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EFRAG draft comment letter on amendments regarding the application of the investment entities exemption

21 Jul, 2014

The European Financial Reporting Advisory Group (EFRAG) has issued a draft comment letter on the proposed amendments to IFRS 10 'Consolidated Financial Statements' and IAS 28 'Investments in Associates and Joint Ventures'. The proposed amendments aim at addressing issues that have arisen in relation to the exemption from consolidation for investment entities.

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.

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HM Treasury consults on changes to simplify and streamline central government accounts

18 Jul, 2014

HM Treasury has launched a consultation setting out proposals to restructure the format of the Annual Report and Accounts (ARA) produced by central government entities (“the consultation”).

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. 

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Latest edition of EFRAG Insider

18 Jul, 2014

The European Financial Reporting Advisory Group (EFRAG) has published a new edition of the publicly available newsletter 'EFRAG Insider'.

In addition to discussing IASB Exposure drafts, recent EFRAG publications and stakeholder liaison, the new issue highlights two topical issues:

  • EFRAG reform - succesful completion in line with the directions set by the Maystadt report and
  • developments in connection with the long-term financing of the European economy.

The July 2014 edition of EFRAG Insider also offers an interview with Patricia McBride, the new EFRAG technical director. Please click to download the latest edition of EFRAG Insider from the EFRAG website.

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FRC holds conference on long termism, stewardship and growth

17 Jul, 2014

The Financial Reporting Council (FRC) today held an investor conference on the changing role of the capital markets in supporting UK economic growth.

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.

Robert Bruce Image

The Bruce Column — Making the long-term work

17 Jul, 2014

The B20 summit is taking place in Sydney. One of the greatest challenges facing the world economy, and one that is on the B20’s agenda, is that of how to enable investment in long-term infrastructure projects. A recent report and roundtable pointed a way. Robert Bruce, our resident, regular columnist, explains.

The really big problem up ahead is how to fund the vast, but essential, infrastructure projects required around the world. Estimates suggest that US$3.2 trillion will be needed each year for the next fifteen years. But they also suggest that there will be a shortfall of US$500 billion every year. The reasons for this are straightforward. Governments, post-financial crisis, have constrained budgets. Banks similarly are under pressure to deleverage. So both of the traditional providers of long-term funding are out of the game, as it were.

Instead the world looks to other traditional long-term investors — pension funds and the insurance industry, for example. But these investors are wary. The information that would provide reassurance is not always available or accessible in a form that would help their decision-making. And this is why the B20 Group, which brings together business leaders from the G20 countries, asked the six largest global accounting networks to provide analysis, insights and recommendations which could promote the necessary infrastructure investment.

It is a huge issue, involving huge numbers, but it also links into much of the current thinking in the world of financial and corporate reporting. Even before the financial crisis, and with significantly greater urgency since then, the focus has shifted to how to encourage the long-term view across business and investment.

And the report from the global accounting networks emphasizes this. And as a recent roundtable on its findings agreed it is not the accounting that is an impediment to investment in infrastructure. In the context of long-term investment it is the political and regulatory risks that are the more relevant. Investing decisions by insurers, for example, ‘are likely to be more heavily influenced by the expected stability of cash flows’. And: ‘Financial statements prepared in accordance with International Financial Reporting Statements also offer the significant advantage of being comparable for investors and potential investors across the globe and are therefore especially relevant in the context of cross-border capital flows’.

That said, as participants at the roundtable were swift to point out, under current regulation corporate reporting can fall short in terms of communicating a company’s long-term value proposition. The narrative reporting which accompanies accounts often provides a review of business performance and, in varying detail, a description of strategy, risks and opportunities.  However, it may stop short of the strategic insight into what really makes the company tick which, in some cases, would account for 80% or so of the company’s market value.  This would include the value not on the balance sheet relating to the company’s order book or ‘pipeline’, or representing the company’s intangibles and risks.

There are also the inherent difficulties in long-term investment. An infrastructure project may represent a 25-year long project to build roads, railways, or airports, for example. As one participant at the roundtable pointed out, 25 years in the US would span ten congressional terms. The political risk and uncertainty over that time would be immense. Investors need extraordinary comfort and contact with the project. Sovereign wealth funds or giant pension funds will gain this by investing directly into the project. Other investors will invest through intermediaries, like fund managers. All investors will have different levels and means of access to information across the project’s term. But they will all require transparency.

So the way forward must be innovation that will unlock an understanding of that critical, and currently unseen project information. And the innovation has to be something that works with the grain rather than against it. So it cannot be direct regulatory action. It has to be something that encourages the innovation that investors in long-term projects need and which allows best practice to emerge rather than be proscribed.

