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.

The FRC are of the view that the proposed amendments to IAS 1 “provide useful clarification on the application of materiality to IFRS financial statements (including the notes), the flexibility available in structuring disclosures and the presentation of information in the primary financial statements”. 

The key comments of the FRC are as follows:

• The FRC welcome the proposals that materiality considerations should apply when determining the level of disclosure that is appropriate.  However the FRC comments that certain changes are required to the proposed amendments to “make it clearer that the assessment of the materiality of information should determine which information is presented and disclosed”.  The FRC adds that the IASB “should ensure the language in IAS 1 consistently encourages entities to omit disclosures that are not material (either individually or in aggregate) as “disclosure of immaterial information can impair understandability and obscure useful information”.
• The definitions of ‘present’ and ‘disclose’ defined in paragraph BC7 of the ED are “problematic”.  The FRC “urge the IASB to reconsider these definitions as clarity in this area is critical to the effective communication of information, the progress of the broader ‘Disclosure Initiative’ project and to the development of the Conceptual Framework”.
• That paragraph 114 of IAS 1 should be deleted as this “undermines” the aim of the proposed amendments to IAS 1 of allowing flexibility in determining an appropriate structure and order for the notes.

A number of drafting changes are also suggested in relation to the proposals for presentation in the statement of financial position and statement of profit or loss and other comprehensive income and the proposals relating to the presentation of items of Other Comprehensive Income (OCI) arising from equity-accounted investments.

The full comment letter can be accessed from the FRC website. 

The task force has been established in consultation with the International Association of Insurance Supervisors (IAIS) and the International Accounting Standards Board (IASB). It has been set up to survey securitisation markets with the aim of understanding how they are evolving in different parts of the world, identify factors that may be hindering the development of sustainable securitisation markets, assess whether there are factors inhibiting the participation of investors, particularly non-bank investors, and develop criteria to identify and assist in the development of simple and transparent securitisation structures.

Securitisation played a significant role in the American subprime mortgage crises which led to the financial crisis. The regulators reacted with different measures to the financial crisis (IFRS 9 Financial instruments expected to be issued in its completed version later this month was the IASB's response to the crisis to improve the accounting for financial instruments), and the work of the task force is designed to determine how the measures have influenced the developments in securitisation markets since the crisis and how the development of orderly and sustainable securitisation markets, which could provide an alternative source of funding for economic activity and recovery, can be supported.

To this end, the task force has developed a questionnaire to seek the views of market participants. Among other questions, participants are asked in the survey for their assessment of the developments in securities markets, whether accounting changes have helped or hindered development in these markets and whether they believe that further accounting changes could lead to an increased activity in them.

The questionnaire and a corresponding press release are available on the IOSCO website. The questionnaire should be completed by 25 July 2014.

The agenda for the meeting is summarised below:

Agenda papers for the meetings are available on the IASB's website.

Disclosure initiative

The ASAF members discussed an Exposure Draft published by the Brazilian Accounting Standards Committee proposing that immaterial information should not be disclosed and that this should be enforced. They also considered a comment letter by the European Financial Reporting Advisory Group (EFRAG) on the consultation on alternative performance measures launched by the European Securities and Markets Authority (ESMA) and discussed whether the IASB was the appropriate organisation to address non-IFRS information. Finally, they considered the FASB's work on its disclosure framework project.

Equity method of accounting

The ASAF discussed a paper introduced by the IASB staff that sought input from ASAF members on the scope of the research project on the equity method of accounting. During the discussion, some ASAF members suggested that it might be useful to consider the project in two stages: a short-term simplification project and a long-term conceptual review of the application of the equity method. The discussion also made reference to the EFRAG paper and the KASB paper on this topic.

Insurance contracts

The ASAF considered the release of the contractual service margin for non-participating contracts, contracts with participating features, whether the IASB should develop a separate model for contracts with participating features, whether the shareholders' share of returns from underlying items should unlock the contractual service margin, and whether there should be specific requirements for options and guarantees.

Macro hedging

The IASB staff wanted to gather initial feedback from the ASAF members on the main areas of the Discussion Paper DP/2014/1 Accounting for Dynamic Risk Management: a Portfolio Revaluation Approach to Macro Hedging. The discussion assessed the need for an accounting approach, the scope of the application of the portfolio revaluation approach and other risks. There was overall agreement that before going ahead with the approach, there would need to be acceptance of the consideration of behaviouralisation. ASAF members also considered issues in connection with revaluation and transfer pricing transactions as well as operational complexity and OCI.

