UK Accounting Plus ‘SORPS and New UK GAAP’ project page.

The amendments result from the IASB’s ‘Disclosure Initiative’ project which comprises several smaller projects to improve presentation and disclosure requirements in existing standards.  The amendments aim at clarifying IAS 1 'Presentation of financial statements' to address perceived impediments to preparers exercising their judgment in presenting their financial reports.  The ED proposes amendments to the following areas of IAS 1:

• Materiality and aggregation;
• Presentation in the statement of financial position and statement of profit or loss and other comprehensive income;
• Notes structure; and
• Disclosure of accounting policies.

The amendments also include proposals relating to the presentation of items of Other Comprehensive Income (OCI) arising from equity-accounted investments.

EFRAG supports the changes to clarify the existing guidance in IAS 1 “that was perceived to be overly prescriptive if read and applied too literally”.  EFRAG believes that the changes ”should enable entities to exercise more judgement in presenting and disclosing information” and will lead to an improvement in the quality and relevance of information in the notes. 

However, EFRAG proposes a number of improvements to the drafting of the proposed changes and recommends consistent use of defined terms relative to the current IASB standards to avoid any future amendments.

Click for:

• Press release (link to EFRAG website).
• EFRAG final comment letter (link to EFRAG website).
• Our 25 March 2014 story on ED/2014/01.
• Our disclosure initiative project page.

Highlights included the issuance of two draft comment letters related to (1) IASB’s discussion paper on macro hedging and (2) IASB’s exposure draft on investment entities and approved a final comment letter on the IASB’s proposed amendments to IAS 1. In addition, the EFRAG TEG approved:

• An invitation to comment relating to the endorsement for use in the European Union and European Economic Area of IASB publication on bearer plants.
• An EFRAG/ICAC/OIC/RJ discussion paper on separate financial statements.
• Two short discussion series papers on the presentation of the reversal of acquisition ‘step-ups’ and the question of whether IFRIC 21 unveiled issues in IAS 37.

Additional topics discussed in the newsletter are:

• IFRS 15
• IASB’s annual improvements to IFRS (2012-2014 cycle)
• EFRAG/ANC/FRC research paper The Role of the Business Model in Financial Statements
• EFRAG Short Discussion Series paper on equity method
• Conceptual framework
• Insurance contracts
• Rate-regulated activities

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

The Discussion Paper is intended to contribute to the global discussion on how goodwill should be accounted for and disclosed. Under IFRS, goodwill arising from a business combination is not amortised but subject to an annual impairment test. In connection with the post-implementation review of IFRS 3 Business Combinations, the debate on the strengths and weaknesses of an impairment-only model gained renewed momentum.

In the Discussion Paper, the Research Group explores possible approaches to remedy the shortcomings that constituents identified:

• limited usefulness of the information resulting from the impairment-only approach,
• cost and subjectivity of the impairment testing in accordance with IAS 36, and
• lack of timeliness in the recognition of impairment losses.

In its paper, the Research Group considers one or a combination of the following: (a) changing the accounting requirements for goodwill, (b) improving the requirements for impairment testing and (c) improving the disclosure requirements in IAS 36 Impairment of Assets. As a result of its analysis, the Research Group concluded that reintroduction of amortisation of goodwill would be appropriate because it reasonably reflects the consumption of the economic resource acquired in the business combination over time, and can be applied in a way that achieves an adequate level of verifiability and reliability. In addition, the Research Group concluded that further improvement should also be considered in the area of disclosure requirements.

The Discussion Paper also includes a chapter providing the Research Group's observations if the IASB decides to reintroduce the amortisation and impairment approach.

The ASBJ, EFRAG and OIC invite comments on the Discussion Paper by 20 September 2014.

Press releases offering access to the Discussion Paper are available on the ASBJ and EFRAG websites.

Update 3 October 2014: The deadline for commenting on the paper has been extended to 30 November 2014. Please see the press release on the OIC website.

We generally agree that the changes proposed to the application of judgement can result in clearer communication to financial statement users; however, we believe there is a need for additional guidance to assist in that application of judgement. Further, we believe that a review of specific disclosure requirements within new and existing standards should be initiated.

Lastly, the disaggregation of line items in the statement of profit or loss continues to be a topic of much debate (see ESMA consultation paper and IFAC exposure draft). We believe that the IASB is best placed to provide a globally accepted framework for the presentation of additional information in the statement of profit or loss and encourage the Board to press ahead with the consideration of the presentation and disclosure of non-IFRS financial information.

Click for the full comment letter.

