For the progress report the EDTF conducted a survey on the level and quality of the implementation of their report Enhancing the Risk Disclosures of Banks in major banks’ 2012 annual reports.

The survey results demonstrate that the recommendations are beginning to make a positive impact on the reporting practices of global banks. The banks’ self-assessment is that they have implemented 50% of the EDTF recommendations in aggregate in 2012 disclosures. 2011 this number was at 34%; and the banks expect to implement 72% of the recommendations in 2013.

Geographically, banks in the United Kingdom showed the highest implementation rates (80%), while implementation was lowest in the United States and Canada (39% and 41%, respectively). Canadian banks expect to implement an additional 50% of recommendations in 2013, though.

Analysed by sections, qualitative disclosures related to the EDTF's general recommendations and other risks show the highest implementation rates (exceeding 71% over all banks) while the lowest implementation rates were observed in relation to market risk and funding disclosures.

The findings of the EDTF are in line with the results of a survey conducted by Deloitte (UK) that reviewed the implementation of the 32 recommendations by banks that were members of the EDTF Working Group.

Please click for the following information on the FSB website:

• Press release welcoming the publication of the progress report
• Progress Report on Implementation of Disclosure Recommendations (full report including appendix)
• Progress Report on Implementation of Disclosure Recommendations (report only)
• Progress Report on Implementation of Disclosure Recommendations (appendix only)

The IAASB recently issued an exposure draft that proposes changes to audit reports, including provisions to include more information on how audits are performed. During his speech, Mr Schilder highlighted certain aspects of the proposal that would create substantial changes in how auditors communicate their opinion to users of their reports, including:

• Movement of the opinion to the first item in the auditor's report.
• A new section of the report where the auditor communicates significant matters during the audit.
• A specific statement in the report about the entity's ability to continue as a going concern.
• A statement about the auditor's independence from the audited entity.

The transcript of his speech is available on the IFAC website.

SORPS issued by the SORP Board apply to further and higher education institutions preparing accounts under UK GAAP to present a ‘true and fair view’ and are intended to supplement accounting standards and other legal and regulatory requirements to reflect transactions or circumstances that are unique to the sector within which such institutions operate.  The SORP is also intended to “promote comparability in reporting across the sector”.

The ED updates the previous SORP to include the requirements of FRS 100 ‘Application of Financial Reporting Requirements’, FRS 101 ‘Reduced Disclosure Framework’ and FRS 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland'; the three main standards that were introduced as a package to replace UK GAAP.

The new SORP will result in a number of changes on how further and higher education institutions present financial performance, assets and liabilities in their financial statements.  The most significant changes are:

• Changes to existing terminology to reflect FRS 102 most notably the Income and Expenditure Account becoming the ‘Statement of Comprehensive Income’, the Balance Sheet becoming the ‘Statement of Financial Position ‘ and the Statement of Recognised Gains and Losses becoming ‘Changes to Reserves and Funds’;
• Changes to accounting for endowments and donations and capital grants as a result of the new revenue recognition rules.  Significantly the current practice of deferring capital grants on the Balance Sheet and then releasing to the Income and Expenditure Account will no longer occur.  Most capital grants will now be credited to the Statement of Comprehensive Income rather than the Statement of Financial Position (deferred capital grants);
• The requirements to record a liability in respect of a defined benefit multi-employer scheme.  The ED states “where an institution participates in a defined multi-employer plan and sufficient information is not available to use defined benefit accounting and the institution has an obligation to fund past deficits within the scheme, the institution must recognise a liability on the Statement of Financial Position for this obligation”.  The SORP Board highlights that this liability is different to the actuarial deficit currently reported in the balance sheet which they say will “add to the confusion of how pension funds are reflected in our Financial Statements and make comparing different HEIs difficult”;
• The requirements to account for certain student accommodation arrangements with third parties as finance leases on the Statement of Financial Position; and
• Changes required to report assets and liabilities at fair value in the Statement of Financial Position.