Conceptual framework

ASAF members discussed the reporting of income and expenses and the choice of measurement based on a paper by the Financial Reporting Council (UK), suggesting a justification for a mixed measurement model and principles for distinguishing between profit or loss and other comprehensive income.

A full summary of the meeting is available on the IASB's website. The ASAF's next meetings will be on  25 and 26 September 2014 and on 4 and 5 December 2014.

The formation of the Investor Forum was announced in December 2013 by The Collective Engagement Working Group, a group established by the Association of British Insurers (ABI), the Investment Management Association (IMA) and the National Association of Pension Funds (NAPF). The forum is intended to “promote shared commitment to long-term strategies and sustainable wealth creation among asset owners, asset managers and companies” and its creation was one of the recommendations of Professor Kay in his review of the UK equity market in 2012 (the “Kay Review”).  The ‘Kay Review of UK Equity markets and long-term decision making’, published in July 2012, sought to address the issue of short-termism in the equity market.

Click to read:

• The press release from the IMA announcing the formal launch of the forum.
• Our previous UK Accounting Plus news item discussing the forum's creation.

Our key points in response to this consultation are that we:

• support the changes around remuneration and AGM results subject to clarification of the wording in the Main Principle;
• continue to believe that the proposed amendments around risk management and internal control represent good business practice and should serve to increase confidence in the governance of UK listed companies;
• support the proposed introduction of a new future viability statement which allows boards the flexibility to look forward over a period which best fits their business planning and investment cycles; and
• support the retention of the specific statement on the appropriateness of the going concern basis of accounting. The FRC’s introduction of this statement in its current form in 2008 has done much to promote good discipline in the board’s involvement in forecasting.

In our view, without further guidance, some elements of the proposed new disclosures and practices could result in differing interpretations being adopted by companies.   We believe that this is particularly true of the requirement to explain what actions have been or are being taken to remedy any significant failings or weaknesses identified in the review of the systems of risk management and internal control; in this area we think that executive directors, audit committees and auditors would welcome guidance on interpretation. This would provide clarity into what might otherwise be difficult conversations in the boardroom and provide investors with confidence that the principles have been applied consistently across their portfolio.

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

The finalised framework, titled International Framework: Good Governance in the Public Sector, was developed by an 'international reference group' of individuals drawn from a wide range of organisations and follows the publication of an exposure draft in June 2013. The stated aim of the framework is "to encourage better service delivery and improved accountability by establishing a benchmark for aspects of good governance in the public sector". It is designed to be used by those who develop and set public sector governance codes when existing codes at the national or sectoral level are updated or new codes are put in place.

The framework considers governance as comprising the arrangements put in place to ensure that intended outcomes for stakeholders are defined and achieved. It seeks to do this by setting out seven principles covering topics such as ethics, openness, defining outcomes and how they are achieved, capability development, risk management and strong financial management.

The seventh principle focuses on implementing good practices in transparency, reporting and audit to deliver effective accountability. Specific recommendations related to the seventh principle include:

• Accountability reports should be written and communicated in an open and understandable style appropriate to the intended audience, whilst striking a balance between the right amount of information and imposing onerous requirements on the entity to prepare
• Public sector entities should report publicly at least annually in a timely manner, and performance information and accompanying financial statements should be prepared on a consistent and timely basis, with International Public Sector Accounting Standards (IPSAS) prepared by the International Public Sector Accounting Standards Board (IPSASB) seen as providing "the most complete suite of accrual-based international financial reporting standards developed specifically for the public sector"
• Integrated reporting is also seen as supporting public sector entities in engaging with stakeholders in a more integral and coherent manner
• The provision of assurance through external audit is an essential element of a public sector entity's accountability, whilst internal audit can also contribute to accountability mechanisms.

Click for press release (link to IFAC website).

A recalibrating of the purpose of financial and non-financial reporting is under way. But worries over how far the investment community is engaging with this remain. Two recent conferences in the UK underlined this. At the first one, run by consultant Black Sun, Deepa Raval, project director in the accounting and reporting policy team at the Financial Reporting Council, (FRC), emphasised just how far ahead the UK was in the use and development of narrative reporting. And how the recently issued FRC guidance on strategic reports should encourage companies to continue to experiment and be innovative in the way they developed their annual reports.

