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• Removing “outdated” statutory disclosures required by the Audited Accounts Regulations in relation to types of investment (for example equity, fixed interest public sector, fixed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.

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.

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.*

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. 

Click for:

• European Commission press release (link to European Commission website).
• Full text adopted by the Parliament (link to Parliament's website - please refer to Part 5, pp 312-346).
• FRC press release (link to FRC website).
• BIS press release (link to BIS website).
• Our previous UK Accounting Plus news item the Directive.

The stakeholder event, which also featured a keynote speech by Michel Prada, Chairman of the IFRS Foundation Trustees, included an interactive panel discussion with senior financial reporting stakeholders. Ian Mackintosh, Vice Chairman of the IASB, was a member of the panel.

The panel discussion was titled Global Accounting Standards: Are they fit for purpose? For the largest part the panel members discussed complexity and materiality.

On the question of what introduces complexity into financial reporting, Mr Mackintosh commented users also "assist" in bringing about complexity by asking for more and more information and for interpretations: "Interpretations make the whole system more complex," he stated and added on the frequent requests regarding implementation guidance:

You need to push back when you hear problems and say: 'Are they really problems at all or are they something, if you went away and thought about it properly, you could solve for yourself?'

After the discussion touched briefly on other topics such as the Conceptual Framework project, the leases project, and integrated reporting, it concluded on the topic of public sector accounting. Hans Hoogervorst, Chairman of the IASB, who had already earlier contributed to the discussion from the audience, commented on the IPSASB governance consultation and the question whether the monitoring and oversight of the IPSASB should be given to the IFRS Foundation's Monitoring Board and Trustees:

I would love to do the job – setting financial standards for the public sector – […] but the big danger would be that it would politicise our work even further than is already the case and we would like to retain our independence and if we get thrown into that sea, we might sink.

Please click to access a video recording of the panel discussion on the IASB's website.

At the December meeting of ASAF, the IASB confirmed that in its redeliberations it would explore how to provide relief and and alleviate complexities associated with the proposed guidance for leases. The European delegation offered to consult with European constituents to which areas needed to be simplified the most.

Due to time constraints, the standard-setters did not conduct a public survey but contacted respondents to the prior field-test and other preparers directly. 44 respondents from 10 countries took part in the survey; the majority of which were European listed groups. The industries mostly represented were retail, automotive, telecommunication; and transport and logistics:

• A majority of respondents supported additional recognition exemptions beyond the current short-term exemption; and
• a majority of respondents indicated their preference for a single type A model for all leases. However, some respondents would support a single model only if the distinction between leases and services was improved in the forthcoming standard.

The Financial Reporting Council (FRC) has recently published a letter to the IASB outlining the results of outreach they performed on a number of UK preparers regarding simplifications to the leases proposals.  The results of the FRC outreach support the view for a single Type A model for lessee accounting.  

Please click to access the full report of the EFRAG website.

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

• EFRAG reform - in the beginning of April, the EFRAG Supervisory Board approved the proposed amendments to the EFRAG Statutes and the EFRAG Internal Rules for submission to EFRAG's current Member Organisations and EFRAG's additional future members; it is intended that in the first half of June the EFRAG General Assembly will be called to approve the amendments.
• Separate financial statements - EFRAG, OIC, ICAC and DASB are conducting a joint project aimed at addressing a number of potential problems that have been revealed by the IAS Regulation option enabling Member States to permit or require non-listed companies to prepare their annual accounts in conformity with IFRS; the publication of a discussion paper is expected in the third quarter of 2014.

The April 2014 edition of EFRAG Insider is available on the EFRAG website.

The new rules will be in the form of a Directive amending the Statutory Audit Directive (Directive 2006/43/EC) (link to Europa website) and a Regulation on specific requirements regarding the statutory audit of public-interest entities (PIEs).  

Under the new rules, the societal role of auditors will be clarified, with the aim of increasing audit quality, transparency and audit supervision.  The new rules will require that audit reports be more detailed and informative and their work will be more closely monitored with strengthened audit committees.

