May/June/July 2012

Financial Reporting Update

Financial Reporting Council structure

The Financial Reporting Council (FRC) has taken direct responsibility for the development of UK accounting, auditing and actuarial guidance, along with professional monitoring and discipline matters.  This results in the demise of the Accounting Standards Board (ASB) and the Auditing Practices Board (APB), amongst others, along with the introduction of a number of committees to advise the FRC in these areas.  No policy changes are expected and all existing standards and guidance remain in force, although future guidance will be issued by the FRC rather than the previous operating boards. 

The revised FRC structure is now operational, with the FRC taking direct responsibility for the work completed by the previous UK accounting, auditing, actuarial and disciplinary boards.   The FRC will be supported by a new committee structure which will complete the detailed work of the previous boards.  Set out below is a summary of the various ongoing roles within the FRC’s remit, along with the previous and current bodies involved.

 There is no immediate change in the overall role of the FRC bodies as a whole, being to act as the UK’s independent regulator responsible for promoting high quality corporate governance and reporting, to foster investment. However, the FRC comments that the reforms will enable it to operate as a unified regulatory body, with enhanced independence from those it regulates, and a more proportionate range of sanctions.

Role Previous structure Current structure
Overall responsibility and strategic direction of the key decisions

FRC Board, although the functions were exercised principally by the operating bodies


FRC Board direct responsibility, taking advice from various committees as set out below
Development of guidance    
Develop accounting standards Accounting Standards Board/Urgent Issues Task Force Codes and Standards Committee advised by the Accounting Council

Develop and maintain standards and guidance for audit and assurance engagements


Auditing Practices Board

Codes and Standards Committee advised by the Audit and Assurance Council


Promote high standards of corporate governance through the UK Corporate Governance Code and the Stewardship Code


FRC and Committee on Corporate Governance Codes and Standards Committee
Actuarial policy:  Oversight of UK actuarial profession and setting of technical actuarial standards Board for Actuarial Standards Codes and Standards Committee advised by the Actuarial Council
Conduct and discipline    
Corporate reporting review (including powers regarding defective accounts) Financial Reporting Review Panel Conduct Committee and its sub-committee the Monitoring Committee, which will operate a Financial Reporting Review Group


The Urgent ssues Task Force (UITF) is being disbanded.  A new Committee will be formed to address all issues relating to UK accounting standards.  Until that time, the Accounting Council will deal with any issues that might be the subject of an FRC Abstract.

The role of audit quality monitoring previously completed by the Audit Inspection Unit will now be completed by an Audit Quality Review team overseen by the Conduct and Monitoring Committees.  The roles of the Accountancy and Actuarial Discipline Board and Professional Oversight Board are now the responsibility of the Conduct Committee supported by the Case Management Committee on discipline matters and the Monitoring Committee on oversight issues.

It is possible to subscribe for newsletters and alerts from the FRC by entering your email address on its home page.  Due to the website change, users who had previously subscribed will need to refresh their subscription.



Sharman Panel reports on going concern and liquidity

The FRC’s Sharman Panel has published its final recommendations, which focus on the disclosure of going concern risks as a means of demonstrating good governance and the need for longer-term assessments and more in-depth disclosures.  Other recommendations include the retention of the emphasis of matter paragraph in the auditor’s report.  The FRC will now determine when and how any changes could be implemented.

The FRC’s Sharman Panel (the Panel) has issued its final report and recommendations in response to the initial inquiry launched by the FRC in March 2011 to identify lessons for companies and auditors addressing going concern and liquidity risks. A preliminary report and recommendations were published in November 2011 (see November/December 2011 Update).

The Panel believes that the most important function of going concern disclosure is the demonstration of the economic and financial viability of the company and the directors’ stewardship.  To achieve this, the Panel recommends that narrative reporting setting out how the directors have concluded that the company is (or is not) a going concern should always be made, as part of the company’s discussion of its strategy and principal risks.  This would include both shorter term (and more quantitative) liquidity risks and longer term, more qualitative, solvency risks.  These disclosures would not form part of the audited accounts themselves but would be part of the narrative sections within the annual report. 

