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FRC issues Plan and Budget for 2014/2015

22 Apr, 2014

The Financial Reporting Council (FRC) has today published its Plan and Budget for 2014/2015. The plan sets out the activities that the FRC will focus on over the next year to pursue the six key priorities identified in 2013 as part of its three year plan for 2013 to 2016.

The FRC has identified the following activities as areas of focus in 2014/15:  

Governance and Stewardship

The FRC will continue to promote a longer term approach to corporate governance and investor stewardship, by:

  • updating the provisions of the UK Corporate Governance Code in relation to risk management, going concern and remuneration;
  • encouraging fuller explanations as part of the 'comply or explain' framework;
  • engaging with investors to better understand their information needs; and
  • encouraging investors to give more disclosures around stewardship. 

Corporate Reporting

The FRC will address the needs of investors from corporate reporting, by;

  • supporting companies in complying with new requirements such as the statement that an annual report is 'fair, balanced and understandable', for example through the work of the Financial Reporting Lab;
  • promoting more useful auditor reporting;
  • influencing EU and international  reporting developments, including IASB and IAASB initiatives such as the IASB's Conceptual Framework and Disclosure Framework projects; and
  • evaluating how it can assist smaller listed and AIM companies to improve confidence in their financial statements by improving the quality of their reporting. 

Audit Quality

The FRC will work to promote audit quality by:

  • undertaking its annual programme of approximately 125 audit inspections and imposing sanctions when poor quality audits are identified; and
  • undertaking a thematic review of the auditing of banks and building societies. The need for improvements in the quality of auditing of financial institutions was highlighted as a key concern in the 2013 Audit Quality Inspection Report and the FRC recently commented that “the pace of improvements in the quality of auditing of banks and building societies has not been sufficient”.

Investigative, monitoring and disciplinary procedures

The FRC will address the consequences of major legislative change and other proposals affecting audit and audit monitoring, which will add very significantly to its workload.  Its goal is to secure that this additional work delivers a notable improvement in audit quality.

These legislative changes include the Competition Commission recommendations, the EU audit Directive and Regulation and a new requirement for the FRC to review local government audits.

As well as the areas listed above, the FRC will also continue its work to promote the quality of actuarial work.

The full details of the plan and budget and press release can be obtained from the FRC website.  Our previous story on the draft plan and budget sets out further information on the background behind these areas of focus.

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BIS releases revised proposals for simplifying company reporting

22 Apr, 2014

In response to the comments received from its consultation on Company Filing Requirements, the Department for Business, Innovation and Skills (BIS) yesterday published updated plans to proceed with reducing the regulatory burden on companies.

The consultation, which closed in November 2013, was part of the UK Government's 'Red Tape Challenge' and proposed a number of measures to decrease the regulatory burden on companies as regards their communication with Companies House.

Following the responses to this consultation, the government is now proposing the following changes:

  • Replacing the annual return with a more flexible system where companies can confirm whether their company information is correct and complete at any point in a year.
  • Allowing private companies to maintain various information directly on the public register at Companies House, rather than keeping it on separate internal registers.  This covers the register of directors; directors' residential addresses; secretaries; members; and the register of beneficial ownership proposed by the government in its 'Transparency and Trust' proposals.
  • Changing the required content of a company's Statement of Capital.
  • Widening the circumstances in which companies can choose to receive electronic communications from Companies House.
  • Simplifying the procedures for resolving issues with a company's registered office address, confirming the appointment of directors and striking off a company.

The Government intends to bring forward legislation to implement these proposals as soon as Parliamentary time allows.

As a result of feedback received, the original proposal to mandate a single date for filing accounts with Companies House and HMRC has been dropped in favour of making changes to the joint filing tool to make the provision of simultaneous information more attractive. The proposed changes to the requirements for reporting a company's subsidiaries will now be pursued as part of the implementation of the revised EU Accounting Directive.

The full outcome report can be downloaded from the BIS website.

The response to the Transparency and Trust discussion paper is also available from the BIS website. This report, which was issued earlier this month, proposes the establishment of a new central registry of UK company beneficial ownership information, as well as other changes to improve the transparency of company ownership and control. 

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IASB launches Research Centre

22 Apr, 2014

The IASB has announced the launch of a web-based IFRS Research Centre. The Research Centre is designed to facilitate communication between the IASB and the research community. Its main objectives are to (1) increase awareness of the issues that the IASB will be considering in the coming two to three years, (2) to encourage researchers to undertake targeted research projects in these areas, and (3) to support the IASB in moving to more evidence-based standard-setting.