The SORP Board will consider all of the responses received with a view to issuing a final version of the SORP in June 2014. 

The final SORP will be effective for accounting periods beginning on or after 1 January 2015. 

Click for further information from the SORP Board on the draft SORP and the Exposure Draft Statement of Recommended Practice: Accounting for Further and Higher Education (all links to further and higher education SORP website).

Whilst the narrative report consists of a Strategic Report and a Director’s Report, the FRC draft guidance (link to FRC website) does not cover the Directors’ Report which must include information on greenhouse gas emissions under the narrative reporting regulations.  The UK Department for Environment, Food & Rural Affairs (DEFRA) has published guidance as to how companies should report their greenhouse gas (GHG) emissions.  

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 non-mandatory guidance, contained within ‘Exposure Draft: Guidance on the Strategic Report’, has been developed in response to a request from the Department for Business, Innovation and Skills (BIS) and is intended “to encourage preparers to consider how the Strategic Report fits within the annual report as a whole and help enhance the quality of narrative reporting more generally”. 

The FRC guidance aims to be: 

principles-based;

shorter and more streamlined than the RS;

mindful of recent developments in narrative reporting best practice; and,

aligned with the requirements in the UK Corporate Governance Code. 

The key points from the Exposure Draft are: 

• It is applicable to all entities preparing Strategic Reports, although the FRC note that the guidance has been written “with quoted companies in mind”
• Only information that is material to shareholders should be included in the Strategic Report. 
• Strategic Reports should include information that:

- is fair, balanced and understandable;

 - is concise;

 - is forward looking

 - is specific to the entity in question; and

 - that links to other information included within the Annual Report.  The FRC provide supplementary guidance which provides suggested examples where information should be linked within the Annual Report. 

• The content of the Strategic Report is driven by the Companies Act 2006 as amended by the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013 and should include “a description of the entity’s objectives, strategies and business model”.  The ED also highlights that a Strategic Report should include “an explanation of the main trends and factors affecting the entity; a description of its principal risks and uncertainties an analysis using key performance indicators and an analysis of the development and performance of the business”.
• The Strategic Report should include “disclosures around the environment, employees, social issues and diversity”.

The non-mandatory guidance is structured in a way which provides the main principles supported with additional supplementary application guidance and practical examples. 

The FRC will be holding an outreach event to discuss the proposed guidance in October.

Click for (all links to FRC website):

• Press release
• Exposure Draft: Guidance on the Strategic Report
• FRC Staff Guidance Note – Strategic Report Regulations
• Our previous story on the narrative reporting regulations including source of DEFRA guidance for greenhouse gas reporting.

The paper on 'connectivity' notes themes such as the linkage between 'integrated thinking' and 'integrated reporting', the need to convey a holistic view of strategy, governance, performance and prospects, that connectivity does not mean 'monetisation', and that connectivity is "enhanced when the integrated report features a logical structure, linked sections, cross-referencing and navigation devices such as icons, color coding or other tools". It also notes that communications technology such as extensive business reporting language (XBRL) play a critical role in sharing and connecting information electronically.

The 'value creation' background paper relates the concept to the other fundamental integrated reporting concepts of the business model and capitals, noting that inputs of capital are transformed through the entity's business model to produce both positive and negative effects. It then goes on to conclude that an integrated report should allow for the assessment of whether an entity's business model affects the wider context that supports or threatens value creation in the short, medium and long term.

Click for access to the background papers (link to IIRC website).

The outreach round-tables will provide participants a direct opportunity to discuss the proposals in greater detail with the IASB. In order to cover a wide range of views on the topic, the Boards are seeking participation from preparers, auditors, users of financial statements, and others.

