Financial Reporting Brief
Our featured article for November is CORE & MORE with Brendan Sheridan commenting on the reports of the UK and Irish accounting supervisors together with some interesting suggestions on improvements by both the European Accountants, FEE, and Deloitte UK.
CORE & MORE
Some recent publications provide an insight into both (a) the possible future direction of corporate reporting - particularly, the FEE publication which presents a new approach to corporate reporting – CORE & MORE, and (b) the views of the supervisors on the current quality of financial reporting with both the Irish Auditing and Accounting Supervisory Authority (IAASA) and the Financial Reporting Council (FRC) Corporate Reporting Review Group having both published their Annual Reports.
In addition, Deloitte has published ‘Annual Report Insights 2015 – Building a Better Report’.
CORE & MORE
Corporate reporting is an essential means by which companies communicate with stakeholders, as part of their accountability and stewardship obligations. The Federation of European Accountants (FEE) paper looks at how fast corporates and investors are moving in a rapidly evolving world, where corporate reporting also needs to change to reflect these dynamics. None of the reports currently available can address the needs of a wider stakeholder group as a single standalone report.
The CORE Report would contain the key information that is important for obtaining a fair understanding of the key elements of a company’s main messages for stakeholders. Some examples of the latter could be information about the past and expectations about the future, including the company’s objectives, strategy and business model, together with the risk and risk mitigation processes.
The MORE Reports would include more detailed information, for example detailed disclosures for financial statements or additional information on a wider range of topics than that of the CORE Report.
The enhanced use of technology would facilitate the presentation of the CORE & MORE reports, for example hyperlinks would allow readers to click on those parts that they are interested in and access the level of detail that they need to fulfil their information needs.
The work being done by the International Integrated Reporting (IIRC) is promising, IR is still developing and is at present one of the main facilitators for improved reporting in practice, and as such may provide a way forward for corporate reporting. However, IR is still in an experimentation phase and it needs to evolve further to fulfil its mission to establish integrated reporting and thinking within mainstream reporting practice as the norm in the public and private sectors.
Similarly to Integrated Reporting, CORE & MORE raises the question of whether a major change in the overall fundamentals of reporting is needed to meet the expectations of investors and others. Meanwhile, Supervisors grapple with trying to improve the manner in which the current reporting frameworks are being applied.
Corporate Reporting Review
The Report, published by the FRC, is based on a review of 252 sets of reports and financial statements in the year to 31 March 2015, of which 76 (30%) were approached for further information and explanation. The FRC is reassured that the quality of reporting remains high among listed companies and that there is also some good reporting by some smaller listed and AIM quoted companies although there continued to be evidence of many straightforward errors and lack of focus at that level.
Delving into the CRR report a little more shows the FRS considers that: -
a. There is a potential concern about how some Boards assess materiality
b. Materiality assessments should not be used to conceal errors or achieve a particular presentation
c. Boards need to look at issues through the ‘right lens’ – what do investors expect to see
d. Smaller companies need to explain their story more thoroughly
Other areas which the FRC highlights in its CRR report are:
e. Implementation of the new consolidation standards – including ‘de facto’ control
f. The need for explanation of pension deficit funding commitments
g. The continuing need for improved disclosure about complex supplier arrangements
The following ten areas were most frequently raised with companies during the year: -
- Strategic reports
- Accounting policies
- Critical judgements
- Clear and concise reporting
- Business combinations
- Exceptional and similar items
- Cash flow statements
Many of these are consistent with the FRC’s most frequently raised areas in previous years indicating the need for continuing efforts by reporters in improving the quality and transparency of reporting. However, there are some additional perspectives in these areas which reporters should become aware of.
Areas of focus of the CRR which are new or receive greater emphasis include: -
a. Business combinations – whether companies have identified all separate intangible assets arising from business combinations
b. Exceptional items – focus on inconsistent presentation of non-recurring charges and credits, missing accounting policies for exceptional items, and items that were described as non-recurring but had also occurred in previous years
c. Pensions – following implementation of the revised IAS 19, the FRC expected companies to include comprehensive quantitative information regarding their minimum funding requirements in order to give a complete picture of their pension arrangements, but this was not consistently disclosed. Sensitivity analysis for all actuarial assumptions was also not disclosed in some cases.
The FRC Corporate Review Report, complete with case studies and technical findings are available here.
IAASA Annual Report
Chapter 2 of the IAASA Annual Report comments on the key activities undertaken by IAASA in relation to its financial reporting enforcement function.
The main matters considered in the 2014 financial statement examinations by IAASA were: -
a. Forborne loan disclosures – banks
b. Accounting for assumptions used to measure pension liabilities
c. Accounting for uncertain tax positions (UTPs)
d. Presentation of financial statements: classification of liabilities as current or non-current
e. Classification of shares in limited life entities as liabilities or equity (puttable financial instruments)
Accounting for UTPs has been an area of focus for the IASB and its Interpretations Committee in recent times and a draft Interpretation has issued on matters consistent with those identified by IAASA during its review of financial statements. IAASA found that the disclosure of UTP measurement policies, key judgements and any changes therein has been varied and lacking in detail. As a result of examinations, a number of issuers have provided undertakings to improve their disclosure of the financial reporting treatments applied in respect of UTPs.
IAASA has also engaged in two topical thematic examinations, being:
- Review of the application of IAS 7 ‘Statement of Cash Flows’ by selected Irish equity issuers
- Alternative performance measures – a survey of their use together with key recommendations: An update
The IAASA Annual Report may be accessed here.
