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

SORPS issued by the IMA apply to UK authorised funds 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 authorised funds operate.

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

• New disclosures about the methods to determine fair value;
• Revised disclosures about the risks to which funds are exposed; and
• Simplification of the recognition of debt security interest

The SORP also includes a number of specific requirements aimed at non-UCITS (Undertakings for Collective Investment in Transferable Securities) funds introduced as a result of the Alternative Investment Fund Managers Directive (AIMFD) in July 2013.  The SORP includes an appendix as to how to apply the requirements in the context of FRS 102 including a requirement to disclose gains and losses that are realised separately to those that are unrealised in the notes to the statement of total return.      

Proposals are also made for a new format to present performance and charges in the ‘comparative table” required by the Financial Conduct Authority (FCA) regulations (the Collective Investment Schemes sourcebook).  The SORP proposes “a format for the presentation of this data such that there will be a single table for each unit class which enables investors to focus on the numbers relevant to their holding”. 

The ED proposes that the final SORP will be effective for accounting periods beginning on or after 1 January 2015 although, for certain provisions not connected with FRS 102, it recognises that earlier application may be desirable and seeks comments on this.

Click for the link to the Investment Manager Association website (includes links to the Invitation to Comment and the Exposure Draft Statement of Recommended Practice: Financial Statements of UK Authorised Funds).

These regulations come into force alongside a number of other changes which will apply to companies with periods commencing on or after 1 October 2012:

• The 2012 UK Corporate Governance Code and related Guidance for Audit Committees - this includes the requirement to report whether the annual report contains the information necessary to understand the company’s performance, strategy and business model and whether, taken as a whole, the annual report is “fair, balanced and understandable”; enhanced disclosure of the work of the audit committee; and more transparency on the auditor relationship and on how the effectiveness of the external audit process is assessed.
• The extended auditor’s report – this applies to audit reports for listed companies and requires the auditor to give significantly more detail about and insight into the audit.
• Going concern - the FRC is encouraging larger companies to provide more reporting of risks around financing and going concern in line with the proposals set out in its recent consultation.

A number of other regulations were also approved simultaneously (all links to statutory instruments):

• The Companies (Receipt of Accounts and Reports) Regulations 2013 - these allow companies to provide shareholders who do not wish to receive the full report and accounts with a strategic report with certain supplemental information instead of a summary financial statement;
• The Companies (Revision of Defective Accounts and Reports) (Amendment) Regulations 2013 amend the 2008 regulations that provide how companies should revise their accounts and reports if they are found to be defective; and
• The Unregistered Companies (Amendment) Regulations 2013.  The amendments were made as a consequence of changes to the Companies Act 2006 made by the Enterprise and Regulatory Reform Act 2013 and the Strategic Report Regulations

Click for:

Approved directors’ remuneration report regulations (link to statutory instrument)

Approved narrative reporting regulations (link to statutory instrument)

Our previous story on the narrative reporting regulations

Our previous story on the new directors’ remuneration report regulations

EFRAG appreciates the large number of changes that ED/2013/7 Insurance Contracts shows in comparison with the 2010 ED and supports most of those changes. However, EFRAG also voices some concerns:

• EFRAG believes that the IASB’s proposals in the ED in combination with the classification and measurement requirements in other standards will not help to eliminate accounting mismatches and would result in reporting the insurance performance split across profit or loss and OCI.
• EFRAG also suggests that the IASB should acknowledge the long-term oriented investment business model of insurance activities in the requirements.
• In respect of the proposed measurement and presentation exception, EFRAG voices several concerns (starting point of the proposed ‘mirroring’, scope, measurement basis, and presentation).

Regarding the proposed measurement and presentation exception, EFRAG is currently considering an alternative proposal developed by the insurance industry that might, wholly or partly, address EFRAG's concerns. The alternative is described in an appendix to the draft comment letter, however, EFRAG has not yet formed a view on the approach and has not yet assessed its technical details, operational complexities or conceptual/technical merits.

Please click for the draft comment letter and a corresponding press release on the EFRAG's website. Comments on the draft comment letter are requested by 18 October 2013.

Under the ‘The Partnerships (Accounts) Regulations 2008’ [QP 2008 Reg 3(1)] a partnership (including a limited partnership) is a qualifying partnership if each of its members is 

• A limited company; or
• An unlimited company, or a Scottish partnership, each of whose members is a limited company. 