The Panel also recommends that the audit committee should be required to report on the effectiveness of the process undertaken by directors; the auditor would make an explicit statement as to whether they have anything to add or emphasise on the disclosures made by the directors.  This requirement would, however, be limited to those companies within the scope of the FRC’s eventual Effective Company Stewardship requirements.  The FRC is currently consulting on proposals which would limit these stewardship requirements to companies within the scope of the UK Corporate Governance Code – i.e., most listed companies.

In a change to the November 2011 draft recommendations, the final recommendations retain the auditor’s emphasis of matter paragraph.  The accounts would retain disclosure of material uncertainties and include the directors’ assessment of going concern risks. 

In addition, the Panel recommends that the FRC seeks to align descriptions of going concern within auditing and accounting standards, the UK Corporate Governance Code and the Listing Rules, and to engage with regulators and international standard setters where appropriate.  The Panel also recommends that the FRC should develop a process to learn lessons when significant companies fail or suffer distress but survive.


Proposal for single figure for remuneration

BIS is seeking to introduce a ‘single figure for remuneration’ as part of replacing the current directors’ remuneration requirements (as set out in the Companies Act 2006). It has enlisted the help of the FRC’s Financial Reporting Lab, which has issued a report on how a single figure might be measured and presented.

In June the Department for Business Innovation & Skills (BIS) issued a consultation paper, Directors' Pay: Consultation on Revised Remuneration Reporting Regulations, which is derived from responses to previous discussion papers on executive pay and narrative reporting.

As well as introducing a binding vote for shareholders over the framework for directors' pay, the government is seeking to increase transparency over directors' remuneration through the introduction of a 'single number for remuneration' as part of the replacement of the current Directors' Remuneration Report disclosure requirements in the Companies Act 2006.

In drafting the new disclosure requirements, BIS asked the FRC’s Financial Reporting Lab to undertake a project to seek views from the investment community as well as accounts preparers on how a single figure might be measured and presented.

The Lab’s report has concluded that a single figure on its own cannot provide the information required, but it did support the idea of having all the directors' remuneration information in one place. It also concluded that consistent presentation and measurement of the numbers included in the disclosures were key and might only be achieved through introducing precise definitions of the elements included in the 'single figure'.

The report discusses the key elements of the total remuneration number and its most useful presentation as well as its measurement basis, and also gives recommendations on how to supplement the numbers with appropriate narrative disclosures (particularly in the light of shareholders' demand for a presentation of the link between pay and performance).

The majority of the disclosures proposed by BIS are already required in existing legislation. However, additional disclosures are proposed, for example, regarding the company's policy on exit payments and a graph comparing the company’s performance with the chief executive officer’s pay. A number of changes to how certain elements of remuneration are measured are also proposed, for example, pension benefits and the allocation of long-term incentive benefits to respective periods.

The BIS consultation remains open for comments until 26 September 2012. The Lab’s report is available here


Agreement reached on way forward for lease accounting project

At their June 2012 meeting, the IASB and FASB agreed to proceed with the right-to-use model for lease accounting with a new proposal for two possible patterns of lease expense recognition – the straight-line model and the accelerated model – dependent on the extent of consumption of the asset over the lease term and whether the leased asset is classified as property.

The International Accounting Standards Board (IASB) and U.S. Financial Accounting Standards Board (FASB) announced in June 2012 that they have agreed an approach to the pattern of recognition of lease expenses which allows them to move forward on the leases project after a period of uncertainty on the project’s future.  The approach maintains the key objective of getting leases on balance sheet although the lessee’s expense to be recognised will either be straight-line or ‘accelerated’ depending on the extent of consumption of the underlying asset over the lease term, and whether the leased asset is classified as property or other assets.

All leases, other than those with a maximum term of twelve months, will be recognised on the balance sheet as a right-to-use asset and a financial liability with the initial measurement of the asset and liability based on the longest probable lease term.  

There are two possible patterns of expense recognition – the straight line model and the accelerated model.  The straight-line model adjusts the amortisation of the right-to-use asset and interest expense on the financial liability to achieve an annual constant lease charge similar to current operating lease accounting. The accelerated model reflects the front end loading effect of the interest expense similar to current finance lease accounting. 

