Financial Reporting Brief - November 2014
This month's article: Supervisory authorities – fundamental to consistent reporting
Welcome to our Financial Reporting Brief for November, our opportunity to update you on recent developments with our featured article "Supervisory authorities – fundamental to consistent reporting" commenting on the importance of the work done by the Supervisory Authorities.
Supervisory authorities – fundamental to consistent reporting
At a recent United Nations Conference on Trade and Development the case for global reporting standards was eloquently made by the Chairman of the IFRS Foundation when he stressed that global standards liberate companies from the burden of complying with different, and often incompatible, accounting standards. They give investors access to revenue and profit numbers all calculated on the same basis regardless of the country they are calculated in, and provide market supervisors and government leaders around the world with a standardised set of performance metrics on which to build globally consistent regulatory initiatives.
The Chairman went on to note that it is in everyone’s interest to reduce friction in the global system – that is what IFRS does. To do this, global standards only function properly if everyone adheres to them, the reality is that if you want to reap the benefits of global standards, then everyone must commit themselves to adopting the same single set of high quality standards.
The widespread adoption of IFRS continues to grow but this success story can only be part of the package, as it is essential that the standards are being used correctly and consistently within a strong regulatory and legal framework. That process is up to governments, financial regulators and auditors in individual jurisdictions. The IASB does not have the mandate nor the resources to enforce and monitor application of the standards that it creates. The IASB has however taken a number of initiatives including entering into deeper co-operation arrangements with both the International Organisation of Security Commissions (IOSCO) and the European Securities and Markets Authority (ESMA), to promote development and implementation of IFRS on a globally consistent basis. The carrying out of post-implementation reviews by the IASB of major standards should also assist.
The European enforcement process
The European Securities and Markets Authority (ESMA) is responsible for the monitoring of compliance of the financial information published by listed European entities with International Financial Reporting Standards (IFRS). ESMA discharges this responsibility mainly through the European Enforcers Co-ordination Sessions (EECS) which co-ordinate the enforcement activities of Member States in order to increase convergence amongst European enforcers' activities. The EECS also provides feedback to the IASB on issues related to the application of IFRSs identified as part of the enforcement process. A number of issues have been submitted to the IFRS Interpretations Committee where diversity in practice was identified, requesting additional guidance in areas where a lack of clarity in IFRS might have contributed to their divergent application.
In its 2013 Annual Report, published in May 2014, ESMA indicates that approximately 1,900 reviews of interim and annual IFRS financial statements were carried out by European national enforcers with around 500 enforcement actions taken. ESMA highlights the areas of deficiency considered most noteworthy as being (a) impairment of non-financial assets, (b) recognition and measurement of deferred tax assets, (c) distinction between a change in an accounting policy and a change in accounting estimate, and (d) recognition of financial liabilities.
ESMA and the national enforcers evaluated the level of compliance with IFRS in the areas identified as common enforcement priorities for 2012 IFRS financial statements. Shortcomings were identified in particular in issuers’ disclosure of management’s approach to key assumptions related to impairment of goodwill and the related sensitivity analysis.
ESMA has in recent days announced the priority issues that the assessment of listed companies’ 2014 financial statements will focus on. With the significant changes coming in with the Consolidation standards - IFRS 10, 11 and 12 – the preparation and presentation of both consolidated financial statements and those of joint arrangements with the related disclosures pose particular challenges to issuers in the application of the new IFRS requirements. Additionally, the recognition and measurement of deferred tax assets will pose particular challenges to issuers at a difficult time for forecasting future taxable profits in periods of low economic growth. ESMA and the national enforcers expect EU listed banks to provide relevant information in relation to material impacts resulting from the European Central Bank’s comprehensive assessment of the banking sector and to consider the findings of the 2013 ESMA report on comparability of financial statements of financial institutions.
Supervisory and enforcement activities are carried out on a national level in Europe with the responsibility in Ireland being with the Central Bank of Ireland and the Irish Auditing and Accounting Supervisory Authority (IAASA) with the Financial Conduct Authority and the Financial Reporting Council (FRC) being responsible in the UK.
UK Corporate Reporting Review
In October the FRC published its Annual Report based on its Corporate Reporting Review for the year ended 31 March 2014.
The FRC’s assessment is based on a review of 271 sets of reports and accounts, of which 100 companies were approached for further information and explanation. The FRC continues to find that corporate reporting by large public companies is generally of a high standard but it continues to see a significant proportion of poor quality accounts produced by smaller listed and AIM quoted companies.
