News

FRC letter on ISA 720 - June 2014 Image

We comment to the FRC on the IAASB’s Exposure Draft on an auditor's responsibilities relating to 'other information'

18 Jun, 2014

We have published our comment letter to the Financial Reporting Council (FRC) on their invitation to comment on the International Audit and Assurance Standards Board’s (IAASB’s) revised Exposure Draft of International Standard on Auditing (ISA) 720 'The auditor’s responsibilities relating to other information in documents containing or accompanying audited financial statements and the auditor’s report thereon'.

The IAASB issued an Exposure Draft for a revised International Standard on Auditing (ISA) 720 in November 2012.  The revised Exposure Draft responds to significant concerns raised in response to the IAASB's original proposals.

In their invitation to comment, the FRC sought the views of respondents on the IAASB’s proposals in order to assist it in developing a response to the IAASB and were also keen to understand from respondents whether (and if so how) the proposed changes should be adopted in the UK and Ireland.

Our main points are:

  • The FRC should adopt the revised standard, supplementing for the UK, in place of the existing ISA (UK and Ireland) Section A.
  • The FRC should take the opportunity to combine the existing ISA (UK and Ireland) Section B with the revised ISA 720. Section B deals with the auditor’s statutory duty to report on the consistency of the directors’ report with the financial statements. Following the introduction of the strategic report, Section B is out of date; combining the two would also reduce confusion for auditors and other stakeholders and improve audit quality by applying the tougher requirements of the revised ISA to this statutory duty.
  • Both the existing ISA 720 and the IAASB’s exposure draft allow the “other information” to be provided both before and after the auditor’s report on the financial statements is signed. This has never been the case in the UK; ISAs (UK and Ireland) require all of the “other information” to be provided to the auditor, read by the auditor and approved by those charged with governance before the auditor’s report is signed. We agree with the FRC that this should continue to be the case for now. However, we recommend that the FRC should keep this under review as the Financial Reporting Lab explores electronic reporting options, where standing information may be updated as and when it changes rather than being refreshed every time new financial statements are issued.
  • The FRC should consider whether there is a way of combining the statutory consistency opinion and the reporting by exception on other information. This would streamline the audit report and reduce confusion for readers.

Further comments and a full response to all questions raised in the invitation to comment are contained within the full comment letter.

Leaf - sustainability (green) Image

UNEP Finance Initiative proposes a new model putting sustainability at the heart of governance and corporate boards’ strategic agendas

18 Jun, 2014

The United Nations Environment Programme Finance Initiative (UNEP FI) has published a report that proposes a new model of governance that puts sustainability at the heart of governance and corporate boards’ strategic agendas (“the report”).

The UNEP FI highlight that companies are increasingly recognising the “need to develop a sustainable strategy, where sustainability issues are integrated into the core of the business model”.  The UNEP FI indicate that “sustainability reporting is becoming mainstream” and cite Integrated Reporting as one area that is attracting increasing attention.  The report presents evidence of “superior financial performance” for companies adopting sustainable strategies and highlights that if companies are to adopt such sustainable strategies then “there is a need to create a governance model “that is able to supervise the formulation and execution of such a strategy”.

The report presents a case that current systems of governance are “ineffective in promoting a culture of sustainability” and proposes a new model of governance called ‘Integrated Governance’ that promotes sustainability as the core part of a corporation’s strategy rather than it being a peripheral part.

The UNEP FI comment that Integrated Governance is:

the system by which companies are directed and controlled, in which sustainability issues are integrated in a way that ensures value creation for the company and beneficial results for all stakeholders in the long term

To achieve Integrated Governance, the report identifies that companies will need to go through a series of changes proposing that there are “three major stages each with its unique characteristics that describe the journey each company has to go through to achieve a model of Integrated Governance”.  Each company will be at a different stage of the journey depending upon the level of integration of sustainability issues into their strategic agenda and consideration at board level and the report considers the actions companies may need to take in order to “reform their governance practices towards and Integrated Governance model”.

The UNEP FI highlight that the report “can be a good starting point for investors interested in sustainability, and how that is handled in well-governed corporations”.  It also highlights that the Integrated Governance model can be used by companies “as a guide to benchmark themselves against this new practice and their competitors and identify areas for improvement in their governance practices”.