This is not easy. Providing that sort of forward-looking information is not something which CFOs traditionally feel comfortable with; not because they are intrinsically opposed, but because they recognize the dangers for the company, themselves, and the investors. The commercial sensitivity of risk and forward-looking information are difficult. Amongst other things some form of safe harbor provision need to be provided.

Many projects may well be public sector infrastructure looking for private sector investment. And here there will have to be much greater symmetry between the different financial and corporate reporting models for it to work.

But recent developments in corporate reporting have been moving in the right direction to free up the information required to facilitate long-term investment. Internationally the development of integrated reporting is an example. This directly addresses many of the issues of reporting that elusive but vital information. And innovation is also coming into play in other ways. The UK Financial Reporting Council’s financial reporting lab is a good example of how companies and investors can come together and experiment and exchange views as they try to identify best practices. Also, requirements in the UK for a strategic report, and corporate governance “comply or explain” provisions in South Africa for an integrated report, create a good climate for experimentation and innovation in this space.

The answers to the problems are within people’s grasp. It is a question of understanding what is at stake and allowing best practices to emerge. It is all about creating an enabling environment.

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IFRS Advisory Council’s terms of reference amended

17 Jul, 2014

During its July 2014 meeting, the IFRS Foundation Trustees approved an amendment to the secondary objective of the IFRS Advisory Council’s terms of reference in order to address a shift in focus from promotion and adoption of IFRS to one that encourages board participation in IFRS development.

Previously, the terms of reference were discussed during the IFRS Advisory Council meeting held on 9-10 June 2014, where the council members recommended a change to the secondary objective to clear any misconceptions regarding its independence and objectivity.

For more information, see the press release on the IASB’s website.

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IFRS conference in Mexico City announced

17 Jul, 2014

The IFRS Foundation has announced that an upcoming conference will be held in Mexico City on 6-7 October 2014. The English and Spanish-language conference will include discussions on the latest IASB updates on the major IFRSs and its future plans. In addition, the conference will focus on innovations in IFRS disclosures and the support for consistent implementation of new IFRSs.

The conference will feature presentations by IASB Chairman Hans Hoogervorst, Vice-Chairman Ian Mackintosh, and IASB members (Amaro Gomes, Darrel Scott, and Mary Tokar).

Some of the topics to be covered at the conference include:

  • IASB update: progress and plans
  • Panel discussions on:
  • Advice on implementing new IFRSs:
    • IFRS 9 Financial Instruments
    • IFRS 15 Revenue from Contracts with Customers

The conference will also have a special-interest session on fair value measurement and other cross-cutting measurement issues, as well as break-out sessions led by IASB members and senior staff on the following topics:

  • Macro hedge accounting
  • Leases
  • Insurance contracts
  • Business combinations under common control
  • IFRS 9 implementation for financial institutions
  • IFRS 9 implementation for nonfinancial institutions
  • IFRS 15 implementation
  • Conceptual framework

More details, including registration information, are available on the IIR & IBC Finance website.

Pension SORP - Deloitte response July 2014 Image

We comment on the new draft SORP for financial reports of pension schemes

17 Jul, 2014

We have published our comment letter on the Pension Research Accountants Group (PRAG) and its SORP Working Party Exposure Draft (ED) setting out revised proposals for financial reporting by pension schemes in the UK. Overall the SORP provides some useful guidance, however we have some concerns in relation to some of the proposals in the ED.

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.  

Our key concerns are that:  

  • the requirements for some of the additional disclosures and measurement information specified in the ED may add significant cost in terms of obtaining information, preparing disclosures and engaging actuaries, investment managers and auditors as necessary, particularly for smaller pension schemes; and
  • the costs of the additional complexity and length of pension scheme accounts resulting from these proposals will outweigh the benefits to the key stakeholders (the members of the scheme) in areas such as requiring actuaries to value annuities and the requirement for much more detailed investment risk disclosures.

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

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FRC publishes annual report 2013/14

16 Jul, 2014

The Financial Reporting Council (FRC) has today published its 2013/14 annual report (“the annual report”). The annual report reviews the activity of the FRC over the last year, highlights the achievements of the FRC in 2013/14 and also identifies areas that it will address in 2014/15.

The annual report provides an assessment of the progress that the FRC has made against its three year strategy, set in 2013.  The strategy, focusing on five areas, seeks to promote:

  • High quality corporate governance and investor stewardship which foster trust in the way companies are run.
  • High quality corporate reporting that is fair, balanced and understandable.
  • High quality audit and confidence in the value of audit.
  • Actuarial oversight and standards which underpin high quality actuarial practice, and integrity, competence and transparency of the actuarial profession.
  • Effective, proportionate and independent investigative, monitoring and disciplinary procedures.