The homepage of the Research Centre encourages interaction through four main sections:

  • How you can help contains descriptions of the research issues on which the IASB will be working in the next two to three years and where the IASB is seeking input from the broader research community.
  • Get started lists topics and issues that could be of interest to the academic community and includes links to papers written by IASB staff.
  • Get involved provides information about ways to get involved with the research work of the IASB, including the possibility of joining the organisation through its Academic Fellowship programme.
  • Stay informed gives access to the IFRS Research Round-up. A first issue of the newsletter has been published together with the launch of the Research Centre.

Please click for access to the press release on the IASB website announcing the launch of the centre.

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FEE believes distinguishing between avoidable and unavoidable complexity is not necessary to address the issue

22 Apr, 2014

The Federation of European Accountants (Fédération des Experts-comptables Européens, FEE) has commented on the Conceptual Framework bulletin on complexity published by EFRAG and the National Standard Setters of France, Germany, Italy and the UK in February 2014.

The bulletin considers (1) issues of complexity in financial statements, (2) possible causes, and (3) provides suggestions to the conceptual framework that may reduce the complexity.

FEE agrees with the definition of complexity in the bulletin and also believes that there is a direct relationship between complexity, the costs to preparers and the benefits to users of financial statements. FEE also agrees that the standard-setting process could - to some extent - add to complexity. However, FEE does not support the statement that the standard-setting process contributes to the "avoidable" part of complexity whilst only the complex business environment leads to "unavoidable" complexity:

FEE considers that attempting to distinguish avoidable and unavoidable complexity is a judgmental exercise and we question whether this is necessary in order to address the issue.

FEE therefore comes to the conclusion that complexity should not be considered as a primary factor in standard-setting. Instead, FEE believes that assessing whether undue complexity was introduced in a standard should be considered as part of the field testing and the costs and benefits analysis of a standard.

Please click to access the full comment letter on the FEE website.

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IASB staff paper on insurance contracts

18 Apr, 2014

The IASB staff has prepared a staff paper discussing where and how the proposals in the Exposure Draft (ED) 'Insurance Contracts' would change as a result of the IASB’s tentative decisions to date. It reflects tentative decisions of the IASB made through March 2014.

So far, only three of the five points in the ED have been redeliberated:

  • Adjusting the unearned profit from insurance contracts.
  • Presentation of insurance contract revenue and expenses.
  • Presentation of interest expense between profit or loss and the other comprehensive income.

The staff paper is available on the IASB's website.

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IASB publishes Discussion Paper on macro hedging

17 Apr, 2014

The International Accounting Standards Board (IASB) has published a Discussion Paper (DP) relevant to companies that hedge risks on dynamic portfolios of exposures using derivatives. Although the paper focusses on the example of portfolio interest rate hedging by banks, the concepts discussed can apply to any entity that hedges on a dynamic portfolio basis for any risks. Comments are due 17 October 2014.

Background

The IASB's project on macro hedge accounting considers risk management that assesses risk exposures on a continuous basis and at a portfolio level (i.e. dynamic portfolio hedging). This type of risk management strategy tends to have a time horizon over which exposures are hedged. Consequently, as time passes new exposures are continuously added to the hedged portfolio and other exposures are removed from it.

This area of accounting is complex and currently only accommodated to a limited extent in IAS 39 Financial Instruments: Recognition and Measurement, which includes a macro fair value hedging model for interest rate risk. The IASB's objective is to consider an alternative macro hedging model that will ultimately replace the macro fair value model in IAS 39 and have wider applicability to other risks.  

Given the complexities involved, and the difficulties in proposing a single model in an exposure draft, the IASB decided to single accounting for macro hedging out from the project on general hedge accounting and to issue a discussion paper as the first due process document to consider a range of alternatives. This provides an opportunity for constituents to provide the IASB with feedback on those alternatives and give guidance on how to proceed.

 

Summary of the main proposal

The discussion paper entitled Accounting for Dynamic Risk Management: a Portfolio Revaluation Approach to Macro Hedging puts forward a 'revaluation approach', which is a simple concept of adjusting the measurement of the portfolio of exposures for changes in the hedged risk. The corresponding gain or loss is recorded in profit or loss to provide a natural offset against derivatives, measured at fair value through profit or loss, used to hedge those risks.

The objective of the model is to be less operationally burdensome than applying general hedge accounting to dynamic portfolios and be more reflective of an entity's dynamic risk management resulting in more meaningful and transparent financial reporting. The model is not a full fair value model, i.e. the risk exposures are only revalued for changes in the hedged interest rate risk and not for other risks, such as credit risk. Therefore, the normal accounting of income and expenses applies for the effect of other risks, for example the accrual of the credit margin charged on customer loans would be accrued in interest income as usual.

