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Deloitte Response FRED 52 Image

We comment on FRED 52 'Draft amendments to the Financial Reporting Standard for Smaller Entities (effective April 2008) — Micro-entities'

31 Jan, 2014

We have published our comment letter on the Financial Reporting Council’s Financial Reporting Exposure Draft (FRED) 52 ‘Draft amendments to the Financial Reporting Standard for Smaller Entities (effective April 2008)-Micro-entities'.

Overall we support the proposed amendments to the Financial Reporting Standard for Smaller Entities (FRSSE).  However we have some specific comments on the implementation of the amendments.  We comment: 

we are concerned that preparers of micro-entity accounts may find it difficult to identify those requirements that are applicable to them, and suggest that these may be presented in a more user-friendly format; and

we recommend that transitional provisions are implemented in respect of the proposed amendments which require micro-entities to apply historical cost accounting for tangible fixed assets, fixed asset investments and investment properties.

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

EFRAG (European Financial Reporting Advisory Group) (dk green) Image

EFRAG issues final endorsement advice and effects study report on the amendments to IAS 19

31 Jan, 2014

The European Financial Reporting Advisory Group (EFRAG) has submitted to the European Commission its endorsement advice letter and effects study report on the amendments to IAS 19 regarding employee contributions to defined benefit plans.

EFRAG supports the amendments to IAS 19, which clarify the requirements that relate to how contributions from employees or third parties that are linked to service should be attributed to periods of service and permit a practical expedient if the amount of the contributions is independent of the number of years of service. The EFRAG’s assessment is that benefits for preparers and users implementing the amendments to IAS 19 outweigh the costs and therefore EFRAG recommends that the European Commission (EC) endorses the amendments.

Click for the following information on the EFRAG website:

ACCA (UK Association of Chartered Certified Accountants) (lt green) Image

ACCA comment on the FRC consultation on risk management

30 Jan, 2014

The Association of Chartered Certified Accountants (ACCA) has published their response to the Financial Reporting Council’s (FRC’s) consultation ‘Risk management, internal control and the going concern basis of accounting’. Whilst commenting that “the new draft guidance much better reflects the intent of the Sharman Panel” and “that the joined-up approach in the guidance, which attempts to link risk management and internal control with risk reporting and assessment of going concern, is very helpful”, the ACCA has expressed some “serious concerns” with the “prioritised risk listing approach” to risk identification and management proposed by the FRC.

The FRC draft guidance, published in November 2013, seeks to integrate the FRC current guidance on going concern and risk management and internal control (often referred to as the “Turnbull Guidance”) and also makes some consequential revisions to the UK Corporate Governance Code and auditing standards.  The FRC has taken this approach “to encourage boards, as part of the same on-going process, to consider risk identification and management, including the assessment of solvency and liquidity risks, and to determine whether the company is able to adopt the going concern basis of accounting”.  

The FRC draft guidance also seeks to support the principles underlying the recommendations advocated by Lord Sharman in his report “Going Concern and Liquidity Risks: Lessons For Companies and Auditors” (link to FRC website).  

The main concern of the ACCA is that they feel the draft guidance will “steer” directors to a certain approach to risk management and that using the approach directors may feel that they have identified a complete list of risks which are the only ones they feel they should be managing.  They highlight that “the main danger, or risk, is that the guidance could foster a misplaced complacency about risk and the resilience of the risk model”.  They comment: 

the draft guidance implies that there is one way to do risk management by assessing the principal risks to the company’s business model and ability to deliver its strategy.  While this may be an important component of managing risk for most companies it should not be the only one.  This approach tends to assume that all significant risks can be foreseen and accurately assessed 

Company resilience, not risk assessment, should be the principal aim for boards when considering risk 

The ACCA would like further guidance as to how companies and their boards can be resilient to risks that have not been identified and provide some suggested steps to ensure this in their comment letter such as scenario planning and analysis.  

In relation to the section on guidance to identify material uncertainties to the going concern basis of accounting, the ACCA comment that they “broadly agree” with the proposals but would like the FRC to be clearer on the purpose of the exercise. 