The regulations [QP 2008 Reg 2(2)] then state “any reference in the Qualifying Partnerships Regulations to the members of a qualifying partnership should be construed, in relation to a limited partnership, as a reference to its general partner or partners”. 

This implies that the status of the general partner or partners would be considered when determining whether the partnership is a qualifying partnership.  However, a view exists under the currently effective legislation (‘The Partnerships (Accounts) Regulations 2008’) that by having a single limited partner with unlimited liability, such as an individual, a partnership does not meet the definition of a qualifying partnership, despite the fact that their liability is limited by virtue of being a limited partner.  This view is supported by the fact that the Government has found it necessary to amend the law rather than issue clarifying guidance. 

The updated definition (link to approved regulations) of a qualifying partnership now ensures that when the partnership is a limited partnership, only the status of the general partners is taken into account when considering whether it is a qualifying partnership.  The effect is that more limited partnerships will fall under the definition of a qualifying partnership and, among other things, will need to prepare and file annual accounts and reports. 

In addition to updating the definition of a qualifying partnership, the amendments also revise the rules around the publication of accounts and amend the definition of members for the purposes of applying the requirements of the regulations.

Each update lasts no more than an hour, and sessions are normally held three times a year, approximately at the end of March, July, and November. We intend to make a recording of each session available on IAS Plus for a period of at least four months from the date of the presentation. The topics covered in the July 2013 webcast include:

• a round up of UK corporate reporting news, including the following items which apply for September 2013 year ends:
  • the new narrative reporting regulations, which require companies to prepare a strategic report; and
  • the new regulations that overhaul the reporting of directors’ remuneration;
• the IASB’s exposure draft on accounting for leases; and
• other IASB developments.

To access the recording click here.

FRED 50 Draft FRC Abstract 1 replaces UITF Draft Abstract 49 Residential Management Companies’ Financial Statements and applies to residential management companies preparing financial statements under FRS 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’.  It clarifies that all RMCs act as principals and not agents in their residential management transactions with third party suppliers.  On the basis that they RMCs are acting as principals, FRED 50 Draft FRC Abstract 1 addresses how RMCs shall recognise transactions with third party suppliers in their financial statements when discharging their duties to manage and arrange maintenance of a property. 

Entities will be required to apply FRED 50 Draft FRC Abstract 1 and the consequential amendments to the FRSSE for accounting periods beginning on or after 1 January 2015 with early adoption permitted.  

The FRC invite comments by 11 November 2013.  

FRED 50: Draft FRC Abstract 1 - Residential Management Companies' Financial Statements can be found here (link to FRC website).

The document, entitled Preliminary Board View: Preface to the Conceptual Framework for General Purpose Financial Reporting by Public Sector Entities, identifies that the primary objective of most public sector entities is to deliver services to the public, rather than to make profits and generate a return on equity to investors.

The preface notes discusses the following characteristics of public sector entities:

• The volume and financial significance of non-exchange transactions including involuntary transfers such as the collection of taxation, increasing the importance of the accountability objective of financial reporting
• The importance of the approved budget and information to compare actual spending, revenues and the resulting surplus or deficit with budget estimates
• The nature and purpose of assets in the public sector, which are primarily held to provide services rather than to generate cash flows. In addition, such assets may contribute to the historical and cultural character of a nation or region, or represent areas of natural significance
• The longevity of the public sector and the nature of public sector programs, making the going concern concept difficult to interpret in the public sector context, and resulting in an increased need for information about the long term sustainability of an entity's finances
• The regulatory role of public sector entities, including entities operating in certain sectors of the economy, to address market failures, or to regulate themselves
• Relationship to statistical reporting, and the commonalities and differences between general purpose financial statements (GPFS) and government finance statistics (GFS).

The preliminary preface follows an earlier exposure draft which was issued in April 2011, and will not be finalised until the IPSASB finalises its conceptual framework during 2014. The IPSASB is not formally calling for constituent comment on the preliminary preface, but considered its publication important "because of the importance of the characteristics identified to the future development of IPSASs and RPGs".

Click for access to the preliminary preface (link to IFAC website).

CRD IV is the EU package of rules and regulations which implements Basel III, the international regulatory framework for banks. The package is binding on all EU member states. It aims to address the problems that caused the financial crisis by increasing the level and quality of capital held by banks, enhancing risk coverage, expanding disclosure requirements and reducing procyclicality. CRD IV provides a basis for EU liquidity standards and introduces leverage disclosure requirements.    