Example

Consider a bank that has portfolios of financial assets (e.g. loans) and liabilities (e.g. customer deposits) and hedges the resulting interest rate risk position between those assets and liabilities using interest rate swaps. The model would result in the managed portfolio being remeasured for interest rate risk (with no assessment of hedge effectiveness required). The derivatives used for hedging the interest rate risk would be accounted for at fair value through profit or loss. The net impact in profit or loss shows the bank's remaining open risk position, after hedging with respect to interest rate risk. The revaluation model would be an overlay adjustment to the normal accounting under IFRS 9. Hence the usual recognition and measurement of assets and liabilities would be applied first before a revaluation adjustment is applied.

 

Complexities and questions

A portfolio revaluation model would address many of the accounting issues encountered with hedge accounting. The single model could also, if appropriately developed, represent an alternative for presenting hedging activities in the financial statements in addition to existing fair value and cash flow hedging, resulting in a more faithful reflection of portfolio risk management activities. However, complexities arise from determining which exposures to include in the revaluation and how to measure and present the revaluation.

Therefore, the discussion paper seeks feedback on a range of different aspects of the model:

  • Should any forecast transactions be recognised and measured on balance sheet?
  • Should the whole portfolio exposed to the hedged risk be revalued or just the part that is hedged?
  • Can only the bottom layer of a portfolio be remeasured?
  • Should demand deposits, pipeline transactions and equity model book be eligible for hedge accounting?
  • Can internal derivatives be used?
  • What are the various presentation and disclosure alternatives?
  • What practical expedients are necessary to make the model operational, for example, can internal transfer pricing be used?

These questions and more are debated in the paper and the IASB is seeking feedback to understand whether the model proposed would provide useful information and be operational. The comment period ends on 17 October 2014.

 

Additional information

On 29 April 2014, the IASB will hold two live webcasts introducing the Discussion Paper. Please click to register on the IASB's website for the 10am slot or the 2pm slot (both London time).

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Comments invited on new draft SORP for pension schemes

16 Apr, 2014

The Pension Research Accountants Group (PRAG) in conjunction with its SORP Working Party has today published an Exposure Draft (ED) on a revised Statement of Recommended Practice (SORP) setting out revised proposals for financial reporting by pension schemes (“the draft SORP”). Comments are invited until 16 July 2014.

The draft SORP, which will replace the current 2007 SORP (“the 2007 SORP”), 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 draft SORP also updates the 2007 SORP to include the requirements of new regulations and changes in the pension industry since the 2007 SORP. 

Some of the most significant changes include: 

  • Removal of the exemption available under the Audited Accounts Regulations and 2007 SORP to value annuity policies at nil as FRS 102 requires annuity policies to be valued at the amount of the related obligation.  PRAG comment that “this change will require many schemes to incur additional costs in obtaining valuations for annuities previously reported as nil”.  However the SORP highlights “if the value of the annuity is not considered significant to the Statement of Net Assets and the costs of obtaining a valuation outweigh the benefits then the current practice can continue”.
  • Setting out a fair value hierarchy for valuation of financial instruments and introducing new disclosure requirements on the approach to determining fair value of financial instruments.  These disclosures are extended to all scheme investments including investment property.  PRAG comment that “the fair value hierarchy required by FRS 102 is not consistent with the fair value hierarchy under IFRS and this may require providers of investment accounting information to provide two different analyses of investment valuations” and will raise this with the Financial Reporting Council.
  • The introduction of new disclosures on investment risks arising on financial instruments.  These disclosures are extended to all scheme investments including investment property.
  • The requirement to report scheme investments in subsidiaries, associates and joint ventures at fair value in the Statement of Net Assets.
  • Reducing and simplifying the existing guidance on accounting for DC arrangements.
  • Incorporating a “pragmatic approach” to accounting for the first contribution due for auto-enrolled employees.  The SORP recommends that opt-out payments made by the scheme are reported as an item of expenditure in the Fund Account.
  • Removing “outdated” statutory disclosures required by the Audited Accounts Regulations in relation to types of investment (for example equity, fixed interest public sector, fixed interest other and indexed linked securities analysed between quoted and unquoted and UK and overseas) and disclosure of pooled arrangements between property/other and unit trusts/managed funds.  PRAG are liaising with the Department for Work and Pensions over these changes. 

