November 2013



Breaking News UK − UK and international financial reporting developments

Welcome to Breaking News UK, a monthly bulletin from KPMG in the UK that brings you the need-to-know information on UK and international standards in the accounting and regulatory space. This bulletin is based on articles from KPMG IFRG Limited's Breaking News, which are available on the Global IFRS Institute site.

There are quick links above, giving you easy access to KPMG's Global IFRS Institute and past editions of Breaking News UK.

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FRC calls for action to improve disclosure

The FRC has issued a call for action for preparers and auditors to consider improving the quality of disclosures in the annual report. It believes that the guiding principle for annual reports as a whole to be fair, balanced and understandable is crucial to high quality financial reporting. In particular, the FRC recommends:

  • that disclosures focus on communication of relevant information to investors;
  • that boilerplate disclosures should be avoided, focusing instead on entity-specific disclosures; and
  • linking related information in order to ‘tell the story’ of a company.

This call for action reinforces the FRC’s drive towards encouraging companies to experiment and be innovative in the drafting of their annual reports. In August it issued its draft Guidance on the Strategic Report, which it hopes will act as a catalyst for companies to publish more relevant narrative reports.

The FRC's press release is available to download here.

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FRC aims to 'raise the bar' for going concern disclosure

The FRC has issued new proposals as part of its response to the recommendations of the Sharman Panel on going concern reporting. The new proposals would be incorporated into the FRC’s guidance on the application of the internal control and risk management aspects of the UK Corporate Governance Code (known as the Turnbull Guidance), also updated as part of these proposals, and would replace the 2009 Going Concern and Liquidity Risk: Guidance for Directors. Associated revisions to the UK Corporate Governance Code are proposed.

The new proposals replace those issued by the FRC in January 2013. Helpfully, the proposals now make a clearer distinction between the meaning of going concern for the purpose of “front end” narrative reporting and how it is applied for the purposes of the financial statements. They also make a clearer link between the assessment of solvency and liquidity risks and the broader risk assessment that should form part of a company’s normal risk management.

The proposals apply to entities applying the UK Corporate Governance Code (both mandatory and voluntary application). Additional guidance is provided for banks.

The consultation ends on 24 January 2014. The FRC intends to consult separately during 2014 on guidance for unlisted entities.

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FRC consults on executive remuneration

Now that the Government’s legislation on voting and reporting on executive remuneration has been finalised (SI 2013/1981), the FRC is consulting on whether to amend the UK Corporate Governance Code to address a number of issues relating to executive remuneration, i.e.:

  • clawback arrangements;
  • whether non-executive directors who are also executive directors in other companies should sit on the remuneration committee; and
  • what actions companies might take if they fail to obtain at least a substantial majority in support of a resolution on remuneration.

If changes to the Code are ultimately proposed, they will be subject to consultation in the first quarter of 2014. The new Code would then apply to accounting periods beginning on or after 1 October 2014.

The FRC's consultation document is available to download here.

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Financial Reporting Lab issues Reporting of Audit Committees

This report provides insight from companies and investors on effective approaches to audit committee reporting, including the content and the way information is presented. It has been released now in order that companies can benefit from its observations when drafting their audit committee reports for this calendar year.

Revisions to the UK Corporate Governance Code in October 2012 introduced requirements for audit committees to describe in more detail the work that they do. The Lab found that investors are keen to gain an understanding of the issues that have been the subject of the audit committee's focus for the year.

The Lab's report goes on to provide examples of what investors are looking for in this regard, including describing in more detail the actions taken by the audit committee rather than just the functions they serve.

The Financial Reporting Lab report is available to download here.

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Focus areas for regulators: the need for consistency and clarity

A recent statement issued by the European Securities and Markets Authority (ESMA) highlights the areas of focus for European national regulators when reviewing IFRS financial statements for the year ending 31 December 2013.

ESMA’s statement builds on its 2012 messages, specifically pointing out areas for improvement and emphasising a need for companies to focus on what is relevant to their financial statements. The statement stresses the need for transparency and the appropriate and consistent application of accounting principles, while providing detailed and relevant disclosures on the items that matter to the company and its investors.

Although the topics included in the statement are those deemed to be most relevant at a European level, regulatory bodies outside of Europe are also likely to take notice, and to pay particular attention to the same areas of focus.