The Capital Requirements Regulation is directly applicable in all member states whilst the Capital Requirements Directive must be incorporated within UK law, by means which would include through the rules and regulations of the PRA and FCA. 

One provision in the CRD in relation to the role of the nomination committee will affect how companies approach boardroom diversity and the disclosures they make.  It states: 

The nomination committee shall decide on a target for the representation of the underrepresented gender in the management body and prepare a policy on how to increase the number of the underrepresented gender in the management body in order to meet that target. The target, policy and its implementation shall be made public.

In their consultation document ‘Strengthening Capital Standards: implementing CRD IV’ (link to PRA website), the PRA has stated that these proposals will be included within their regulation and once incorporated into UK law will therefore require firms to set and publish quotas in order to promote gender diversity.  This will represent a change from current requirements in the UK where, although companies are encouraged to adopt diversity targets this is not a legal requirement.  The FCA has also indicated that it will implement these proposals in their consultation ‘CRD IV for Investment Firms’. 

Aside from the requirements in relation to diversity, the CRD contains a number of other specific provisions relating to the “management body”, risk management and remuneration which the PRA will implement although it highlights that some of these will not have a significant impact.  

Management Body 

The CRD introduces a new requirement relating to the management body who it defines as those which “are empowered to set the institution’s strategy, objectives and overall direction”.  This requires that the chairman and chief executive officer must be independent, however this is not a new requirement to UK companies as this is not seen as good governance. 

Risk management

The PRA intends to implement the CRD requirements in relation to risk management.  The main requirements are that: 

• The management body should approve and periodically review the strategies and policies for taking up, managing, monitoring and mitigating the risks the institution is or might be exposed to, including those posed by the macroeconomic environment in which it operates in relation to the status of the business cycle.
• The management body should devote sufficient time to consideration of risk issues
• Large organisations should establish a risk committee composed of members of the management body who do not perform any executive function in the institution concerned.
• The management body should retain overall responsibility for risks and have access to all relevant information to be able to perform their role.
• Organisations should have a risk management function which is independent from the operational functions and which shall have sufficient authority, stature, resources and access to the management body. 

Remuneration 

The CRD provisions in relation to remuneration, introduce, among other things limits on bonuses, where a base line level will be set and can only be amended with shareholder approval.  The provisions also stipulate that the board should review the general principles of its remuneration policy and, at least annually, review compliance with that policy.  The FCA and PRA will consult at a later date how best to take these provisions forward. 

In addition, a number of reporting and disclosure requirements are required by the CRR to which the PRA is introducing rules for.  These include the requirements to disclose certain regulatory information publicly and a new rule for financial institutions to disclose their return on assets among their key indicators in their annual reports.  Additionally the CRR and CRD require companies within their scope to report on a country by country basis.  This will require a change in the law which HM Treasury will consult on in the autumn.

Click for:

• PRA press release (link to PRA website including links to consultation)
• FCA press release (link to FCA website including links to the consultation)
• Further information on CRD IV (link to European Commission website)

SORPS, issued by ‘SORP-making bodies’ are intended to supplement accounting standards and other legal and regulatory requirements to reflect transactions or circumstances that are unique within specialised industries or sectors.  

The SORP ‘Policy and Code of Practice’ (link to FRC website) provides the policy which industry or sectoral bodies must follow if they are to become a recognised ‘SORP-making’ body.  The SORP ‘Policy and Code of Practice’ also contains a Code of Practice for such bodies on developing SORPS.

The revisions do not alter the overall policy in relation to SORPS but have been made to reflect “FRC reform and experience of applying the previous version”.  The FRC has been working with SORP-making bodies in updating their SORPS to reflect the requirements of FRS 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’. 

The FRC has also provided some guidance on the early application of FRS 102 for entities within the scope of a SORP.  Paragraph 1.14 of FRS 102 permits early application, where an entity is within the scope of a SORP when “it does not conflict with the requirements of a current SORP or legal requirements for the preparation of financial statements”.  The FRC notes that current SORPS, as they are currently written, may not conflict with FRS 102 and so careful consideration is required to determine whether there is a conflict prior to them being updated to reflect FRS 102.  They note that “in particular an entity should consider whether or not the recognition and measurement requirements of FRS 102 are consistent with the current SORP”.  Nevertheless, the FRC emphasise that legal or regulatory requirements will still need to be considered to determine whether early application is permitted.