The press release and full report can be downloaded from the UNEP FI website.

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Report from the latest meeting of the IFRS Foundation Monitoring Board

18 Jun, 2014

The IFRS Foundation Monitoring Board, the body responsible for the oversight of the IFRS Foundation, met on 13 June 2014 in Madrid. A short report from the meeting has been posted to the Monitoring Board's website.

The Monitoring Board's Final Report on the Review of the IFRS Foundation's Governance published in February 2012 identified a number of enhancements, among them expanding the membership, developing criteria for membership and beginning periodic assessments of the members against membership criteria. With regard to the selection of new members, the Monitoring Board discussed applications for the remaining two permanent seats primarily from major emerging markets to make the Monitoring Board more inclusive. Regarding the review of existing members based on the agreed membership criteria, the Board concluded its first review and found that no member was  non-compliant with the membership criteria.

At the meeting, the Monitoring Board also discussed the IFRS Foundation's governance and control developments and expressed support for the efforts made by the Foundation. However, the Monitoring Board encourages the Foundation to ensure that appropriate compliance requirements are fully implemented and to continue its efforts around transparency. As an additional topic, the European Commission raised the issue of long-term investors and accounting.

Please click for access to the full report on the Monitoring Board's website.

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We comment on BIS consultation on country-by-country reporting in the extractive industries

18 Jun, 2014

We have published our comment letter on the Department for Business, Innovation and Skills (BIS) consultation on proposals to implement the country-by-country reporting requirements for large extractive companies introduced by the European Union (EU) Accounting Directive.

Chapter 10 of the EU Accounting Directive (Directive 2013/34EU (link to European Commission website)) (“the Directive”) and changes made by Directive 2013/50/EU (link to the European Commission website) to the Transparency Directive (2004/109/EC)) require listed and large non-listed companies with activities in the extractive industry and the logging of primary forests to report any payments made to governments on a country-by-country basis in an effort to improve the transparency.  The Directive was published in the Official Journal of the European Union on 29 June 2013 and EU Member States have until 20 July 2015 to incorporate the rules into their national law.  The BIS proposals were published in March 2014.

Our main points are:

  • In relation to the proposals that the first reports should relate to financial years commencing on or after 1 January 2015 we identify two key issues.  We question whether companies will have sufficient time to introduce the necessary changes to their reporting systems, and subject them to adequate testing, to allow for compliance.  We highlight that “systems changes take many months to design, implement and test”.  Secondly we question whether there are significant benefits of early adoption especially when there is “little consensus within the EU as to the most appropriate implementation deadline”.  In this respect we comment that “much of the benefits for the public in reporting 2015 figures will be lost” with an earlier adoption date in the UK and hence see “some merit to delaying the operative date of introduction, to bring the UK into line with the majority of EU member states”.
  • Due to the differing implementation dates across the EU, we comment that “it will be inevitable that UK-registered subsidiaries will be obliged to report as solo entities in respect of 2015, and then be exempted from reporting for subsequent years, once their EU parent prepares consolidated extractives reporting”.
  • We highlight that the draft regulations need to be amended in a number of “key areas” including Regulation 7(2) which, as drafted, “appears to exclude overseas subsidiaries from their UK parent’s extractives reporting”.  We provide a number of recommendations for BIS to consider.

Further comments and a full response to all questions raised in the invitation to comment are contained within the full comment letter.

EFRAG (European Financial Reporting Advisory Group) (dk green) Image

EFRAG issues draft endorsement advice and effects study report on amendments to IAS 16 and IAS 38

17 Jun, 2014

The European Financial Reporting Advisory Group (EFRAG) has issued for comment its draft endorsement advice for the use of the amendments to International Accounting Standard (IAS) 16 ‘Property, Plant and Equipment’ and IAS 38 ‘Intangible Assets’ in the European Union (EU). EFRAG has also issued its Effects Study Report.

The amendments to IAS 16 and IAS 38, issued by the International Accounting Standards Board (IASB) in May 2014, provide additional guidance on how the depreciation or amortisation of property, plant and equipment and intangible assets should be calculated.  The amendments are effective for annual periods beginning on or after 1 January 2016, with earlier application being permitted.

