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Technical
InTERnATIOnAL
The International Federation of Accountants (IFAC) has released updates to two previously published international standard support resources: ● Agreed-Upon Procedures (AUP)
Engagements: A Growth and
Value Opportunity (the AUP
Publication):This describes AUP engagements, when they are appropriate, and identifies key client benefits. It also covers AUP engagements on financial and non-financial subject matters, and provides six short case studies with example procedures that might be applied and two illustration AUP reports from ISRS 4400 (Revised). ● Choosing the Right Service:
Comparing Audit, Review,
Compilation, and Agreed-
Upon Procedures Services (the Brochure):This explains and differentiates the range of audit, review, compilation and AUP services which practitioners can provide in accordance with relevant international standards. Itcan help current and prospective clients to understand the range of services available, when they are appropriate, as well as their benefits.
Both these resources have beenupdated to reflect the International Standard on Related Services 4400 (Revised),AgreedUpon Procedures Engagements, which was approved by theInternational Auditing and Assurance Board (IAASB)earlier this year and is effective for AUP engagements for which the terms of engagement are agreed on or after 1 January 2022. The demand for AUP engagements continues to grow as a broad range of stakeholders, such as regulators, funding bodies and creditors, use AUP reports for a variety of reasons. Flexibility is a key benefit of AUP engagements, as they can be tailored to different circumstances and focused on individual items of financial or nonfinancial subject matters.
One of IFAC’s three strategic objectives is contributing to and promoting the development, adoption and implementation of high-quality international standards. There are numerous additional guidance and support resources available on the dedicated “Supporting International Standards” section of the IFAC Knowledge Gateway.
InTERnATIOnAL
IFAC welcomes a new report on climate-related financial disclosure
IFAC applauds the publication of “Reporting on enterprise value, illustrated with a prototype climaterelated financial disclosure standard”, a new report from leading sustainability and integrated reporting organisations CDP, CDSB, GRI, IIRC and SASB.
The report represents another milestone in the journey to enhancing corporate reporting, and stands to advance the dialogue between companies and their investors and stakeholders through reporting of sustainability-related information.
In September 2020, IFAC published The Way Forward, a call for the creation of an international sustainability standards board.
Earlier this month, IFAC issued its response to the IFRS Foundation Consultation Paper on Sustainability Reporting, where it reiterated its view that the IFRS Foundation should establish a new sustainability standards board alongside the IASB, in order to focus on reporting requirements that address enterprise value creation, and to deliver at speed by leveraging the expertise and standards that already exist as a result of work that has been conducted by the CDP, CDSB, GRI, IIRC and SASB, as well as the TCFD.
The report not only provides a valuable starting point for this IFRS initiative, but also clearly demonstrates the collaborative intent and effort of these organisations – now and going forward.
IFAC encourages its members and stakeholders to respond to the IFRS Consultation Paper by 31 December. IFAC will continue to speak out on behalf of the global accountancy profession in support of a global solution for reporting sustainability information.
IFAC responds to IFRS Foundation Sustainability Reporting Consultation
The International Federation of Accountants (IFAC) has submitted its response to the IFRS Foundation’s Consultation Paper on Sustainability Reporting, issuing a resounding “yes” to the question of whether an international sustainability standards board is needed to lead a coherent global system of interconnected corporate reporting that will rationalise the current fragmented ecosystem for sustainability information.
Reiterating the themes of its September 2020 call-to-action, Enhancing Corporate Reporting: The Way Forward, IFAC calls for the creation of the new board alongside the IASB under the IFRS Foundation. The proposed board would address the urgent and growing demand from investors, policy makers and regulators for a reporting system that delivers consistent, comparable, reliable and assurable information relevant to enterprise value creation, sustainable development and evolving stakeholder expectations. “This is a significant opportunity to bring new relevance to professional accountants’ work in corporate reporting and assurance and will advance the public interest,” said IFAC CEO Kevin Dancey.
“The accountancy profession must continue to play an active role in helping companies, economies and societies achieve a more sustainable future, made all the more urgent due to the climate emergency. IFAC stands ready to engage with the IFRS Foundation, as well as our member organisations and other stakeholders, to ensure the success of this important initiative.”
IFAC encourages its members and other stakeholders to review its response and engage in this important conversation with the IFRS Trustees.
The International Federation of Accountants released their latest “Point-of-View” (POV): Embracing a People-centred Profession.
The new publication explores the connection between the people in the accountancy profession, the core components of the profession (education, professional judgment, ethics, values) and the profession’s commitment to the public interest.