ESMA is also about to publish a study on its assessment of IFRS financial statements of European financial institutions – watch this space for further details.

Read KPMG IFRG Limited's In the Headlines to find out more.

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Latest guidance on fair value measurement

Fair value measurement is an area of US GAAP and IFRS that is substantially converged. The respective standards establish a framework for measuring fair value and a fair value hierarchy based on the source of the inputs used to estimate fair value, and require disclosures about fair value measurements. They do not establish new requirements for when fair value is required or permitted, but provide guidance on how fair value is measured.

KPMG IFRG Limited has issued Fair Value Measurement - Questions and Answers, which focuses on fair value measurement, providing guidance on the application of the standards and highlighting the handful of differences between US GAAP and IFRS.

You can access a PDF copy here via the Global IFRS Institute.

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Financial Instruments – Boards make progress on major projects

The September meetings proved productive for the IASB’s and FASB’s financial instruments projects, as the Boards reached a number of decisions on classification and measurement and the impairment of financial assets.

The IASB made progress in refining the contractual cash flows assessment for financial assets, although some differences of view with the FASB emerged. The Boards reached tentative decisions on the meanings of ‘principal’ and ’interest’, contingent features, and prepayment and extension features.

The IASB also moved forward with clarifications to its proposed impairment model, reaching tentative decisions on assessing increases in credit risk and the definition of ‘default’. It then agreed to look at future possibilities for convergence with the FASB.

Read KPMG IFRG Limited's IFRS Newsletter – Financial Instruments for a summary of recent developments.

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Revenue – What to expect in the new standard

A number of problematic issues were resolved in October’s joint meeting between the IASB and the FASB. The Boards reached significant decisions on the revenue constraint, i.e. the measurement of revenue when there is variable consideration, licences of intellectual property and collectability.

These decisions mark the end of substantive redeliberations of the proposals published in the 2011 exposure draft Revenue from Contracts with Customers. The Boards have now directed staff to finish drafting the new standard and progress the remaining due process steps.

Read KPMG IFRG Limited's IFRS Newsletter: Revenue to find out what to find out what these developments could mean for your business.

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Worth waiting for? KPMG comments on insurance proposals

When the IASB and FASB each issued proposals for new insurance contracts standards in June, we labelled them ‘a new world for insurance’. Now, the Boards’ respective comment periods have closed – and KPMG has provided comments on their proposals.

Overall, we welcome the proposals, and although they would be complex to implement, they do respond to many aspects of constituent feedback on profit or loss volatility arising from short-term market fluctuations.

While we broadly agree with the principles in the revised proposals, we do have several areas of concern. Furthermore, we believe that the Boards should seek to resolve key remaining differences between their respective proposals, but not at the expense of a significant delay. Given the current diversity in accounting practice for insurers under IFRS, an insurance IFRS is urgently needed. 

KPMG’s comment letter setting out its view of the proposals is available to download here.

KPMG IFRG Limited's In the Headlines and New on the Horizon publications will help you to understand what the proposals might mean for your business.

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IFRS compared to US GAAP 2013

It was not so long ago that the mention of IFRS immediately conjured up thoughts of convergence with US GAAP. But today, the key words are ‘comparability’ and ‘consistency’. Comparability of information prepared under IFRS and US GAAP, rather than convergence of the two frameworks; and consistency of application and enforcement.

With respect to comparability, the differences between IFRS and US GAAP remain significant in many areas, and are of keen interest to the preparers and users of financial statements. Understanding these differences is part of the way to achieving consistency and comparability. With this in mind, KPMG IFRG Limited has published its latest edition of IFRS compared to US GAAP. An abridged overview version is also available that provides a high-level briefing for audit committees and boards.

You can access a PDF version of the overview on the Global IFRS Institute. If you wish to order hard copies of the books, please speak to your usual KPMG  contact.

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On the move – IFRS on your iPad

It’s easier now than ever to access our IFRS publications, through the KPMG Thought Leadership app for iPad.

The app brings you insight into the most pressing business and financial issues from a range of industries. You can download over 100 of our most recent IFRS publications to your bookshelf for offline reading, and add personal reading lists, bookmarks and annotations.

To find IFRS content within the app, go to Global/Audit/IFRS. Go to iTunes to download the free KPMG Thought Leadership app, or find out more at kpmg.com/app.

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