The Corporate Reporting Review identifies ten areas of corporate reporting that were commonly raised with companies during the year. All are areas which companies should take note of and ensure that any deficiencies are addressed in their next report. Many of the issues to be addressed are not only matters for listed companies but also may be seen as a guiding influence for private entities and others. They include:-
- The question of whether business reviews are ‘balanced and comprehensive’ or whether they focus only on ‘good news’
- The need for greater consistency in the treatment of ‘exceptional items’ in income statements, with a case study to illustrate the FRC’s perspective
- The supplementing of key accounting policies with a discussion of the key judgements made which need to be clear and give a full appreciation of the underlying issues
- The need for accounting policies to avoid ‘boiler plate’ descriptions which are not tailored to the facts and circumstances of the company
- The need to address potential areas of concern arising from poor quality disclosure of asset impairment, with inadequate description of key assumptions and sensitivity analysis
- The need for improved disclosure of the basis for the company believing a deferred tax asset is recoverable, with a case study to illustrate the FRC perspective
Following recent changes in IFRS, the FRC report highlights emerging issues that it considers will be particularly relevant in the near future. These include:-
- Pensions – the revisions in IAS 19 to how pension costs are measured and recognised, including the means by which the financing element is calculated
- De facto control of subsidiaries – a major change brought about by IFRS 10, introducing significant additional judgement as to whether a parent/subsidiary relationship exists
- Acquired intangibles – growth in the economy will lead to increased acquisition activity and application of IFRS 13 on Fair Value will become even more significant.
In June 2014, the FRC announced its ‘Clear & Concise’ initiative bringing together a number of activities aimed at ensuring that reports and accounts provide the most relevant information for investors, with the Financial Reporting Lab’s report ‘Towards Clear & Concise Reporting' providing information on the practical steps companies can take.
IAASA – Annual Report 2013
In July IAASA published its 2013 Annual Report. IAASA carried out 32 examinations of annual and interim financial statements together with a number of thematic examinations and topical surveys.
Some of the financial reporting matters considered by IAASA in its 2013 examinations include:-
- IAS 37 – aggregation of provisions into classes, and complying with minimum required disclosures
- IAS 12 – recognition and measurement of deferred tax assets
- IFRS 7 – disclosure of valuation techniques and assumptions
- IFRS 7 – improving the completeness of credit risk disclosures
- IAS 32 – the rationale for the classification of certain shares as liabilities rather than equity
- IAS 12 & IAS 37 – uncertain tax positions – recognition, measurement and disclosure
- IAS 36 – impairment of assets – the basis of assumptions used in cash flow projections
IAASA has recently published its annual Observations document highlighting key topics to be considered by those preparing, approving and auditing 2014 financial statements. Key topics covered include:-
- Measurement of recoverable amounts on cash generating units
- Recognition, measurement and disclosures surrounding deferred tax assets
- Accounting for uncertain tax positions
- Assessing control under IFRS 10 – Consolidated Financial Statements
- Alternative performance measures
There are also a number of measures highlighted for financial institutions regarding accounting aspects of the ECB Asset Quality Review, impairment provisions and disclosures in relation to forbearance measures.
It is a fundamental of corporate reporting by major entities, both listed and otherwise, that global standards only function properly if everyone adheres to them. The reality is that if the benefits of global standards are to be reaped, then everyone must commit themselves to adopt the same, single set of high quality standards. The role played by the enforcers and supervisors is critical to achieving this.
Trustworthy information which is transparent and comparable engenders trustworthy behaviour, which in turn encourages investors to continue providing long term finance in capital markets.
What’s new - monthly reporting pack
Irish/UK GAAP/GAAS and related developments
- FRC’s Corporate Reporting Review Annual Report emphasises areas of reporting focus for boards
- FRC formalises increased transparency of its review of company accounts
IFRS and related developments
- ESMA announces enforcement priorities for 2014 financial statements
- Pan-European study of financial information usage
Regulatory and related developments
- Minister Fitzgerald establishes Charities Regulatory Authority
- IAASA Commentary on review of the application of IAS 7 Statement of Cash Flows
- Model Disclosure Documents published by the Pensions Authority
- IAASA publishes observations on selected accounting issues for 2014 financial statements
Financial Reporting Brief
- Quarterly Financial Reporting Brief: October 2014
- October 2014: Group reporting – A way forward
- September 2014: The Financial Reporting Lab - An experiment that works?
- August 2014: Financial Instruments – Accounting we can all understand?
- July 2014: Standards – the current state of play
- Quarterly Financial Reporting Brief: July 2014
- June 2014: Revenue – getting the top line right
- May 2014: The quest for improved disclosure
- Quarterly Financial Reporting Brief: April 2014
- April 2014: Sustainable investment – accounting a concern?
- Financial Reporting Brief special edition (March 2014): FRS 103 Insurance Contracts
- March 2014 - Annual reports – Achieving their goal?
- February 2014 - Pensions – more than an accounting challenge?
- January 2014 - Quarterly edition of Financial Reporting Brief