Mandatory rotation of auditors for PIEs will be introduced, requiring such companies to retender at 10 years and change the auditor at least every 20 years. The reforms include a prohibition on the provision of certain non-audit services to PIE audit clients (including tax advice and services linked to the financial and investment strategy of the audit client) and also introduce a cap on the fees that can be earned from the provision of permitted non-audit services to PIEs.

Additionally the rules prohibit the use of restrictive clauses in contracts which limit a company’s choice of auditor in order to promote market diversity.

The Council has indicated that “the supervision of the system will be carried out within the framework of a Committee of European Auditing Oversight Bodies (CEAOB) with assistance from the European Securities and Markets Authority (ESMA)”.

The directive was already approved by the European Parliament on 3 April. Both the Directive and the Regulation will enter into force 20 days after their publication in the Official Journal of the European Union.  The Directive must be adopted by EU member states within 2 years of that date and the Regulation is effective 2 years from that date.  The restriction on fee income from non-auditing services is to take effect within 3 years.

The Competition Commission (now taken over by the Competition and Markets Authority (CMA)), which has been delaying the release of their package of remedies to increase competition within the provision of statutory audit services to FTSE 350 companies in the UK is now likely to review their package in light of the EU announcement in order to consider the implications of the EU rules on their Orders which bring their measures into law.

Click for:

• Press release (link to Council's website)
• Full text of the directive (link to Council's website)
• Full text of the Regulation (link to Council's website).
• Our previous UK Accounting Plus news item on EU audit reform.

Under the Companies Act 2006 ("the Act"), the Conduct Committee of the FRC reviews the reports and accounts of public and large private companies to determine whether they comply with the Act and other reporting requirements. Where it appears that those requirements have not been complied with, the Conduct Committee investigates the position and determines the action to be taken, in accordance with their operating procedures, to address any non-compliance.  

The FRC proposals include:

• Formally reflecting the concept of a ‘Committee Reference’.  Currently, where a Conduct Committee enquiry gives rise to a significant correction or improvement which it considers investors and preparers ought to be aware of but where there is less cause to inform the market at large, it may ask the company to refer to interaction with the Conduct Committee in the annual report and accounts where a change as a result of the investigation is made.  The FRC is now proposing that Conduct Committee operating procedures explicitly refer to Committee References and include the tests that the Conduct Committee applies to ensure that the text included by the company is “fair and balanced”. It also indicates that the Conduct Committee will expect to be given the opportunity to comment on the disclosure that the company makes.
• An amendment to the operating procedures to allow the names of those companies that have published Committee References and a brief description of the issue to be included within the Corporate Reporting Review Annual Report.  The FRC highlights that this change in operating procedures is proposed as currently Committee References are only known to those who read the specific set of accounts to which it appears.  In the consultation paper, the FRC comments: “we believe that investors and potential investors would benefit if we were clearer about our regulatory outcomes” and that “the citing of corrections which the Committee has secured would allow others to appreciate what has been found to be non-compliant and would illustrate what the Committee finds unacceptable in terms of corporate reporting”.
• An explanation within the operating procedures that the Conduct Committee’s letter to a company may include references to aspects of reporting other than compliance with mandatory reporting requirements, such as cutting clutter.
• Amending the operating procedures to clarify how the Conduct Committee manages complaints, including how anonymous complaints are handled and providing a link to the FRC’s reference and advice to whistle-blowers. 

Click for (all links to FRC website):

• Press release.
• FRC consultation paper ‘Revised operating procedures for reviewing corporate reporting’.

The new Directive came into force on 20 July 2013, and European Member States have until 20 July 2015 to incorporate the rules of the Directive within their national law.

The Directive aims simplifying the accounting requirements for small companies and improves the clarity and comparability of companies' financial statements within the Union. The EFAA paper is designed to support governments, standard-setters, EFAA member organisations and other interested stakeholders in their efforts to transpose the new Accounting Directive into national legislation.

Please click to access Implementing the New European Accounting Directive - Making the right choices on the EFAA website.