The annual report highlights:

  • That “the quality of governance amongst larger listed UK companies is generally sound” as indicated by the high levels of compliance with the UK Corporate Governance Code (“the Code”) found in the annual review of the Code and Stewardship Code published in December 2013.  However the FRC comment that many companies “still struggle to articulate clearly why they have chosen not to comply with the Code”.  The FRC also indicate that it has “concerns about whether companies, markets and policymakers take a sufficiently long-term view” and that, going forward, it will be looking to provide thought leadership in the EU on the developing role of risk capital.
  • That corporate reporting has generally been “good” but notes that improvements could be made in the reporting by smaller listed and AIM companies.  The annual report highlights the initiatives, such as the publication of the Guidance on the Strategic Report that the FRC is undertaking to improve the overall quality of corporate reporting in order to address the needs of investors. 
  • That the quality of auditing in the UK is “generally good” most notably in relation to the largest listed companies.  The FRC highlight that “there is scope for improvement in the banking sector in particular, including a concern about the lack of sufficient challenge when testing key assumptions underpinning loan loss provisions”.  This was highlighted in the 2013/14 Audit Quality Inspections Annual Report.  The FRC also highlight that there has been a “positive response” to their efforts to promote audit re-tendering and that its work, alongside UK stakeholders, on the new EU audit Regulation and Directive will “ensure that UK audit regulation can remain effective and proportionate”.

Looking ahead, key priorities for the FRC include:

  • Undertaking a project to evaluate and plan how it might assist smaller listed and AIM companies to address the quality of their reporting so as to improve confidence in the integrity of their financial statements and of the markets as a whole.  The project will aim to achieve a step change in the quality of financial reporting of smaller listed and AIM companies over a three year period. 
  • Undertaking a thematic review of UK bank audits, focusing on how these are conducted, identifying why improving their quality has been slow and seeking to understand what needs to be done to improve them.
  • Developing further guidance for audit committees focusing how audit quality and effectiveness might best be assessed by audit committees.
  • Implementation of aspects of the EU Audit Regulation including reviewing auditor independence requirements.
  • Reviewing audit firm governance.
  • Supporting the application of the new UK GAAP standards.
  • Implementation of Lord Sharman’s recommendations on going concern. reporting.
  • Promoting Clear and Concise reporting in annual reports.

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New SORPs issued for charity accounting and reporting

16 Jul, 2014

The Charity Commission for England and Wales (Charity Commission) and the Office of the Scottish Charity Regulator (OSCR) have today published two new Statements of Recommended Practice (SORPs) setting out a new framework for charity accounting and reporting.

SORPs issued by the Charity Commission and OSCR apply to charities preparing accounts under UK GAAP to present a ‘true and fair view’ and are intended to supplement accounting standards and other legal and regulatory requirements to reflect transactions or circumstances that are unique within the charities sector. 

The SORPs set out the required accounting and reporting by charities 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.  One SORP is targeted at those charities that adopt FRS 102 (“the FRS 102 SORP”) and the other is targeted at those charities that, depending on their size, can choose to adopt the Financial Reporting Standard for Smaller Entities (FRSSE) (“the FRSSE SORP”).  Each SORP reflects the different accounting treatments under the two standards.  Both SORPS are effective from financial years beginning on or after 1 January 2015 and have been developed after reflecting on feedback received on the original Exposure Draft issued in July 2013.

The SORPs have been created in a modular format containing a set of core ‘modules’ which apply to all charities and also a number of additional modules which will only apply to specific charities.  The Charity Commission and the OSCR have highlighted that charities will be able to customise the SORP according to their specific circumstances through an interactive website.  It is hoped that this modular format will help to better meet the needs of the preparers of charity accounts especially for smaller charities. 

Alongside the publication of the SORPs the Charity Commission and the OSCR have published guidance to help charities choose the right SORP to adopt.  Help sheets have been created that explain the main differences between the FRS 102 SORP and the FRSSE SORP and the criteria that must be met to be able to adopt the FRSSE SORP.  An indication is provided that the FRSSE standard is due to be reviewed in 2016 in light of the new EU Accounting Directive and this may mean that charities adopting the FRSSE now will have to change their accounting policies twice in succession due to the amendments. 

The Charity Commission and the OSCR emphasise that “it is important to make the right choice” of accounting framework to adopt and advise that charities speak to their auditor, independent examiner or advising accounting to assist in choosing the standard that is best.  They comment that “although the two SORPS have the same structure and order of modules, the requirements differ significantly due to underlying differences in terminology, accounting policies and disclosures required by the FRSSE and FRS 102”.

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