EFRAG supports the adoption of the amendments to IAS 16 and IAS 38 and recommends their endorsement.  EFRAG’s initial assessment is that the amendments to IAS 16 and IAS 38 meet the technical requirements of the Regulation (EC) No 1606/2002 of the European Parliament and of the Council on the application of international accounting standards.     

EFRAG’s conclusion is supported by an Effects Study Report which considers the costs and benefits of implementing the amendments to IAS 16 and IAS 38. EFRAG’s assessment is that the benefits for preparers and users in implementing the amendments to IAS 16 and IAS 38 outweigh the costs.

Comments are requested by 17 July 2014. 

Click for (all links to EFRAG website):

Integrated Reporting <IR> (old) Image

Corporate Reporting Dialogue launched

17 Jun, 2014

The International Integrated Reporting Council (IIRC) today has introduced the Corporate Reporting Dialogue (CRD) which brings together organisations that have significant international influence on the corporate reporting landscape, among them the IASB and the FASB.

Participants in the CDR are the CDP, the Climate Disclosure Standards Board (CDSB), the Financial Accounting Standards Board (FASB), the Global Reporting Initiative (GRI), the International Accounting Standards Board (IASB), the International Integrated Reporting Council (IIRC), the International Public Sector Accounting Standards Board (IPSASB), the International Organization for Standardization (ISO), and the Sustainability Accounting Standards Board (SASB).

The participants aim to work together to respond to market calls for better alignment and reduced burden in corporate reporting by promoting proactive engagement between the key organisations. The principle aims of the CRD include:

  • To communicate about the direction, content and ongoing development of reporting frameworks, standards and related requirements;
  • to identify practical ways and means by which respective frameworks, standards and related requirements can be aligned and rationalised;
  • to share information and express a common voice on areas of mutual interest, and where possible, will engage key regulators.

According to the press release, the initial deliverable will be "to develop a 'Corporate Reporting Landscape' highlighting the connectivity of the various reporting frameworks and standards and their relevance to Integrated Reporting".

Please click for additional information on the IIRC website:

EFRAG (European Financial Reporting Advisory Group) (dk green) Image

EFRAG updates its endorsement status report once more

17 Jun, 2014

After publishing endorsement status reports reflecting the adoption of IFRIC 21 'Levies' for use in the EU and the issuance of a draft endorsement advice letter on amendments to IFRS 11, the European Financial Reporting Advisory Group (EFRAG) has updated its Endorsement Status Report for the third time in two days - this time to reflect the issuance of a draft endorsement advice letter on amendments to IAS 16 and IAS 38.

On 12 May 2014, the IASB published Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to IAS 16 and IAS 38) providing additional guidance on how the depreciation or amortisation of property, plant and equipment and intangible assets should be calculated. EFRAG currently expects that the amendments will be endorsed for use in the EU in the first quarter of 2015.

The new endorsement status report, dated 17 June 2014, is available here.

Consulation paper Revised operating procedures for reviewing corp rep Image

We comment on the FRC's Conduct Committee operating procedures consultation

16 Jun, 2014

We have published our comment letter on the UK Financial Reporting Council's proposals to amend the operating procedures of its Conduct Committee with respect to reviewing corporate reporting. We believe that in the proposals are an appropriate response to the challenges faced by the financial reporting community in restoring trust in corporate reporting following the financial crisis.

We note that the FRC's proposals largely seek to codify changes to the Conduct Committee's operating procedures that have already evolved organically.  The two main proposals are that:

  • Rather than issuing a press notice when a company has made a significant correction or improvement to a report, the Committee will request that the company refers to the Committee's intervention in the report in which the change is made (a "Committee reference").
  • Each year, the Committee will identify in its Annual Report those companies which have published a Committee reference in the year under review.

Although these are not currently reflected in its procedures, use has been made of Committee references rather than press notices for several years.  Also, in its 2013 Annual Report the names of the companies that had published Committee references in the year under review, although we note that companies were given the chance to object to this and one did ask for their name to be withheld.

Our full response to this consultation can be downloaded from the publications page.

EFRAG (European Financial Reporting Advisory Group) (dk green) Image

EFRAG issues draft endorsement advice and effects study report on amendments to IFRS 11

16 Jun, 2014

The European Financial Reporting Advisory Group (EFRAG) has issued for comment its draft endorsement advice for the use of the amendments to International Financial Reporting Standard (IFRS) 11 ‘Accounting for Acquisitions of Interests in Joint Operations’ in the European Union (EU). EFRAG has also issued their Effects Study Report.