Deloitte Insights - Annual Report 2015
The annual Deloitte UK survey of the annual reports of 100 listed companies has recently been reported on. It is of concern that since this survey was carried out first in 2006, the average length of annual reports has continued to grow, increasing from 85 pages to 135 pages. The level of linkage within the Annual Reort has also remained weak, with only 10% of companies demonstrating comprehensively how all the various elements of the report link together. Neither of these are helpful to improving the transparency of Annual Reports and the clarity of the key messages being delivered.
The report also comments on compliance by companies with the 2012 UK Corporate Governance Code and their readiness for the 2014 Code. For many UK companies who continue to adopt UK GAAP for the parent and subsidaries, decisions need to be made by them for 2015 as to whether to continue to adopt UK GAAP (FRS 102) or to move to IFRS, either FRS 101 or full IFRS.
Building a Better Report
The Deloitte UK survey and report builds on the experience gained in this year’s review, and in previous years, to take steps to improve the annual report process and to develop a framework for the purpose – The Reporting Landscape.
The framework proposed is broken down into four levels
- Building solid foundations – the foundations of a good report are compliance with the rules- getting it right delivers real benefits, helping to attract new investment and encourage dialogue with existing shareholders
- Making your structure watertight – next step is the structure to communicate effectively the company’s main messages and strategy, making it watertight to deliver a clearer and more concise report.
- Adding the finishing touches – going that bit further to deliver to investors and other stakeholders deeper insights into key messages and responding early to new reporting initiatives.
- Making your house a home – to live your story not merely to talk about it. A truly integrated report is the output of integrated thinking within an organisation.
The Deloitte Report may be accessed here.
The demands on corporate reporting are continually growing and diversifying and corporate reporting needs to properly address the needs of an ever-wider audience.
Efforts and initiatives, not least those of the FRC and IAASA, are essential to making reports ever more clear and concise. We live in a complicated world and it is a task for all involved to make sense of it and to provide solutions and timely and useful guidance.
What's New- Monthly Reporting Pack
Irish GAAP / GAAS & Related Developments
- The FRC has issued revised editions of FRS 100, FRS 101 and FRS 102
- FRC consults on package of measures to implement the EU Audit Regulation and Directive
- FRC issues draft guidance on going concern for non-Code companies
- IAASA highlights key topics for 2015 financial statements
- FRC publishes Corporate Reporting Review Annual Report 2015
- FRC to focus its strategy on embedding change, opportunities to deregulate and promoting improvements
- FRC seeks feedback on board succession planning
IFRS & Related Development
- IFRS Interpretations Committee publishes draft interpretation on foreign currency transactions and advance consideration
- IFRS Interpretations Committee publishes draft interpretation on accounting for uncertainties in income taxes
- IASB tentatively decides on effective date of IFRS 16, the new standard on leases
- IASB publishes update on the definition of a lease
- IASB publishes proposed Practice Statement on materiality
- IPSASB has released for comment two Exposure Drafts (EDs): ED 57 'Impairment of Revalued Assets' and ED 58: 'Improvements to IPSASs 2015’
- FASB proposes clarifications to its new revenue standard
- IASB publishes update on its investor programme
- IFRS for SMEs-based not-for-profit guide to financial reporting published by ACCA
- GRI publishes second analysis on sustainability and reporting trends in 2025
- FEE paper puts forward the idea of 'CORE & MORE'
- Four European Studies on IFRS 9
- EFRAG Questionnaire on proposed definitions of assets and liabilities
Regulatory & Related Developments
- S.I. No. 423 of 2015 European Union (Traded Companies- Corporate Governance Statements) Regulations 2015 published
- ESMA publishes four documents in preparation for implementing EU-Transparency Directive requirements
- ESMA publishes documents to support the entering into force of the amended Transparency Directives
- ESMA announces enforcement priorities for 2015 financial statements
- ESMA issues public statement on disclosures
- Central Bank publishes Central Bank UCITS Regulations
- Central Bank publishes feedback statement and submissions on consultation paper 92
- Regulations to amend S. 1373(7) of CA 2014 – Auditor reporting on corporate governance – actuarial regime under Solvency 2
- Deloitte Annual Report Insights 2015 — The reporting landscape
- The Bruce Column — The gradual change that is transforming corporate reporting
- The Bruce Column — Finance drives sustainability and SSE to awards win
- The Bruce Column — From reporting to thinking: what the annual survey shows
- IFRS industry insights: Mining sector — IFRS 15, the new revenue Standard could impact profile of revenue and profit recognition
- IFRS Project Insights — Insurance contracts
- IFRS on point — September 2015 (published October 15)
- The journey to government’s digital transformation
Financial Reporting Brief
- October 2015: Corporate Reporting – Future Expectations
- Quarterly Financial Reporting Brief: October 2015
- September 2015: Conceptual Framework – A New Foundation
- August 2015: IFRS 9 - Moving forward
- Quarterly Financial Reporting Brief: July 2015
- July 2015: Quality of Reporting – Needs to Improve!
- June 2015: Revenue - A Standard in Progress?
- May 2015: Financial Reporting in Ireland – Is It All New?
- Quarterly Financial Reporting Brief: April 2015
- April 2015: Corporate Reporting – A Broader Horizon
- March 2015: Impairment losses – Improved recognition?
- February 2015: The Challenge of Transition
- Quarterly Financial Reporting Brief: January 2015
- January 2015: Integrated Reporting – crossing the chasm
- December 2014: Clear and concise reporting – achievable?
- November 2014: Supervisory authorities - fundamental to consistent reporting
- 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?