Highlights were the adoption of:

As consequence of the financial crisis, more questions are being asked about the value of corporate reporting and the related assurance. Often these questions concern perceptions that the story presented by management in the narrative commentary within the annual report is not free from bias and does not provide users with an insight into the way in which the organisation is being directed. 

Currently there is no obligation for companies to have the 'front half' of annual reports audited.  However the new narrative reporting regulations have increased the attention stakeholders pay to the ‘front half’ of annual reports.  The ICAS DP ‘Balanced and reasonable’ focused on the provision of auditor assurance over the ‘front half’ of the annual report in the form of a new ‘Balanced and reasonable’ positive opinion over the narrative reporting of the board.  The DP also explored the challenges for the auditor of providing such an opinion and whether this would be feasible under the current International Auditing and Assurance Standards Board (IAASB) framework.  The debate on the provision of such assurance was further extended by the Institute of Chartered Accountants in England and Wales Narrative Assurance Working Party in their report ‘The Journey: Assuring all of the Annual Report?’

The ICAS report ‘Assurance on management commentary – what next?’ continues along the same theme and suggests next steps for ICAS to take.  The ICAS report summarises the responses received to ‘Balanced and reasonable’ from respondents and participants in a number of events held by ICAS.  These included “nine of the current top 10 UK accounting firms”, “senior staff from the Financial Reporting Council (FRC)” and IAASB.

The ICAS report highlights that there is “broad support” for the proposals put forward by ICAS with many audit firms considering that the provision of such assurance will become “inevitable” over time.  It also highlights “some confusion” regarding user views as to how much and what type of assurance is currently provided by auditors under the Financial Reporting Council’s (FRC’s) ‘fair, balanced and understandable’ requirement, introduced as part of revisions to the UK Corporate Governance Code in 2012 and amendments to ISA 700 (UK and Ireland) 'The Independent Auditor’s Report on Financial statements'.

Although supportive of the proposals, respondents were “split” over whether they could be adapted to fit within the existing framework.  Many cited barriers to implementation such as whether auditors had the necessary skills and ability to undertake this type of work, the need to revisit the auditor liability regime and whether assurance could be provided on all of the information contained within the front half of the annual report.  Just under half of respondents (44%) also highlighted that there was a need to first identify that this type of assurance was required.  The ICAEW Narrative Assurance Working Party found that organisations are already asking for additional assurance reports aside from the traditional audit report on the financial statements.  The importance of demonstrating benefits compared to costs was also mentioned by 41% of respondents.

ICAS is keen to “promote a framework for corporate reporting and assurance which meets the needs of the users, primarily the investment community, at a cost which is acceptable”.  The ICAS report identifies a number of next steps to further this objective.  They comment:

A first step is to commission research into the changes observed in the current reporting and assurance environment. The findings from this research will form the basis of a discussion and interaction between auditors, preparers and investors to understand how the far the new regime has gone in meeting their needs and if they would like any further assurance to be provided

A number of other projects “under consideration” are also identified in the paper which can be downloaded using the links below.

Click for:

• Press release (with links to the ICAS report) (link to ICAS website).
• Our previous UK Accounting Plus news item on the ICAS report ‘Balanced and reasonable’.
• Our previous UK Accounting Plus news item on the Institute of Chartered Accountants in England and Wales Narrative Assurance Working Party report ‘The Journey: Assuring all of the Annual Report?’

The regulation forms the legal basis for the continuation of financing the IFRS Foundation and PIOB for the period 2014-2020 and of EFRAG for the period 2014-2016. The financing period of EFRAG is limited to three years in view of prospective reforms that might arise from the Maystadt Report.

Regarding the premises of continued financing, the regulation states:

The Commission, taking into account developments following the recommendations set out in the special advisor's report, should submit reports in March 2014 and on a yearly basis as of 2015, at the latest in June, on EFRAG's progress in the implementation of its governance reforms. The IASB has initiated the review of the Conceptual Framework. Following the issue of the revised Conceptual Framework, the Commission should report to the European Parliament and to the Council on any changes that have been introduced in the Conceptual Framework and reasons thereof, with a particular focus on the concepts of prudence and reliability ensuring that a ‘true and fair view’, as laid down in Directive 2013/34/EU, is respected.

Please click to access the full text of the regulation on the European Union website (available in all languages of the EU).

The consultation paper outlines three key strategic objectives around financial statement audits, global developments and collaboration, and puts forward a work plan for 2015-2016 which prioritises the topics of quality control, professional scepticism and special audit considerations relevant to financial institutions. 

ESMA believe that “the strategic objectives of the IAASB for 2015-2019, as indicated in the CP, are appropriate and reasonable given the time and organisational constraints of the IAASB”. 

ESMA supports the priorities identified by the IAASB in the proposed work plan for 2015-2016 including the special audit considerations related to financial institutions, the IAASB’s decision to review the International Standard on Quality Control 1 (ISQC1) – Quality control for firms that perform audits and reviews of financial statements, and other assurance and related services engagements and the IAASB’s intention to revise ISA 600 – The work of related auditors and other auditors in the audit of group financial statements . 