Click for:

• More information, including details on regional events, on the IASB website
• IAS Plus article on the Conceptual Framework Discussion Paper
• IAS Plus project page on the IASB’s conceptual framework project
  
  

Sir David was Chairman of the IASB for 10 years and served another decade before that as Chairman of the UK Accounting Standards Board. He overhauled UK GAAP and spearheaded the adoption of IFRS in over 100 countries. Sir David now serves as Chairman of the International Valuation Standards Council (IVSC) Board of Trustees.

The IASB published a short press release on its website about Sir David's induction into the Hall of Fame. A detailed press release can be found on the Ohio State University website.

The proposals are intended to address what the Competition Commission sees as lack of competition within the provision of statutory audit services in the UK and ensure that competition is directed towards satisfying the demands of shareholders.  The proposals are also intended to increase the influence of audit committees, something that the FRC has re-emphasised in publishing their guidelines for an efficient audit tender process. 

While the FRC “supports the objectives that the Competition Commission is seeking to achieve through the remedies it has proposed”, they have raised a number of concerns (link to FRC website) around the proposal for FTSE 350 companies to put their statutory audit engagements out to tender at least every five years highlighting that the tendering could become a “sham process” as it is not taken seriously by companies or by firms. 

The FRC note that there are a number of benefits to regular audit tendering, highlighting that, among other things, it will “guard against complacency on the part of the auditor”, “stimulate innovation and spread best practice” and will provide “audit firms which are seeking to expand the opportunity to win new work”.  The FRC also recognise that there are risks and costs associated with regular audit tenders such as time and resources spent on the tender and the inability to fully understand the business and risk of the company to be audited if tenders are too frequent. 

The FRC do not see that the benefits of retendering every five years will outweigh the costs and highlight that, for “non-Big Four firms” the 5 yearly proposals may actually impede their ability to enter the market for FTSE 350 audits due to the costs involved.  The proposals also remove comply or explain which is central to the UK Corporate Governance Code. 

Instead, the FRC favours a ten year retender period in line with their recent revisions to the UK Corporate Governance Code.  They would like the Competition Commission to give the ten year period “time to demonstrate its effectiveness”. 

They comment:

We are concerned that if the retendering period is reduced from ten years, a firm will not be confident of recovering the costs of tendering, introducing innovations and securing any necessary skills.  It may therefore be less willing to innovate or, if it has invested, seek a close relationship with the company to increase the chance of reappointment but, in the process, jeopardise its independence.

Concerns were also expressed over the proposals in relation to the role of the AQR team.  The Competition Commission proposed that

The Audit Quality Review team (AQR) should review every audit engagement in the FTSE 350 on average every five years; and

Those firms that audit ten or more public interest entities should be inspected and reported upon by the AQR on an annual basis

The FRC “supports the Competition Commission’s objective of enhancing the effectiveness of audit committee oversight of audits by increasing the availability of information on audit quality at the main firms auditing public interest entities”.  However they are concerned that the level of review proposed will require an increased budget for the investigations and also could “undermine” their risk-based approach to the selection of audits for inspection.  The Competition Commission would like the AQR list to be limited to the six largest firms - and not the nine that the proposed remedy would catch.  The FRC points out that “thematic reviews” could be carried out for the smallest firms which focus on particular aspects of the audit process rather than carrying out an annual AQR.

A number of other comments are made by the FRC on areas of the Competition Commission proposals. 

On the proposals to strengthen the accountability of the external audit the FRC are broadly supportive but are of the view that there areas of the proposal that “would undermine the independence of the auditor”. 

In response to the proposal for the FRC to “amend its articles of association to include a secondary objective to have due regard to competition”, the FRC highlight that they are not a competition regulator but “will continue to have regard for competition issues”

Aside from expressing concerns over a number of the proposals, the FRC does support the removal of mandatory auditor rotation, compulsory joint audit and a role for the FRC in the appointment of auditors which were included in original proposals of the Competition Commission.  The European Commission (EC), however, does not support the removal of mandatory auditor rotation insisting that it is "as essential step for ensuring the independence and professional scepticism of auditors". 

