Technical

INTERNATIONAL

IPSASB issues IPSAS 44 ‘Non-current assets held for sale and discontinued operations’

The International Public Sector Accounting Standards Boardhas issued International Public SectorAccounting Standard(IPSAS)44‘Non-current assets held for sale and discontinued operations’. IPSAS 44 has an effective date of 1January 2025. Earlier application is permitted.

IPSAS44 is based on International Financial Reporting Standard (IFRS) 5‘Non-current assets held for sale and discontinued operations’. The new IPSASspecifies the accounting for assets held for sale and the presentation and disclosure of discontinued operations. IPSAS 44 includes additional public sector requirements; in particular,the disclosure of the fair value of assets held for sale that are measured at their carrying amounts, when the carrying amount is materially lower than their fair value.

‘This standard fills a gap in the IPSAS suite by providing guidance on how to account for public sector assets that are held for sale on commercial terms,’ said IPSASB chair Ian Carruthers. ‘Adding guidance on this topic is important from a public interest perspective, as it ensures transparency and accountability when decisions to sell public sector assets have been taken.’

In July 2020, the European Financial Reporting Advisory Group (EFRAG) published a discussion paper ‘Accounting for cryptoassets (liabilities): holder and issuer perspective’. The discussion paper provided possible approaches to address the gaps in crypto-assets (liabilities) requirements. EFRAG has now reviewed the feedback received and derives recommendations for the IASB.

Based on the feedback received,EFRAG recommends clarifying or amending existing standards using atwo-step approach. As a first step, EFRAG recommends addressingthe accounting requirements for holders of crypto-assets by amending IAS38‘Intangible assets’to allow measuring crypto-assets or other intangibles within thescope of the standard at fair value through profit and loss and to develop disclosure requirements for issuers.

As a second step EFRAGconsiders that it is important to also address issuer accounting in more detailand determine theappropriate accounting requirements for issuers, given the challenges that arise from the ambiguity on the nature of rights and obligations associated with the issuance of the novel and fastmoving crypto transactions.

INTERNATIONAL

ISSB delivers proposals that create a comprehensive global baseline of sustainability disclosures

The International Sustainability Standards Board (ISSB), established at COP26 to develop a comprehensive global baseline of sustainability disclosures for the capital markets, has launched a consultation on its first two proposed standards. One sets out general sustainability-related disclosure requirements; and the other specifies climate-related disclosure requirements.

The proposals – exposure drafts – build upon the recommendations of the Task Force on ClimateRelated Financial Disclosures (TCFD) and incorporate industry-based disclosure requirements derived from Sustainability Accounting Standards Board (SASB) Standards.

When the ISSB issues the final requirements, they will form a comprehensive global baseline of sustainability disclosures designed to meet the information needs of investors in assessing enterprise value. The ISSB is working closely with other international organisations and jurisdictions to support the inclusion of the global baseline into jurisdictional requirements.

The ISSB is seeking feedback on the proposals over a 120 day consultation period closing on 29 July 2022. It will review feedback on the proposals in the second half of 2022 and aims to issue the new Standards by the end of the year, subject to the feedback.

The proposals have been developed in response to requests from G20 leaders, the International Organisation of Securities Commissions (IOSCO) and others for enhanced information from companies on sustainability-related risks and opportunities. The proposals set out requirements for the disclosure of material information about a company’s significant sustainability-related risks and opportunities that is necessary for investors to assess a company’s enterprise value.

Later this year, the ISSB will consult on its standard-setting priorities. This consultation will include seeking feedback on the sustainability-related information needs of investors when assessing enterprise value and on further development of industrybased requirements, building on SASB Standards, which address a broad range of sustainability matters. The ISSB has also set out its plan for how its work will build on the SASB Standards and industry-based standard-setting processes.

Emmanuel Faber, Chair of the ISSB, said: ‘Rarely do governments, policymakers and the private sector align behind a common cause. However, all agree on the importance of high-quality, globally comparable sustainability information for the capital markets. These proposals define what information to disclose, and where and how to disclose it. Now is the time to get involved and comment on the proposals.’

IFRS Sustainability Disclosure Standards are intended to provide a global baseline and to be compatible with jurisdiction-specific requirements, including those intended to meet broader stakeholder information needs. The ISSB’s Press Release is www.ifrs.org.