Consistent with comments made by the Financial Reporting Council (FRC) and the Association of Chartered Certified Accountants (ACCA), ESMA highlights that the IAASB should consider additional areas to address in their work programme and provide a number of suggestions in their comment letter.

The full comment letter can be obtained from ESMA's website.

More information about the issues is set out below:

You can access all our comment letters to the IASB, IFRS Foundation, and IFRS Interpretations Committee here.

The key comments from the preparer outreach were:

• That there was “general support” for ‘approach A’ lessee accounting discussed by the IASB at its January 2014 meeting.  This proposes a single approach, according to which a lessee would account for all leases as the purchase of a right of use (ROU) asset on a financed basis.  Under this model a lessee would account for all leases as Type A leases (that is, recognising amortisation of the ROU asset separately from interest on the lease liability).  Only a minority supported the dual approach (‘approach 3’) with lease classification based upon the existing guidance in IAS 17 ‘Leases’.
• There were concerns raised as to the distinction between a lease and a service.  A majority of the participants considered that the proposals were not clear on how to determine whether or not a contract is a lease or a service.  Participants were also of the view that if a contract considered a significant service component then it should be accounted for as a service contract and the lease component should not be accounted for separately. 
• A number of participants were supportive of a reduction in the requirements to reassess the lease liability discussed in ASAF Agenda Paper 4A (link to IASB website).
• Most participants were of the view that they would incur “significant costs” to implement the lease proposals and were in favour of simplifications that reduced costs.  The FRC highlight that “most of these participants are unsure whether the leases proposals in their current form will result in a sufficient enhancement of the usefulness of financial statements to justify the costs of implementing the proposals as well as the ongoing costs”. 

Subsequent to the January meeting the IASB held further discussions on leases in their March 2014 meeting where a number of these concerns were raised and deliberated.  At that meeting the majority of the IASB voted in support of a single lessee accounting model.  Click here for the meeting notes taken and our 'Need to know' newsletter detailing the decisions reached.

The full letter can be obtained from the FRC website.

The MoU seeks to formalise the principles for cooperation and coordination between the two organisations in the areas of public oversight, registration, inspections and investigations of auditors of companies that are subject to the regulatory jurisdictions of both parties. 

The FRC comment that “given the global nature of capital markets, it is the common interest of both parties to cooperate in the oversight of auditors”.  Cross border regulation and oversight under the MoU will help to improve the quality, accuracy and reliability of the audit of public companies and will “avoid the undue burden of overlapping supervision”. 

The press release and MoU can be obtained from the FRC website.

The topics discussed at the meeting included:

• Leases. The CMAC members discussed the alternative lessee accounting models. Most of the members supported the single model approach because it shows a link between the balance sheet and income statement. The few that supported the dual approach believed that it effectively reveals the economic differences between real estate leases and equipment leases.
• Post-implementation Review of IFRS 3. The CMAC provided feedback to certain questions within the Request for Information paper issued on 30 January 2014. Specifically, the members discussed:
  • Business combinations versus assets acquisitions.
  • Separate recognition of intangible assets from goodwill.
  • Goodwill: Non-amortisation versus amortisation.
• Integrated reporting. The CMAC members provided feedback on the IASB’s role concerning integrated reporting. There were a variety of views ranging from the IASB not focusing on integrated reporting to others believing the information is already present for investors.
• Debt disclosures. The CMAC supported the introduction of a project on debt disclosures and provided additional suggestions to the IASB staff.
• Equity method. The CMAC provided some considerations to the IASB staff on the scope of a project on equity method.
• Disclosure initiative — Materiality. The CMAC supported the IASB project on materiality. They believe that the goal should be to make disclosures more effective, but not reduce the amount of disclosures. They also suggested that the IASB research ways to clearly define the concept of materiality.

The next CMAC meeting is scheduled for 30 June 2014.

For more information, see the meeting page on the IASB 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).  

In December 2013 a preliminary agreement between the Lithuanian EU Council Presidency and the European Parliament on the framework for EU audit reform was reached.  This framework was subsequently endorsed by the Legal Affairs Committee (JURI) of the European Parliament in January 2014.­

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 vote has been welcomed within the profession including the Financial Reporting Council (FRC) and the Association of Chartered Certified Accountants (ACCA).  The FRC comment:

The Financial Reporting Council welcomes the positive vote today by the European Parliament in favour of the EU audit reform. We commend the work of the EU institutions in working together, compromising where necessary; to ensure that the EU retains a high quality and competitive audit market.  The FRC is especially pleased that EU legislation will now be following the UK’s example of retendering an audit every 10 years. 

The package of measures must still be formally adopted by the Council of Ministers.  Subject to this formal approval, it is expected that the new rules will be published in the Official Journal of the European Union in the second quarter of 2014.  Both the Directive and the Regulation will enter into force 20 days after their publication into the Official Journal.  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 European Parliament website).
• Statement by Commissioner Barnier (link to Europa website).
• Frequently asked questions on the EU reform (link to Europa website).
• FRC press release (link to FRC website).
• ACCA press release (link to ACCA website).
• Our previous UK Accounting Plus news item on EU audit reform.
• Our 'Governance in brief' newsletter on the vote by the European Parliament.