“Our new POV focuses on the human aspect of our profession,” said Kevin Dancey, IFAC CEO. “Through this lens, we address issues such as gender equality, diversity (both of individuals and skills), work-life balance, mental health, and lifelong learning.
“While many of the views expressed are not new, IFAC believes it is important to set out a clear message as the global voice of the accountancy profession.”
In the POV, IFAC offers insights and guidance on how firms, organisations and PAOs can better understand and appreciate the benefits and challenges of a profession made up of individuals.
IFAC also examines the relationship between a strong focus on “human capital” and the ability to attract, challenge and retain talented people throughout their careers.
“Events like the Covid-19 pandemic remind us that ours is a profession powered by individuals,” Dancey continued. “Individuals with their own talents, backgrounds, aspirations and challenges. Recognising and appreciating the individual characteristics of professional accountants helps foster an environment where trust and judgment can thrive, and it is fundamental to the continued relevancy of the profession.”
IASB reviews package of IFRS Standards for group accounting
The International Accounting Standards Board (Board) is calling for feedback on the IFRS Standards for group accounting – IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements and IFRS 12 Disclosure of Interests in Other Entities.
The Request for Information has been published as part of the Postimplementation Review (PIR) of these Standards.
PIRs are carried out to assess the effects of a new Standard after companies have applied the requirements for some time.
IFRS 10 sets out requirements for the preparation of group – consolidated – financial statements; IFRS 11 addresses how to account for interests in joint arrangements; and IFRS 12 sets out the information to be disclosed in the notes to the financial statements about interests in other companies.
These IFRS Standards have been effective for annual reporting periods beginning on or after 1 January 2013.
The Request for Information seeks feedback on applying the Standards and on the information provided to users of financial statements.
The Board will use the feedback on the Request for Information to determine whether any further action is required.
Hans Hoogervorst, Chair of the International Accounting Standards Board, said: “Post-implementation reviews are an opportunity to check that our Standards do the job they were intended to do. I encourage all stakeholders to help us in the process by providing relevant feedback.”
Further information about postimplementation reviews can be found in the Due Process Handbook.
The deadline for comments is 10 May 2021.
UK AnD IRELAnD
UK-adoption of Amendments for IBOR Phase 2 and Amendments to IFRS 4
The Secretary of State for Business, Energy and Industrial Strategy (BEIS), in exercise of the powers conferred by statutory instrument 2019/685*, adopted on 5 January 2021, the following amendments to international accounting standards for use within the United Kingdom:
1. Interest Rate Benchmark Reform – Phase2 (Amendments to IFRS9, IAS39, IFRS7, IFRS4 and IFRS16) The Amendments are effective for annual periods beginning on or after 1 January 2021, with early application permitted.
The Amendments focus on the effects on financial statements when an entity replaces the old interest rate benchmark with an alternative benchmark rate as a consequence of the global regulatory reform of key interbank offered rates (IBORs).
2. Extension of the temporary exemption from applying IFRS9 (Amendments to IFRS4) The Amendments extend the expiry date of the temporary exemption from applying IFRS 9 Financial Instruments from 1 January 2021 to 1 January 2023, to align the effective dates of IFRS 9 with IFRS 17 Insurance Contracts for entities within the scope of the exemption. *The International Accounting Standards and European Public LimitedLiability Company (Amendment etc.) (EU Exit) Regulations 2019, No. 685, regulation 6(1).
FRC launches consultation to revise UK quality management standards
The Financial Reporting Council (FRC) has launched a consultation on the proposed revision of the standards for an audit firm’s responsibilities to design, implement and operate a system of quality management.
The FRC proposes to adopt: ● International Standard on Quality
Management (UK) 1 “Quality
Management For Firms That Perform
Audits Or Reviews Of Financial
Statements, Or Other Assurance Or Related Services Engagements”; and ● International Standard on Quality
Management (UK) 2 Engagement
Quality Reviews.
It also proposes to revise International Standard on Auditing (UK) 220 (Revised 2021) Quality Control For An Audit Of Financial Statements, to reflect recent revisions to the international standards on auditing issued by the International Auditing and Assurance Standards Board (IAASB).
The changes introduce a new quality management approach that is focused on proactively identifying and responding to risks to quality. This new approach requires a firm to customise the design, implementation and operation of its system of quality management based on the nature and circumstances of the firm, using an integrated approach that reflects upon the quality management system as a whole. The FRC has strongly supported the IAASB’s work.