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LLP SORP Comment Letter Image

We comment on the draft SORP 'Accounting by Limited Liability Partnerships'

30 Jan, 2014

We have published our comment letter on the draft Statement of Recommended Practice 'Accounting by Limited Liability Partnerships' (draft LLP SORP) published by the Consultative Committee of Accounting Bodies (CAAB). We agree that the draft LLP SORP overall provides useful guidance on the application of FRS 102 requirements to limited liability partnership accounting. However, we have raised a number of comments on some specific areas of LLP accounting covered by the draft SORP.

Our key comments include:

  • In our view, there is a need to define some of the terms used throughout the draft LLP SORP to ensure consistency of interpretation. In particular definitions of ‘clearly identifiable return on amounts subscribed’ and ‘members’ services’ would be helpful.
  • Instead of the SORP’s requirement for LLPs to produce a separate Member’s report, currently not required by FRS 102 or legislation, we recommend moving the relevant disclosures to form part of the financial statements, where they provide necessary context for the other information presented.
  • While we generally agree with the proposed business combinations accounting guidance, we have a concern about the application of the group reconstruction criteria to LLPs with no interests accounted for as equity. We believe that, in the context of LLPs with no capital accounted for as equity, the reference to ‘equity holders’ should include LLP members and the ‘rights of each equity holder’ should extend to include member profit sharing rights.
  • Overall, we believe the revised guidance on contractual or constructive obligations and annuities adequately reflects the requirements of FRS 102 and FRS 103 in relation to accounting for members’ post-retirement benefits. However the introduction of some additional clarifications and definitions would be useful. In particular we believe further clarification is required of the interaction of the FRS 102 definition of ‘puttable instruments’ and the LLP SORP definition of ‘post-retirement payments to members’ to avoid a potential conflict in application of the accounting guidelines to some situations.

In addition, the CCAB have asked a specific question on the need to retain the FRS 25 application flowcharts in the appendix to the LLP SORP. We agree with the CCAB that the flowcharts were always intended only as an illustrative guidance and to the extent they are not used by preparers their continued inclusion within the SORP is not warranted. We therefore agree with the removal of the flowcharts provided that the body of the SORP reflects all the principles necessary for accounting analysis.

While we agree with the CCAB that in many instances the basic accounting remains unchanged, there is one specific scenario where we envisage the application of the FRS 102 requirements to result in a different classification of members’ interests, in relation to the application of the ‘puttables exception’. For example, LLPs where members provide services, have automatic division of all profits and have their interest puttable on retirement would previously have had no equity, but would now be required to classify capital as equity under FRS 102. We therefore recommend providing an example illustrating the new treatment and highlighting the change from the old accounting requirements.

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

IASB (International Accounting Standards Board) (blue) Image

IASB issues interim standard on rate regulation

30 Jan, 2014

The International Accounting Standards Board (IASB) has published IFRS 14 'Regulatory Deferral Accounts'. This Standard is intended to allow entities that are first-time adopters of IFRS, and that currently recognise regulatory deferral accounts in accordance with their previous GAAP, to continue to do so upon transition to IFRS. The Standard is intended to be a short-term, interim solution while the longer term rate-regulated activities project is undertaken by the IASB. The IASB has stated that by publishing this Standard, they are not anticipating the outcome of the comprehensive rate-regulated activities project which is in its early stages.

 

Background

In September 2012, the IASB started a comprehensive rate-regulated activities project, starting with a research phase to develop a Discussion Paper.  In December 2012, the IASB decided to add an additional phase to the rate-regulated activities project to develop this limited-scope Standard.

In April 2013, the IASB published the Exposure Draft ED/2013/5 Regulatory Deferral Accounts (the ‘ED’), with comments due by 4 September 2013. 

The IASB received comments on the ED which lead to some clarifications and edits, including additional disclosure requirements; however, the main proposals in the ED were not changed substantially in the final Standard.

 

Scope

Initial application of IFRS 14 must coincide with the application of IFRS 1 First-time Adoption of International Financial Reporting Standards. This means, IFRS 14 cannot be applied by entities that have previously adopted IFRSs. Entities applying this interim standard must also meet specified eligibility criteria. Specifically, the entity has to conduct 'rate-regulated activities' (as defined by IFRS 14), and it must have recognised amounts that qualify as regulatory deferral account balances in its financial statements in accordance with its previous GAAP.