UK AND IRELAND

FRC publishes a three year plan and takes further steps towards ARGA

The Financial Reporting Council (FRC) has published its three year plan which sets out the FRC’s progress towards establishing the new Audit, Reporting and Governance Authority (ARGA).

The plan follows the government’s 2021 consultation ‘Restoring trust in audit and corporate governance’, which moved the FRC closer to its aim of becoming ARGA. Respondents to the FRC’s consultation expressed continued support for the establishment of ARGA.

The plan comprises a detailed breakdown of the FRC’s intended expenditure for 2022-23, and a summary of expected costs and headcount for the following two years. To support the FRC’s plan and act in the public interest the FRC’s core objectives are to:

● set high standards in corporate governance and stewardship, corporate reporting, auditing and actuarial work, and assess the effectiveness of the application of those standards, enforcing them proportionately where it is in the public interest;

● promote improvements and innovation in the areas for which it is responsible, exploring good practice with a wide range of stakeholders;

● influence international standards and share best practice through membership of a range of global and regional bodies and incorporate appropriate standards into the UK regulatory framework;

● promote a more resilient audit market through greater competition and choice; and

● transform the organisation into a new robust, independent, and highperforming regulator, acting in the public interest.

The FRC’s CEO Sir Jon Thompson said: ‘In the three years since Sir John Kingman’s review of the FRC, we have made significant progress implementing those recommendations within our power to ensure better outcomes for stakeholders who rely on high quality audit, reporting and corporate governance. As we continue to lay the groundwork for ARGA it is pleasing to see the continued level of support from our stakeholders for the FRC’s current plan.’

New Audit Firm Governance Code published

The Financial Reporting Council (FRC) has published a new Audit Firm Governance Code for the Big Four audit firms and firms that audit FTSE 350 companies and significant numbers of public interest entities (PIEs).

The new Code is a result of the findings of a monitoring programme undertaken by the FRC, which identified scope to further strengthen its oversight and governance and to align the provisions of the Code with operational separation for the Big Four firms.

It separates the roles of the board chair and senior partner/chief executive, clarifies the role played by partnership boards in holding management to account and introduces criteria for board composition, reinforcing the position of independent non-executives within audit firms. For the largest audit firms, it sets out a clearer distinction between the role of independent non-executives and audit non-executives. The new Code also more closely aligns with the UK Corporate Governance Code, emphasising the importance of long-term sustainability, culture and employee engagement.

EUROPE

European Supervisory Authorities see recovery stalling amid existing and new risks

The three European Supervisory Authorities (ESAs) – the European Banking Authority (EBA), European Insurance and Occupational Pensions Authority (EIOPA) and European Securities and Markets Authority (ESMA) – issued their first joint risk assessment report for 2022. The report highlights the increasing vulnerabilities across the financial sector, as well as the rise of environmental and cyber risks.

Russia’s invasion of Ukraine and its economic consequences have aggravated the outlook for growth and inflation and brought heightened market volatility. Market resilience will critically depend on the ability of markets and financial institutions to deal with the economic consequences of the Russian invasion of Ukraine, and to withstand changes in public policy support on the monetary or fiscal side without material disruptions.

Some of the risks emerging during 2021 and highlighted in the report were amplified by Russia’s invasion of Ukraine. The EU economy was on track for a strong recovery from the crisis caused by the Covid-19 pandemic and the financial sector largely proved resilient. However, the recovery appears to have been hindered by new waves and variants of the virus, concerns regarding inflation risk, rising commodity prices and heightened geopolitical risks.

Additional vulnerabilities and risks for the financial system have built up over time. Financial markets remain vulnerable to changes in market sentiment, particularly if financial conditions tighten unexpectedly due to inflation pressures. In the real estate sector, persistent price increases and higher borrowing by households have increased risks. At the same time, the financial sector is increasingly exposed to environmental risks and risks stemming from digitalisation. In light of the risks and uncertainties, the ESAs advise national competent authorities, financial institutions and market participants to take the following policy actions:

1. Financial institutions should be prepared for further potential negative implications stemming from geopolitical tensions and ensure compliance with the sanctions regimes put in place both at the EU and at global levels.

2. Financial institutions and supervisors should prepare for a possible deterioration of asset quality in the financial sector.

3. The impact of further increases in yields and sudden reversals in risk premia on financial institutions and investors should be closely monitored.

4. Retail investors are of particular concern, and supervisors should monitor risks to retail investors seeing that their participation in financial markets has increased substantially in recent years.