When finalised, the quality management standards are proposed to be effective, in line with the international standards, for audits of financial statements for periods beginning on or after 15 December 2022. The early adoption of these revised standards is strongly encouraged.
The FRC is not proposing to add any new UK requirements, given that the IAASB has sufficiently addressed matters raised by the FRC in its comment letter on the IAASB’s Exposure Draft.
The FRC is at the same time consulting on conforming amendments to other UK standards.
The consultation runs until Friday 19 March.
Amendments to accounting standards: UK exit from the EU and IBOR Phase 2
The Financial Reporting Council (FRC) has issued “Amendments to UK and Republic of Ireland accounting standards – UK exit from the European Union”.
The amendments update UK and Republic of Ireland accounting standards for changes in legislation following the UK’s exit from the European Union that come into effect at the end of the Transition Period.
The amendments are limited to those necessary to ensure consistency with UK company law and largely update legal references and terminology used in the standards. The effective date for the amendments is accounting periods beginning on or after 1 January 2021, with early application permitted for UK entities in certain circumstances.
The FRC has also issued “Amendments to FRS 102 – Interest rate benchmark reform (Phase 2)”. These amendments respond to the financial reporting issues arising from interest rate benchmark reform, and are intended to adapt and simplify accounting requirements in that context and provide disclosure of the nature and extent of the risks arising, thereby minimising reporting costs for entities applying FRS 102 and enabling them to provide useful information to the users of their financial statements.
The amendments are effective for accounting periods beginning on or after 1 January 2021, with early application permitted. 30 FRC’s response to its recent consultation on Technological Resources: Usingtechnology to enhance audit quality
The Financial Reporting Council (FRC) has published its response to its recent consultation, Technological Resources: Using technology to enhance audit quality.
The FRC’s response incorporates discussion of responses received, as well as discussion of other matters that have arisen throughout additional outreach and engagement with stakeholders.
Almost all respondents to the consultation agreed that the use of technology could significantly improve audit quality, when deployed at the right time in the audit process and, crucially, by those with the right training. Respondents also agreed that, whilst additional application material and guidance would be beneficial, the current assurance model and audit standards do not themselves represent a significant impediment to the development and deployment of technology in audit.
Training and skill sets were identified as many respondents’ primary concerns. A significant majority of respondents saw the recruitment of staff members with the right skill sets, alongside the development of appropriate training for current staff (both trainees and experienced), as a priority.
Where a consensus around a specific action that the FRC can take to address concerns has been identified, or where the FRC has determined that no action is currently necessary, this has been laid that out within the individual sections of the paper.
Given the almost constantly evolving landscape in this area, conversations about the relationship between technology and audit are ongoing. The FRC’s response captures current thinking on the present and future of technology in audit, but further discussion is still required in many areas.
This response will serve as a foundation for discussions about the role of the regulator in relation to the use of technological recourse in audit, be that enhancing relevant standards, influencing international standard setters, developing guidance on select topics or clearly communicating expectations regarding the use of technology. Snapshot of IAASA’s financial reporting enforcement activities in 2020
The Irish Auditing and Accounting Supervisory Authority (IAASA) has published summary information of its financial reporting enforcement activities undertaken during 2020. The Snapshot document may be accessed on the IAASA website at www.iaasa.ie.
The primary role of IAASA’s accounting enforcement activity is to examine the financial reports of the 91 listed entities which fall within its remit for compliance with accounting standards.
In 2020, IAASA examined 47 annual and half-yearly financial statements and also secured 82 undertakings from companies to improve their financial reporting in future years. IAASA published financial reporting related papers in 2020 including two compendia of financial reporting decisions.
Following public consultation, IAASA issues revised versions of Ethical Standard for Auditors (Ireland) and International Standards on Auditing (Ireland)
Following public consultation, the Irish Auditing and Accounting Supervisory Authority (IAASA) has issued revised versions of: ● the Ethical Standard for Auditors (Ireland); ● certain International Standards on Auditing (Ireland) and the
International Standard on Quality Control (Ireland) 1; and ● the Glossary of Terms, which defines the terms used in the Irish auditing framework.
The main changes to the standards, which are designed to improve audit quality and enhance public confidence in audit in Ireland, are summarised in the feedback statement.
IAASA recognises that this is a challenging time due to the impact of Covid-19 and that working arrangements have changed significantly in recent months. Therefore, the revised standards are effective for audits of financial statements for periods beginning on or after 15 July 2021, with early adoption permitted.