The amendments to IFRS 11, issued by the International Accounting Standards Board (IASB) in May 2014, clarify the accounting for acquisitions of an interest in a joint operation when the operation constitutes a business.  The guidance amends IFRS 11 so that the acquirer of an interest in a joint operation in which the activity constitutes a business, as defined in IFRS 3 ‘Business Combinations’, is required to apply all of the principles on business combinations accounting in IFRS 3 and other IFRSs with the exception of those principles that conflict with the guidance in IFRS 11.  The amendments apply to the acquisition of an interest in an existing joint operation and also to the acquisition of an interest in a joint operation on its formation, unless the formation of the joint operation coincides with the formation of the business.

The amendments are effective for annual periods beginning on or after 1 January 2016, with earlier application being permitted.

EFRAG supports the adoption of the amendments to IFRS 11 and recommends its endorsement.  EFRAG’s initial assessment is that the amendments to IFRS 11 meet the technical requirements of the Regulation (EC) No 1606/2002 of the European Parliament and of the Council on the application of international accounting standards.     

EFRAG’s conclusion is supported by an Effects Study Report which considers the costs and benefits of implementing the amendments to IFRS 11. EFRAG’s assessment is that the benefits for preparers and users in implementing the amendments to IFRS 11 outweigh the costs.

Comments are requested by 16 July 2014. 

Click for (all links to EFRAG website):

ESMA (European Securities and Markets Authority) (dark gray) Image

ESMA report on accounting for business combinations

16 Jun, 2014

The European Securities and Markets Authority (ESMA) has published a report 'Review on the application of accounting requirements for business combinations in IFRS financial statements'. The report finds that some good business combination disclosures are provided in the annual financial statements of European companies but that there are also certain areas where improvements are needed.

The report is based on the review of IFRS 3 disclosures in the 2012 annual IFRS financial statements of a sample of 56 issuers in the European Union, covering 66 businesses combinations reported in these statements.

For the review ESMA selected the following topics that according to ESMA's experience most frequently result in enforcement issues or lead to diversity in practice:

  • intangible assets and contingent liabilities;
  • disclosure of fair value measurement techniques;
  • recognition and measurement of goodwill and bargain purchases;
  • mandatory tender offers;
  • contingent consideration;
  • definition of a business; and
  • adjustments to fair value amounts during the measurement period.

The report details the findings on each item and concludes each point with recommendations for issuers. Although ESMA found that some good business combination disclosures were provided, there were also areas where improvement is needed. Most significantly this was the case regarding the following items:

  • Recognition and measurement of goodwill and bargain purchase gains. Descriptions of the factors making up goodwill were often 'boiler plate', and in 24% of the business combinations analysed no intangibles were recognised separately from goodwill. One third of the issuers reporting a bargain purchase did not disclose an explanation of why the transaction resulted in a gain.
  • Intangible assets and contingent liabilities. In the summaries of the fair values of major assets and liabilities acquired, the level of aggregation of certain assets and liabilities often limited the usefulness of the information provided. Only 11% of the issuers reviewed recognised contingent liabilities arising from business combinations. Of these, very few gave the required IFRS 3 disclosures.
  • Disclosure of fair value measurement techniques. Some issuers referred to external valuations of intangible assets without providing details of the techniques and assumptions used to determine their fair value. Only 35% of the issuers reviewed disclosed how fair values were determined but even of these most disclosed the valuation technique but not the key assumptions.
  • General observations on disclosures. While IFRS 3 disclosures were generally provided, in some cases their understandability was impaired as the disclosures were not tailored to the specific circumstances of a transaction or were insubstantial. Some disclosures were also presented outside the financial statements.

ESMA urges national competent authorities to take action where material breaches of the IFRS requirements were identified during the review. In addition, ESMA hopes that the IASB will consider the findings of the report in its post-implementation review of IFRS 3 Business Combinations as ESMA believes that it will assist the IASB in identifying areas where the standard leads to divergence in practice or lack of comparability and where additional clarification or guidance would be helpful. ESMA has sent the IASB a letter to this effect.

Please click for access to the full report and a corresponding press release on the ESMA website.

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