Under the Local Audit and Accountability Act 2014, the auditors of these bodies will move from being appointed by the Audit Commission to being appointed by local bodies. As with the statutory audit of companies and similar entities, the government has delegated the Secretary of State’s responsibility for oversight to the FRC. The consultation on draft regulations and guidance seeks views on the way in which the FRC should give effect to three specific responsibilities delegated to it by the government: 

• transparency reporting by local public auditors – allowing one combined transparency report for firms also carrying out Companies Act audits;
• the establishment of a register of local public auditors; and
• guidance on the approval of individuals (including practical experience requirements) as engagement leads (in effect as audit engagement partner) for local public audits. 

The FRC expects to implement the regulations and guidance by the end of 2014 and they will be applicable to the audits of local public bodies in respect of accounting periods ending 31 March 2018. 

The press release and full consultation are available on the FRC website.

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.
• A subsidiary providing services that relate to the parent's investment activities. A subsidiary that provides services related to the parent's investment activities should not be consolidated if the subsidiary itself is an investment entity.
• 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.

In its draft comment letter, EFRAG supports the first two proposals but disgrees with the third. In EFRAG's view, IAS 28 should be consistent with the principles supporting IFRS 11. In particular, EFRAG notes that the unit of account is the investment in the associate or joint venture, not the individual assets and liabilities of the investee. Therefore, EFRAG believes that IFRS 10 is not relevant.

Comments on the draft comment letter are due by 5 September 2014. It is availble on the EFRAG website.

An initial consultation was launched by HM Treasury in April 2013 (link to HM Treasury website) on the need to simplify and streamline the presentation of all central government annual report and accounts so that they better meet the needs of users.  The consultation sought to understand:

• who currently uses public sector accounts;
• the purpose for which the information in the accounts is put;
• what information users and potential users would get most value from but is not currently reported; and
• what current requirements were most burdensome.

Findings indicated that “user needs are not being met by the current reporting arrangements” particularly that it was “hard to link the performance narrative to the figures in the accounts”.

Following the initial consultation, HM Treasury has proposed a new format for the ARA that it hopes will “meet the accountability and decision making needs of users”.  The consultation proposes to restructure the traditional ‘front-half’ annual report and ‘back-half’ financial statements into three integrated sections:

Performance – “telling the story”

This section will “tell the story” of the reporting entity and will include information on the entity, its main objectives and strategies and the principal risks it faces.  HM Treasury comment that “it will compliment, supplement and provide context for the financial statements, with the intention that the information in the overall ARA be integrated to provide a cohesive document”.  HM Treasury propose that this section will require reporting entities to produce two sections:

An “Overview” which will give the user a short summary that provides them with sufficient information to understand the organisation, its purpose, the key risks to the achievement of its objectives and how it has performed during the year; and

A “Performance analysis” which will be a more detailed performance summary providing a clear indication of how the entity measures its performance, allowing for the presentation of a more detailed integrated performance analysis. 

Accountability

It is proposed that this section contains the following information:

The Governance Statement and information on strategic risks to the entity;

The remuneration report; and

Information on Parliamentary accountability – including the Statement of Parliamentary Supply. 

Financial statements

It is proposed that this section will contain the audited financial statements.  HM Treasury indicate that the notes to the accounts will only be required for material balances which will “significantly streamline and simplify the accounts ensuring that the user is only presented with and can focus on relevant and material information”.

The consultation contains an example of an ARA under the proposed structure.

Comments are requested by 3 October 2014.  HM Treasury expect the changes to apply for the 2015-16 financial year.

The press release and consultation are available on the HM Treasury website. 

The conference (link to FRC website) entitled ‘Long Termism, stewardship and growth: Are markets meeting the challenge’ brought together investors, industry leaders, academics and regulators.  It addressed:

• how capital markets are, or are not, fostering long-term investment, questioning whether investors are part of the problem or the solution; and
• the role of equity today and its future, and covered issues of trust and governance of UK companies.

Participants debated whether the UK’s regulatory system is conducive to a flourishing market for risk capital whose dynamic channels funds with economic efficiency.  

The conference was hosted by Sir Win Bischoff, FRC Chairman, who highlighted that long-term investment was the best way to restore trust in the free market system.  He commented:

Our starting point for restoring trust is that the delivery of long-term, sustainable returns to investors – including retail investors saving in ISAs and pensions as well as larger institutions, pension funds and so on - is a powerful demonstration that the system is working as it should.  In turn this will attract more capital to UK markets, allowing companies to expand and thrive

In order to attract this long-term investment and attract more capital to UK markets, Sir Win Bischoff indicated that progress was required in a number of areas which, if made, would allow the market to “win back the support of the public” and would result in “a more prosperous UK corporate sector that delivers long-term growth for investors”.

Other speakers at the conference included the deputy governor of the Bank of England (BoE) Sir Jon Cunliffe who gave a keynote speech and Jacqueline Minor, Head of the European Commission Representation in the UK who provided a European perspective on the debate. 

A press release, transcript of Sir Win Bischoff’s speech and links to transcripts of other speakers are available on the FRC website.