 

Overview of the key requirements

  • IFRS 14 requires the balances reflecting the effects of rate regulation to be described as “regulatory deferral account debit balances” and “regulatory deferral account credit balances” (collectively they are referred to as “regulatory deferral account balances”) and these balances cannot be referred to as, or presented with, assets and/or liabilities because  the determination of whether these balances meet the definition of assets or liabilities in the Conceptual Framework must be addressed as part of the IASB's comprehensive conceptual framework project
  • The effects of rate regulation must be separately presented in the statement of financial position and statement(s) of profit or loss and other comprehensive income, and the Standard provides illustrative examples of these presentation requirements
  • All assets and liabilities, balances and transactions have to comply with all other IFRS standards so the regulatory deferral account balances represent the effects of rate regulation only after the requirements of other IFRS standards have been met
  • IFRS 14 includes some specific guidance on how other Standards such as IAS 10 Events After the Reporting Period, IAS 12 Income Taxes, IAS 33 Earnings Per Share, IAS 36 Impairment of Assets, IFRS 3 Business Combinations and IFRS 5 Non-current Assets Held for Sale and Discontinued Operations should be applied to regulatory deferral balances and/or movements in such balances
  • There are specific disclosure requirements to (a) enable users to evaluate the nature of, and the risks associated with, the specific rate regulation regime and (b) enable users to understand how the regulatory deferral account balances are recognised and measured both initially and subsequently.

 

Effective date and transition

The Standard can be applied in an entity's first annual IFRS financial statements for periods beginning on or after 1 January 2016.  Earlier application is permitted. Application of the standard is voluntary. However, an entity that elects to apply the standard in its first IFRS financial statements continues to apply it in all its subsequent financial statements.

 

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FRC Image

FRC issues revised guidance on the audit of housing associations

30 Jan, 2014

The Financial Reporting Council (FRC) has today issued a revised Practice Note 14 on the audit of housing associations in the UK.

Practice Note 14 ‘The audit of housing associations in the United Kingdom’ updates the 2006 version to reflect recent regulatory developments and changes to the environment in which housing associations operate and for the issuance of the clarified ISAs (UK and Ireland) in 2010.  The Practice Note consists of four sections including a section on the business risks and audit risks in the housing sector. 

Along with revised Practice Note 14, the FRC has also published a summary of the feedback received from their consultation on the proposed changes.  The FRC comment that “all of the comment letters expressed strong support for the proposed structure and content of the Practice Note and agreed that the proposed Practice Note was suitable for publication”. 

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IASB (International Accounting Standards Board) (blue) Image

IASB publishes Request for Information on the post-implementation review of IFRS 3

30 Jan, 2014

The International Accounting Standards Board (IASB) has issued a Request for Information (RFI) seeking comments from stakeholders to identify whether IFRS 3 'Business Combinations' provides information that is useful to users of financial statements; whether there are areas of IFRS 3 that are difficult to implement and may prevent the consistent implementation of the standard; and whether unexpected costs have arisen in connection with applying or enforcing the standard.

The post-implementation review process for IFRS 3 was originally expected to commence in 2012 but it was only formally announced to begin on 25 July 2013. Since then the IASB has been gathering information to determine the scope of the review and to identify the main questions that need to be answered before the implementation of IFRS 3 can be assessed.

The RFI published today includes those questions and forms part of the formal public consultation. After the comment period ends, the IASB will consider the comments received along with information gathered through other consultation activities and findings from research on the topic. The final conclusions of the IASB will be presented in a report and a feedback statement which will also set out the steps the IASB believes should be taken as a result of the review.

The technical questions in the RFI address the following areas:

  • Definition of a business,
  • Fair value,
  • Separate recognition of intangible assets from goodwill and the accounting for negative goodwill,
  • Non‐amortisation of goodwill and indefinite life intangible assets,
  • Non‐controlling interests,
  • Step acquisitions and loss of control,
  • Disclosures, and
  • Any other matters the stakeholders wish to raise.

Comment deadline is 30 May 2014. The request for information and a corresponding press release are available on the IASB website.