EUROPE
ESMA issues Public Statement “Disclosures of significant accounting policies and significant judgements related to the third series of Targeted Longer-Term Refinancing Operations (TLTRO III)”
The European Securities and Markets Authority (ESMA) has published a Public Statement calling for greater transparency regarding the financial reporting treatment of the ECB’s Targeted Longer-Term Refinancing Operations in the IFRS financial statements of banks.
ESMA has observed that there is diversity in practice regarding the treatment of the TLTRO III refinancing transactions in banks’ financial statements. The observed diversity relates to: ● the banks’ assessment as to whether: ● the transactions involve belowmarket interest rate borrowings and, if so, whether the advantage of the below-market rate of interest needs to be accounted for under IFRS 9 Financial Instruments or IAS 20 Accounting for Government Grants and Disclosure of Government Assistance; ● the changes in estimates of payments due to revised assessment of meeting the eligibility criteria shall be accounted for in accordance with paragraph B5.4.6 of IFRS 9; and ● the calculation of the applicable effective interest rate.
ESMA emphasises the importance of banks providing an adequate level of transparency regarding the financial reporting treatment of these transactions in their financial statements. In particular, ESMA recommends that the impacted banks provide: ● entity-specific disclosures of the significant accounting policies; and ● the significant judgements and assumptions related to the TLTRO III transactions;
as required by paragraphs 117 and 122 of IAS 1 Presentation of Financial Statements and by paragraph B5 of IFRS 7 Financial Instruments: Disclosures. EU consults on insolvency laws: increasing convergence of national laws to encourage crossborder investment
The current initiative aims to address major discrepancies in national substantive insolvency laws of the member states. These discrepancies were recognised as obstacles for the establishment of a well-functioning Capital Markets Union. The issue at hand is corporate insolvency (i.e. nonbank insolvency), including companies, partnerships and entrepreneurs. More efficient and predictable insolvency frameworks and enhanced confidence in cross-border financing would help to strengthen capital markets in the Union. The initiative is complementary to the Directive on Restructuring and Insolvency, and – consequently – focuses on aspects of insolvency laws that were not addressed there. This public consultation will contribute to this process by gathering the perception and views of Europeans on a range of issues including: ● the liability and duties of directors of companies in the vicinity of insolvency; ● the status and duties of insolvency practitioners; ● the ranking of claims; ● avoidance actions; ● identification and preservation of assets belonging to the insolvency estate; and ● core procedural notions.
ASIA PACIFIC
Singapore listed companies made good progress in adopting best practices relating to audit committees
The latest study on audit committees (ACs) found that listed companies in Singapore have made progress in adopting corporate governance best practices. To build on the progress made, the study also highlighted areas for further improvement.
Audit committees play an important role in ensuring the integrity of companies’ financial reporting. By adopting the best practices in corporate governance, the ACs will enhance the governance and oversight of the company’s corporate reporting function.
The Accounting and Corporate Regulatory Authority (ACRA), the Institute of Singapore Chartered Accountants (ISCA), Singapore Exchange Regulation (SGX RegCo) and Singapore Institute of Directors (SID) have commissioned the Singapore Institute of Technology (SIT) to conduct a study on the profile of ACs of listed companies in Singapore. There were similar studies conducted in 2009, 2011 and 2015.
The 2020 study covers the ACs of 650 listed companies in Singapore comprising 1,539 individuals serving as AC chairmen and members. Led by Professor Ho Yew Kee, the study team gathered data from the annual reports published by the companies for 2019 and information provided by DC Frontiers Pte Ltd. The study team also surveyed 126 respondents and held focus group discussions and conducted individual interviews to gain further insights on the role of ACs.
Key Findings The 2020 study presents an improvement in companies’ practices to raise the effectiveness of ACs. Some areas would benefit from further strengthening. The key findings include: ● The proportions of AC chairmen and members who held four or more
AC positions have dropped to 4% and 1% respectively, as compared to 5% and 2% when the study was last conducted in 2015. A majority of 1,539 unique individuals who served in ACs sat on one AC, either as a chairman (76%) or a member (84%). Holding fewer AC positions allows individuals to dedicate time to discharge their oversight role. ● The number of executive directors in ACs had dropped to 24 in 2020, from 38 in 2015 study. This represents progress towards the standard under the Singapore Code of Corporate Governance (2018) (the
CG Code) which recommends for all
AC members to be non-executive. ● The proportion of women directors in ACs increased to 11% in 2020 from 8% in 2015. While gender is one aspect of diversity, listed companies are also encouraged to consider other characteristics such as experience, age and social background to enhance board/AC diversity in line with the principles of the CG Code. ● 33% of AC chairmen and 26% of
AC members have served in the same ACs for more than 10 years, increasing from 21% and 18% in the previous study in 2015.