It is expected that the final SORP will be effective for accounting periods beginning on or after 1 January 2015, consistent with the effective date for FRS 102.  Early application is permitted. 

The ED can be obtained from the PRAG website, here.

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Chairman Michel Prada discusses globalisation in keynote speech

16 Apr, 2014

The Chairman of the IFRS FoundationTrustees, Michel Prada, gave the keynote speech at a stakeholder event in Sydney, Australia in conjunction with CPA Australia and the Institute of Chartered Accountants Australia (ICAA) on 9 April 2014.

In his speech, Mr Prada discussed the globalisation of IFRS; he promoted the IASB's heavily-researched jurisdiction profiles and provided insight into the transition to IFRS for several large economies such as Japan and the United States.

Mr Prada expressed his optimism for the eventual globalisation of IFRS, noting that "IFRS has only recently reached its teenage years." He pointed to the benefits of a single set of global accounting standards:

[F]undamentally it is a question of economics rather than accounting. The thing to remember is that differences in accounting standards add no economic value or benefit to anyone, unless you are involved in the business of reconciliation. . . . [E]xperience has shown that far from being a tool of national competitive advantage, different accounting requirements only serve to diminish the attractiveness of a jurisdiction in the global market for capital. . . . [A]ccounting standards are best thought of as a global good, not as a tool for national competitive advantage. They play an essential supporting role, facilitating growth and promoting a sustainable and prosperous global economy.

Mr Prada also discussed the areas of focus for the IFRS Foundation Trustees' third constitution review: (1) discussing the optimum size of the IASB, (2) reviewing the Accounting Standards Advisory Forum (ASAF), and (3) seeking feedback on further enhancements to the activities of the IFRS Foundation.

A transcript of Mr Prada's keynote speech is available on the IASB website. The stakeholder event also included an interactive panel discussion with senior financial reporting stakeholders. See our previous story on the panel discussion of complexity.

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PRA publishes supervisory statement setting out deferred tax asset recognition under Solvency II

16 Apr, 2014

The Prudential Regulation Authority (PRA) has published a supervisory statement ‘SS2/14 Solvency II: recognition of deferred tax’ setting out their expectations of insurance firms within the scope of Solvency II in relation to the recognition of deferred tax assets on the Solvency II balance sheet.

Solvency II is the new solvency regime for all EU insurers and reinsurers, which also covers the insurance operation of bancassurers. Due to come into effect on 1 January 2016, Solvency II aims to implement solvency requirements that better reflect the risks that companies face.

The purpose of the supervisory statement is to highlight to firms the areas (in respect of both the balance sheet recognition and the solvency capital requirement calculation) they need to pay particular attention to when considering whether they can recognise a deferred tax asset on their Solvency II balance sheet and to also clarify the PRA’s expectations in relation to evidence supporting the credibility of profit projections to support deferred tax asset recognition. 

The supervisory statement can be accessed from the PRA website.

* Update 20 February 2015.  The PRA has updated SS2/14.  The updated version is available on the PRA website.  Update 2 December 2016 - the PRA has issued an updated SS2/14 which is available on the PRA website.*

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EU Parliament adopts ESG disclosure Directive for large companies and groups

16 Apr, 2014

Members of the European Parliament have adopted the Directive on disclosure of non-financial and diversity information by large companies and groups. The objective of the Directive “is to increase EU companies’ transparency and performance on environmental and social matters and, therefore, to contribute effectively to long-term economic growth and employment”.

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.­ 

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.  

The European Commission highlight: 

Companies will be required to disclose concise, useful information necessary for an understanding of their development, performance, position and impact of their activity, rather than a fully-fledged and detailed report.  Furthermore, disclosures may be provided at group level, rather than by each affiliate within the group. 

The European Commission clarify that “this Directive does not require companies to comply with Integrated Reporting”.  The requirements in the Directive also need not be applied where a company already includes in its annual report a comprehensive report relying on prescribed frameworks (such as the UN Global Compact, ISO 26000, the German Sustainability Code, or GRI guidelines) covering the information required.

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.

The Financial Reporting Council comment:

The approval by the European Parliament of the new non-financial disclosure requirements for EU companies is a positive move for investors and complements the FRC’s work on UK Guidance on the Strategic Report.

The Department for Business, Innovation and Skills (BIS) provide further support for the Directive commenting that it strikes “the right balance between ensuring companies report useful information whilst avoiding imposing unnecessary burdens on business”. 

The rules must still be formally adopted by the Council of Ministers which the European Commission expects to happen “in the coming weeks”.  BIS indicate that the rules will likely be brought into force in the UK by 2016. 

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