For leases of property the straight-line model would be applied unless the lease term is for the major part of the economic life of the underlying asset or the present value of the fixed lease payments account for substantially all of the fair value of the underlying asset.  For leases of other assets the accelerated model would be applied unless the lease term is for an insignificant portion of the economic life of the underlying asset or the present value of the fixed lease payments is an insignificant portion of the fair value of the underlying asset.

Lessors would apply the same lease classification test as that for lessees and apply either a 'receivable and residual' model or an ‘operating lease’ model.  Under the ‘receivable and residual’ model the original underlying asset would be de-recognised and a lease receivable and a residual asset recognised.  Investment properties are now intended to be within scope for lessors, having been out of scope for much of the exposure draft discussions. However, given that property leases are generally not for a major part of the economic life of the underlying asset, the operating lease model would likely apply and this may have relatively little effect in practice. 

Overall approach
The approach reflects a compromise agreement reached by the IASB and FASB to move this project forward with all of the decisions remaining tentative whilst the full implications of these proposals continue to be worked through.  The press release acknowledged that some stakeholders hold the view that the income statement profile of all leases should be the same but the Boards felt that they could accept recognition on a straight-line basis only for those leases that conveyed a small percentage of the value of the asset to the lessee.  Questions that will need to be considered in the revised exposure draft include how the classification test will be applied and whether a clear distinction can be established between the two asset categories of property and other assets.  Concerns about the effect the proposals will have on debt levels, gearing and, for ‘other’ assets, front-end loading of the lease expense will continue. 

A formal re-exposure of the leasing proposals is now envisaged for the final quarter of 2012, with a new standard expected to be issued sometime in 2013.  The IASB and FASB’s press release is available here.  For further discussion and example calculations, please refer to our latest Leases newsletter.


Adopting the consolidation suite of standards: transition simplified

The IASB has issued amendments to the consolidation suite of standards (IFRSs 10 to 12) that should simplify transition for those entities that present one year of comparatives. The consolidation conclusion need now only be tested as at the start of the year in which IFRS 10 is first applied (i.e., 1 January 2013) and the requirement to disclose the impact of the change in accounting policy in the year in which the standards are adopted has been removed.

The IASB has issued Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in Other Entities: Transition Guidance (Amendments to IFRS 10, IFRS 11 and IFRS 12).

The amendments simplify the transition to these new standards and provide additional relief from disclosures that could have been onerous. These standards, including the amendments, are effective for annual periods beginning on or after 1 January 2013.

For entities that present one year of comparatives, the amendments:

  • simplify the transition process by requiring consolidation assessments to be made at the start of the year in which IFRS 10 is adopted rather than the start of the comparative period;
  • remove the requirements to disclose the impact of the change in accounting policy for the year in which the standards are adopted; and
  • require disclosures in respect of unconsolidated structured entities to be provided only prospectively.

For entities that provide additional comparatives on a voluntary basis, only the period immediately preceding the year of adoption of the standards needs to be restated.

For further information on these amendments, please refer to our global In the Headlines publication.



Amendments to IFRSs issued

The IASB’s 2009 to 2011 cycle of improvements amends five standards for annual periods starting on or after 1 January 2013. Earlier application is permitted.

The IASB has issued its Annual Improvements to IFRSs 2009 – 2011 Cycle to make ‘non-urgent but necessary’ amendments to IFRSs. With effect for annual periods beginning on or after 1 January 2013, the following amendments will apply (subject to EU endorsement):

IFRS 1 First-time adoption of International Financial Reporting Standards Repeated application of IFRS 1 An entity whose financial statements had previously omitted an explicit and unreserved statement of compliance with IFRS, having earlier complied, may now choose whether to apply IFRS 1 when presenting financial statements in accordance with IFRS again.
  Borrowing costs exemption Borrowing costs related to qualifying assets that were capitalised prior to transition to IFRS need not now be restated on transition. Borrowing costs incurred on or after the transition date should be accounted for in accordance with IAS 23 Borrowing costs.
IAS 1 Presentation of financial statements Comparative information beyond minimum requirements IAS 1 is amended to clarify that only one set of comparative information – the preceding period – is required in a complete set of financial statements. An entity may elect to present additional comparative information as long as that information is in accordance with IFRS and accompanied by related notes.

