Financial Reporting zone

Financial reporting briefs: July 2007

Andy Simmonds and Nick Anderson have been appointed members of the Accounting Standards Board. Both take up their membership from 1 September 2007.

Andy Simmonds is a Consultation Partner in the National Accounting and Audit department of Deloitte in London. His main responsibilities include advising audit partners on technical financial reporting issues. Among his other responsibilities, Andy is Chairman of the Financial Reporting Committee of the Institute of Chartered Accountants in England and Wales.

Nick Anderson is Head of Equity Research at Insight Investment (the asset manager of HBOS plc), overseeing a comprehensive team of analysts. Nick’s role involves him in considering the full range of financial reporting issues. Nick is also a member of the Corporate Reporting Users Forum.

12 July - Amendments to related party disclosures

The ASB has released a Financial Reporting Exposure Draft 41 (FRED 41) on the proposal to replace the UK’s FRS 8, concerning related party disclosures, with IAS 24. The proposals are designed to ensure consistency between company law and accounting standards. As it stands, FRS 8 defines a related party differently to both international accounting standards and relevant European Directive.

The definition of a related party will be expanded to include: parties with joint control over the entity, joint ventures in which the entity is a venturer, and post-employment benefit plans for the benefit of employees of an entity, or any entity that is a related party to that entity.

The FRED 41 proposals also concern materiality levels and disclosure exemptions as regarding related party transactions. The draft can be downloaded from the FRC website linked here. The deadline for comments is 19 October.

4 July - FRC appoints working group for auditor liability cap

At the request of market participants, the Financial Reporting Council (FRC) has announced the establishment of an independent working group to produce guidance on agreeing a liability cap for auditors of public companies.

The group will be chaired by Sir Anthony Colman, until recently a judge of the commercial court. It includes representatives of companies, investors, and the accountancy profession.

Under the Companies Act 2006, auditors are able to contractually negotiate a liability cap by an amount “that is fair and reasonable in all circumstances.” A separate agreement will be required for each year’s audit, and is subject to shareholder approval at a general meeting. The draft guidance will address the form such agreements will takes.

28 June - ASB interprets statement of principles for public benefit entities

The Accounting Standards Board (ASB) has issued an Interpretation explaining how its “Statement of Principles for Financial Reporting” applies to public benefit entities. Based on an Exposure Draft published in August 2005, the FRC stated the Interpretation responds to a number of issues raised.

“It is important that the principles of financial reporting are expressed so as to be easily applied to the public benefit sector,” said ASB chairman Ian Mackintosh. “This Interpretation will be of widespread interest internationally as well as in the UK.”

Public benefit entities are reporting entities whose primary objective is to provide goods or services for the general public or social benefit and where any risk capital has been provided with a view to supporting that primary objective rather than with a view to providing a financial return to equity shareholders.

27 June - Audit Inspection Unit publishes last old-style annual report

The Audit Inspection Unit has published its third annual report of audit quality for the year 2006/07. In an official overview, the Professional Oversight Board (POB), which oversees the AIU, said that audit quality in the UK was “fundamentally sound” subject to “the agreement of satisfactory action” by the firms inspected.

The report contains 21 recommendations to the profession. One area in which the AIU discovered no clear progress was in the quality of documentation on file to support key audit judgements (key audit judgements are considered central to a principles-based approach). However, the AIU also noted that “significant progress” had been made by all firms in addressing last year’s recommendations. Perhaps surprisingly, the implementation of IFRS proved to be a trouble-free area.

Acknowledging the added stresses of IFRS, Sir John Bourn, Chairman of the POB, said it had been a challenging year. “Notwithstanding this,” he added, “firms still have some way to go in reaching the standards we expect.”

The 2007 AIU annual report will be the last of its kind before the new “naming and shaming report” comes into practice next year (as reported by AccountingWeb here).

25 June - Strong support for stewardship-model of financial reporting

The European Financial Reporting Advisory Group (EFRAG), the Accounting Standards Board (ASB) and a number of other European standard-setters have published a brief paper advocating the rationale for including stewardship (or directors’ responsibility to shareholders) as a separate objective of financial reporting.

The paper is a challenge to proposals by the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) who published a similar paper last year which specified only one objective: that of “decision-usefulness” for allocating resources.

20 June - First-time implementation of IFRS for many UK AIM companies

As of 1st January, AIM parent companies incorporated in the UK were required to present accounts in accordance with IFRS, half-yearly reports included. This summer will be the first time many UK AIM companies will be preparing IFRS accounts.

The Financial Reporting Review Panel (FRRP) published reports on the interim accounts (found here) and annual accounts (found here) prepared by UK listed parent companies last year. The FRRP found evidence of recurring non-compliance in the presentation of the income statement, the allocation of items between the Statement of Changes in Equity, and the Statement of Recognised Income and Expense (SORIE), as well as the appropriateness of policies.

Guidance for auditors concerning first-time implantation of IFRS in the UK and Republic of Ireland may also be helpful and can be accessed here.

18 June - APB issues draft of a standard for investment reporting

The Auditing Practice Board (APB) has issued a draft of SIR 5000 for public comment. Entitled “Investment Reporting Standards applicable to public reporting engagements on financial information reconciliations”, comments are requested by 28th September 2007.

“This exposure draft addresses the one remaining public reporting engagement required of reporting accountants by the Listing Rules that has not been addressed by other SIRs,” said APB chairman Richard Fleck.

APB requests responses to the specific questions raised in the Invitation to Comment as well as comments on the Exposure Draft itself. Copies of the draft can be obtained from the FRC website.

14 June - SEC distributions to WorldCom fraud victims top $500m

SEC distributions to investor victims of the WorldCom Inc accounting fraud have now surpassed $500m. The Sarbanes-Oxley Act gave the SEC the ability to seek court approval to distribute civil money penalties to victims of securities fraud (prior to this the responsibility fell to the general fund of the US Treasury).

“In the last four years, through this and other SEC distributions, the Commission has returned nearly $2bn,” said SEC chairman Christopher Cox, “and I anticipate substantial additional distributions in the near future.”

The SEC obtained a $750m settlement in 2003 for WorldCom investors. $250 now remains, and will be disbursed pending final resolution in the court over any contested claims.