Meanwhile at the second conference, the Non-Financial Reporting Forum, there were doubts that all this innovation was reaching the consciousness of the investment community. Lucinda Bell, the finance director at British Land, made the point that analysts have only three minutes at their internal briefing meetings to present and communicate the essence of British Land’s results and inevitably, given the data-heavy nature of financial reporting, the non-financial information tended to get lost. Another panellist later in the day, Robert Miller-Bakewell, senior independent director with RPS Group, drew on his previous thirty-year experience as an equity analyst to provide an ever less-promising picture. Picking up on Bell’s point he said that analysts would usually have half-an-hour from first seeing a company’s results to the point where they delivered a three-minute report on them. And that half hour, he said, included the time it took to submit a written copy of what they intended to say and have it cleared by the compliance team. His conclusion was simple. There was not going to be much chance of any of the non-financial information getting into that.

And there were different views of how far investors and shareholders use annual reports. At the Black Sun conference Douglas Radcliffe, head of reporting and operations, investor relations, at Lloyd’s Banking Group pointed out that the bank had the largest shareholder base in the FTSE100 at around 2.7 million shareholders. This meant a huge operation involving 8,000 copies of a 396-page annual report, 75,000 copies of a 52-page annual review, and 2.6 million copies of an eight page performance summary. The scale of the task was enormous. And the scale of the battle to engage with as many people as possible was dramatized by one of the remarks at the Non-Financial Reporting forum. Charles Nichols, group controller at Unilever, remarked that it was quite depressing how few people read the formal report and accounts. The biggest audience, he said, was pensioner shareholders.

But the advantage of breaking out from the crowd and a greater emphasis on non-financial and narrative reporting was the comparative freedom it gave organisations to report a wider range of useful information. Lucinda Bell made the powerful point that financial reporting was very heavily regulated and thus it was much harder to communicate information which might be useful in assessing what the future might hold. Whereas non-financial reporting was not subject to the same stifling level of regulation and could be used to give users and investors a better idea of what they might expect.

Both events were broadly convinced that going on the offensive was the answer. 'The change has been intense’, said Sallie Pilot, director of research and strategy at Black Sun. The useful information was increasingly in the reports and the linkage, the connections between the different parts of the information, was on the increase. Black Sun’s most recent survey of trends in FTSE100 corporate reporting showed that a steadily increasing 83% of companies connect their strategy information with their key performance indicators. The push towards greater flexibility and greater emphasis on non-financial and narrative reporting is coming from within. And this cultural change, embodied by initiatives like integrated reporting, is gathering force as an inevitable consequence.

In answer to a question Charles Nichols made it clear that in Unilever integrated reporting was not just the responsibility of the finance function. It was a part of the overall business systems. By tradition the finance function had the role of measuring performance management but with integrated reporting the responsibilities had moved wider within the business. As British Land’s finance director Lucinda Bell put it, the finance function is now part of the conscience of the business. And that, she said, was sign of how mainstream all this had become.

EFRAG commends the IASB’s effort in comprehensively analysing banks’ risk management practices and developing new thinking in how to best reflect the effects of such practices on an entity’s financial position and performance. EFRAG supports the view that a new hedge accounting model for open portfolios, which are managed on a net risk basis, is needed.

However, EFRAG disagrees with the widening the scope of the project evidenced in the discussion paper and in contrast to the original objective when the project was decoupled from the project on general hedge accounting. The focus of the IASB is no longer on finding a hedge accounting solution for open portfolios but on the revaluation of all portfolios that are dynamically managed. EFRAG does not believe that revaluing all portfolios that are dynamically managed, regardless of whether or not they have been risk-mitigated through hedging, will lead to decision-useful information.

EFRAG recommends that the IASB develops a model for hedge accounting in accordance with the original objective of the project. Such a hedge accounting solution would mitigate the accounting mismatch inherent in a mixed measurement model where hedged items are measured at amortised cost and hedging instruments are measured at fair value. At the same time, such a solution would not override the measurement requirement in IFRS 9 Financial Instruments that amortised cost measurement is appropriate for some financial instruments (which the proposed scope in the discussion paper would).

Comments are due by 10 October 2014.

For more information, see:

• EFRAG draft comment letter (link to EFRAG website).
• Press release (link to EFRAG website).
• Our 17 April 2014 article on DP/2014/1.
• Our macro hedging project page.