To strengthen the diversity and independence of their boards, from 1 January 2022, directors who have served more than nine years will be deemed as non-independent under the
SGX Listing Rules, unless their appointments have been approved via a two-tier voting process of shareholders. Listed companies are encouraged to start preparing for the new requirements now. ● 94% of the companies have at least one financially-trained member in their ACs, comparable to the previous study in 2015. The CG Code recommends at least two members, including the AC Chairman, to be financially-trained. ● A vast majority (98%) of the ACs had the requisite of minimum three AC members – the same as the previous study in 2015. The Companies Act and CG Code require at least three members in the AC. ● Almost half (48%) of the survey respondents ranked “going concern and liquidity” as their top concern, alongside impairment of asset values and internal controls. Their areas of concern are consistent with ACRA’s guidance on the proposed areas of review by directors for 2020 financial statements. ● 90% of the survey respondents said that issues covered by ACs had expanded over time, to include areas such as risk management and cybersecurity. 78% of the survey respondents also indicated that ensuring the integrity of the financial reporting had required 10% to 50% more time due to the Covid-19 pandemic.
The findings in the report are encouraging as they show that ACs are stepping up their game. Together with the new listing rules on the appointment of a second auditor and the mandating of Singapore-registered auditors, this will support the effective functioning of Singapore’s capital market and further enhance confidence and trust.
UnITED STATES
FASB clarifies scope of recent reference rate reform guidance
Standards Update (ASU) that clarifies the scope of the FASB’s recent reference rate reform guidance.
In March 2020, the FASB issued guidance aimed at easing the potential accounting burden expected when global capital markets move away from the London Interbank Offered Rate (LIBOR), the benchmark interest rate banks use to make short-term loans to each other.
That guidance, known as Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, provided temporary, optional expedients and exceptions for applying accounting guidance to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued.
Some stakeholders have questioned whether Topic 848 can be applied to derivative instruments that do not reference a rate that is expected to be discontinued but that use an interest rate for margining, discounting or contract price alignment that is modified as a result of reference rate reform. These stakeholders indicated that the modification, commonly referred to as the “discounting transition,” may have accounting implications, and raised concerns about the potential need to reassess previous accounting determinations related to those derivatives and about the possible hedge accounting consequences of the discounting transition.
The amendments in the new ASU clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition.
The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition.
The ASU is available at: www.fasb.org.
FASB proposes accounting alternative to the goodwill triggering event assessment for certain private companies and organisations
Accounting Standards Update (ASU) intended to provide an accounting alternative that would reduce the complexity for certain private companies and not-for-profit organisations when performing the goodwill triggering event evaluation. Stakeholders are encouraged to review and to provide comments to the FASB on the proposed ASU by 20 January 2021.
Under current GAAP, goodwill must be tested for impairment when a triggering event occurs that indicates that it is more likely than not that the fair value of the reporting unit is below its carrying value.
Companies and organisations are required to monitor for and evaluate goodwill triggering events as they occur throughout the year.
Some stakeholders raised questions about the value of evaluating a triggering event at an interim date when certain private companies and not-forprofit organisations only issue GAAPcompliant financial statements on an annual basis. They noted the cost and complexity of preparing interim balance sheets and projecting cash flows that, according to those stakeholders, may not be relevant at the annual reporting date when financial statements are issued.
To address this, the proposed ASU would introduce an accounting alternative that would allow private companies and not-for-profit organisations that only report goodwill (or accounts that would be affected by a goodwill impairment such as retained earnings and net income) on an annual basis to perform a goodwill triggering event assessment, and any resulting test for goodwill impairment, on the annual reporting date only.
It would eliminate the requirement for companies and organisations that elect this alternative to perform this assessment during interim reporting periods, limiting it to the annual reporting date only.
The scope of the proposed alternative would be limited to goodwill that is tested for impairment in accordance with Subtopic 350-20, Intangibles – Goodwill and Other – Goodwill. The guidance would not be limited to a specified time period but would be available on an ongoing basis. No additional disclosures would be required.
The proposed ASU is available at www.fasb.org.