EFRAG (European Financial Reporting Advisory Group) (dk green) Image

Latest edition of EFRAG Insider

30 Jan, 2014

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

In this edition, the EFRAG discusses their support for the business model to play a role in financial reporting; a view which is contained within their draft comment letter on the International Accounting Standard Board’s (IASB’s) discussion paper ‘A Review of the Conceptual Framework for Financial Reporting’ and their other comment letters on the Insurance and Financial Instrument projects of the IASB.

It also addresses the exposure drafts on leases and insurance contracts, particularly the field tests carried out with the National Standard Setters from UK, France, Germany and Italy which were used by EFRAG to formulate their final comment letters to the IASB. 

Additionally this edition covers initial input gathered from European analysts on the post-implementation review of International Financial Reporting Standard (IFRS) 3 'Business Combinations', the IASB’s Rate-Regulated Activities project and provides a spotlight on the recommendations of the Maystadt Review.

 The December 2013 edition of EFRAG Insider is available on the EFRAG website

IFRS Foundation (blue) Image

Meeting notes from IFRS Foundation Trustees meeting

28 Jan, 2014

The IFRS Foundation Trustees held an open meeting on 28 January 2014 in Milan. We have posted Deloitte observer notes from the meeting covering Mr Prada's summary of the joint IFRS Foundation Trustees / IFRSF Monitoring Board meeting held on 27 January 2014, and Mr Scott Evans report on an earlier meeting of the Due Process Oversight Committee.

Click through for direct access to the notes for each session:

IFRS Foundation Trustees meeting (15:00-15:30)

Charity Commission Image

Charity Commission and the Office of the Scottish Charity Regulator publish guidance to trustees on preparing Strategic Reports

28 Jan, 2014

The Charity Commission for England and Wales (‘Charity Commission’) and the Office of the Scottish Charity Regulator (‘OSCR’) have today published guidance to help trustees of large company charities apply the Strategic Report requirements set out in The Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013 (the ‘narrative reporting regulations’). The narrative reporting regulations are applicable for periods ending on or after 30 September 2013.

The narrative reporting regulations require all companies (except small companies) to prepare a Strategic Report which will replace the current business review.  The existing guidance on the business review is contained within the Accounting Standard Board’s Reporting Statement: Operating and Financial Review (RS) published in January 2006.  

The requirements will apply only to those larger charities set up as companies and the Charity Commission and the OSCR have indicated that “the overwhelming majority of charities registered in England, Wales and Scotland, are not affected by the change”.  Many of these charities will not have turnover in excess of £6.5m to be considered medium or large. 

The guidance ‘Information sheet 5: The Strategic Report and company charities’ identifies that the Strategic Report of a charity that is a company should meet three objectives: 

to provide context for the related financial statements;

to provide an analysis of the charity's past performance; and

to provide insight into the charity's main objectives and strategies, and the principal risks it faces and how they might affect future prospects. 

The guidance covers: 

  1. What charities are affected, explaining that it is only those companies that are classified as medium or large as defined in the Companies Act 2006.  Small companies are exempt.
  2. The legislative requirements.
  3. The requirement that the Strategic Report be separately approved by the company directors.  The guidance notes that “the Strategic Report should be included within the Trustees’ Annual Report as a separate clearly delineated section headed Strategic Report”.  The guidance then states that “in approving the Trustees’ Annual Report, the trustees must include a clear statement that they are also approving the Strategic Report in their capacity as company directors”.
  4. Information required and the structure of the Trustees’ Annual Report.  The guidance explains that the Strategic Report should contain:
    • A balanced and comprehensive review of the charity’s development and performance in the financial year, using information from the current ‘achievements and performance’ section of the Trustees’ Annual Report;
    • A balanced and comprehensive review of the financial position at the end of the year, using information from the ‘financial review’ section of the Trustees’ Annual Report;
    • A description of the principal risks and uncertainties facing the charity, using information from the ‘structure, governance and management’ section of the Trustees’ Annual Report; and
    • A description of the charity’s future plans. 

Although the charity SORP is currently under review, the Charity Commission and the OSCR have indicated that no changes are required to the current SORP (SORP 2005) to meet the requirements for producing a Strategic Report. 

Additional guidance for directors on preparing Strategic Reports and applying the requirements of the narrative reporting regulations has been provided by the Financial Reporting Council in their Exposure Draft: ‘Guidance on the Strategic Report’

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