The views of the FRC are echoed by the Institute of Chartered Accountants in England and Wales (ICAEW); and other organisations such as the UK Shareholders Association have also criticised the Competition Commission proposals.  In their response to the Competition Commission proposals the ICAEW note that by requiring FTSE 350 companies to retender every five years it is "unlikely to enhance competition and will increase cost".  They also note that linking the audit tender proposal to the FRC's requirement for engagement partners to rotate every five years "ignores the point that those requirements are to achieve a completely different purpose, namely auditor independence".

Click for (all links to FRC website):

• FRC press release
• FRC response to Competition Commission's Summary of Provisional Decision on Remedies for the Statutory Audit Market
• ICAEW response (link to ICAEW website)
• Our previous story on the Competition Commission proposals

There have been a number of reports and projects initiated by national standard-setters and others on the topic of disclosure, and in May 2013 the IASB issued a Feedback Statement Discussion Forum – Financial Reporting Disclosure and announced that it would start a short-term initiative to explore opportunities to improve and simplify disclosures.

However, the CFA Institute felt that the investors' perspective has not been sufficiently considered and notes "that such efforts were heavily informed by reports based on interviews, surveys, and the work of preparers, accountants, and auditors rather than investors". Therefore, the CFA Institute initiated its own survey among its members in February 2012, and the report reflects the opinions expressed in 332 valid responses received on a web-based survey. Of these responses roughly 2/3 came from the Americas and roughly 1/6 each from Asia Pacific and Europe/Middle East/Africa.

The results presented in the report suggests that many investors and financial analysts feel that they already have the tools at hand to "cut through the clutter", so reducing the amount of disclosure is not their foremost priority. Rather than trying to develop a disclosure framework aimed at reducing the disclosure overload, the CFA Institute believes that accounting standard-setters should focus on improving presentation in and transparency of financial statements themselves. Many inefficient disclosures would disappear when the underlying financial statements are more effective and disclosures no longer need to compensate for poor presentation.

The CFA Institute report also discusses other ways that standard-setters will need to consider to improve disclosures, such as materiality, technology, cost-benefit analysis, and underlying behavioural elements. (These aspects have of course not been disregarded by the standard-setters, and materiality and behavioural aspects were central points of Hans Hoogervorst's "Breaking the boilerplate" speech given in June 2013 at the IFRS conference in Amsterdam.)

Please click for access to the report on the CFA Institute website.

Traditionally, materiality has been defined through the lens of financial reporting. However, as investors increasingly recognize the financial implications, risks, and opportunities that arise from non-financial social, environmental, and governance issues there is a need to expand the definition of materiality and to apply it also to areas such as climate change, human rights, and board accountability.

Thus materiality is no longer restricted to purely financial indicators or single issues. Rather it is necessary to apply it to all five capitals (manufactured, financial, social, human and natural capital) if reports are to continue to be meaningful communications to investors. In our comment letter on the International Integrated Reporting Council (IIRC) Consultation Draft on integrated reporting, which has the multiple capitals theory at its core, we note: "We believe a better and clearer articulation is required in the Framework on how materiality for an integrated report is distinct from materiality for other reports such as financial reports, and how to handle the tension between application of materiality and achieving conciseness," and in his June 2013 "Breaking the boilerplate" speech, IASB Chairman Hans Hoogervorst maintained that it is necessary to clarify "that the materiality principle does not only mean that material items should be included, but also that it can be better to exclude non-material disclosures."

Therefore, the report made available this week describes the landscape of various global materiality initiatives and provides a framework for CEOs, senior managers, and boards that helps them to:

• discerne which issues are most material to the company, its stakeholders, industry, and the wider operating environment,
• develop appropriate mechanisms and processes that enable continual assessment of material priorities,
• manage materiality, and
• disclose the corresponding performance on a timely and transparent basis.

Please click for the following information on the AccountAbility website:

• Press release
• Redefining Materiality II: Why It Matters, Who’s Involved and What it Means for Corporate Leaders and Boards