5. Financial institutions should further incorporate ESG considerations into their business strategies and governance structures.

6. Considering the elevated level and frequency of cyber incidents, financial institutions should strengthen their cyber resilience and prepare for a potential increase in cyberattacks.

EFRAG publishes recommendations and feedback on its crypto-assets discussion paper

In July 2020, the European Financial Reporting Advisory Group (EFRAG) published a discussion paper ‘Accounting for crypto-assets (liabilities): holder and issuer perspective’. The discussion paper provided possible approaches to address the gaps in crypto-assets (liabilities) requirements. EFRAG has now reviewed the feedback received and derives recommendations for the IASB.

Based on the feedback received, EFRAG recommends clarifying or amending existing standards using a two-step approach. As a first step, EFRAG recommends addressing the accounting requirements for holders of crypto-assets by amending IAS 38 ‘Intangible assets’ to allow measuring crypto-assets or other intangibles within the scope of the standard at fair value through profit and loss and to develop disclosure requirements for issuers.

As a second step EFRAG considers that it is important to also address issuer accounting in more detail and determine the appropriate accounting requirements for issuers, given the challenges that arise from the ambiguity on the nature of rights and obligations associated with the issuance of the novel and fast-moving crypto transactions.

UNITED STATES

FASB expands disclosures and improves accounting related to the credit losses standard

The Financial Accounting Standards Board (FASB) has issued an Accounting Standards Update (ASU) intended to improve the decision usefulness of information provided to investors about certain loan refinancings, restructurings and write-offs.

During the FASB’s PIR of the credit losses standard, including a May 2021 roundtable, investors and other stakeholders questioned the relevance of the troubled debt restructuring (TDR) designation and the decision usefulness of disclosures about those modifications.

Some noted that measurement of expected losses under the current expected credit loss model already incorporates losses realised from restructurings that are TDRs; and that relevant information for investors would be better conveyed through enhanced disclosures about certain modifications.

The amendments in the new ASU eliminate the accounting guidance for TDRs by creditors that have adopted current expected credit loss while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors made to borrowers experiencing financial difficulty.

The disclosure of gross write-off information by year of origination was cited by numerous investors as an essential input to their analysis. To address this feedback, the amendments in the new ASU require that a public business entity disclose current-period gross write-offs by year of origination for financing receivables and net investment in leases.

The ASU, including information on effective dates, is available at www.fasb.org.

FASB improves and expands hedge accounting

The Financial Accounting Standards Board (FASB) has issued an Accounting Standards Update (ASU) intended to better align hedge accounting with an organisation’s risk management strategies.

‘The expanded hedge accounting method better reflects the effects of risk management activities in the financial statements and provides investors and other allocators of capital with more transparent, decision-useful information around an entity’s use of derivatives,’ stated FASB Chair Richard R. Jones.

In 2017, the FASB issued a new hedging standard to better align the economic results of risk management activities with hedge accounting. That standard increased transparency around how the results of hedging activities are presented, both on the face of the financial statements and in the footnotes, for investors and analysts when hedge accounting is applied.

One of the major provisions of that standard was the addition of the lastof-layer hedging method. For a closed portfolio of fixed-rate prepayable financial assets or one or more beneficial interests secured by a portfolio of prepayable financial instruments, such as mortgages or mortgage-backed securities, the lastof-layer method allows an entity to hedge its exposure to fair value changes due to changes in interest rates for a portion of the portfolio that is not expected to be affected by prepayments, defaults and other events affecting the timing and amount of cash flows.

The ASU expands the current singlelayer method to allow multiple hedged layers of a single closed portfolio under the method. To reflect that expansion, the last-of-layer method is renamed the portfolio layer method.

Additionally, the ASU:

● expands the scope of the portfolio layer method to include nonprepayable assets;

● specifies eligible hedging instruments in a single-layer hedge;

● provides additional guidance on the accounting for and disclosure of hedge basis adjustments under the portfolio layer method; and

● specifies how hedge basis adjustments should be considered when determining credit losses for the assets included in the closed portfolio.

The ASU applies to all entities that elect to apply the portfolio layer method of hedge accounting. For public business entities, the ASU is effective for fiscal years beginning after 15 December 2022, and interim periods within those fiscal years. For all other entities, the ASU is effective for fiscal years beginning after 15 December 2023 and interim periods within those fiscal years. Early adoption is permitted.

The ASU is available at www.fasb.org.