Presentation of opening statement of financial position and related notes

An opening statement (or third statement) of financial positions will now be required only if the change in accounting policy, retrospective restatement or reclassification is material. Notes to this opening statement are no longer required (except for those disclosures required under IAS 8 Accounting policies, changes in accounting estimates and errors). The opening statement of financial position is prepared as at the beginning of the preceding period, regardless of the earliest comparative period presented.
IAS 16 Property, plant and equipment Classification of servicing equipment Spare parts, stand-by equipment and servicing equipment that does not fall within IAS 16’s definition of property, plant and equipment should be accounted for in accordance with IAS 2 Inventories.
IAS 32 Financial instruments: presentation Income tax consequences of distributions IAS 32 is amended to clarify that IAS 12 Income taxes applies to income taxes arising from distributions to equity instrument holders and transaction costs of an equity transaction. IAS 12 generally requires tax consequences of distributions to equity holders to be recognised in profit or loss.
IAS 34 Interim financial reporting Segment assets and liabilities IAS 34 is amended to align disclosure requirements for segment assets and liabilities in interim reports with those set out in IFRS 8 Operating segments.


Further information on these amendments is available in our IFRS Newsletter: The Balancing Items.


News in Brief

Substantive enactment of 23% UK corporation tax rate
Further to the article in the March/April Update, substantive enactment of the revised UK corporation tax rate of 23 per cent took place on 3 July 2012. This new rate takes effect from 1 April 2013. For full and half year periods ending June 2012, there is no change to deferred tax balances, but the effect of this future rate change should be disclosed.

For periods ending on or after 3 July 2012, deferred tax balances should be re-calculated based on a rate of 23 per cent if the associated timing or temporary difference is expected to reverse at the lower rate.

FRC publishes update for directors of listed companies
The FRC has published An Update for Directors of Listed Companies: Responding to Heightened Country and Currency Risk in Interim Financial Reports. The aim of the update is to draw together a number of the more significant issues directors may consider when preparing interim reports. In particular, it highlights the importance of interim reports giving a balanced and understandable assessment of a company’s position and prospects in the current uncertain economic conditions.

The FRC’s update is available here.


FRC consults on executive remuneration
The FRC is to consult on whether to amend the UK Corporate Governance Code to address a number of issues relating to executive remuneration. It will consult on two proposals that the government has asked it to consider: 

  • to extend the Code’s existing provisions on claw-back arrangements; and
  • to limit the practice of executive directors sitting on the remuneration committees of other companies.

It will also seek views on whether companies should engage with shareholders and report to the market in the event that they fail to obtain at least a substantial majority in support of a resolution on remuneration. Further information on the FRC’s consultation is available here.


Latest EU endorsement activity
On 5 June 2012 the EU endorsed the amendments to IAS 19 Employee benefits and the amendments to IAS 1 Presentation of items of other comprehensive income.

The amendments to IAS 19 require immediate recognition of actuarial gains and losses in other comprehensive income (OCI), thus eliminating the corridor method. They also require net interest income or expense to be calculated using the discount rate used to measure the defined benefit obligation. The amendments are effective for annual periods beginning on or after 1 January 2013.

The amendments to IAS 1 are effective for annual periods beginning on or after 1 July 2012 and require that an entity present separately the items of OCI that may be reclassified to profit or loss in the future from those that would never be reclassified to profit or loss. The amendments also preserve the existing option to present the profit or loss and OCI in two statements.



2012 UK GAAP Checklist

Our bi-annual UK GAAP checklist for 2012 is now available for download from our web site or may be downloaded here.



IFRS newsletters and other publications

KPMG in the UK publishes Financial Reporting Matters, a short newsletter to alert you to key changes in UK and International Financial Reporting Standards and UK company law.  It is available for download here. Alternatively, you may subscribe by sending an email to Financial Reporting Matters.


KPMG IFRG Limited has published the following since the March/April 2012 Update, which are available on its web site at


IFRS Disclosure checklist – Interim financial reports (May 2012)
IFRS for Investment Funds, Issue 4 – Classification of financial assets and liabilities under IFRS 9 (May 2012)
IFRS Illustrative Condensed Interim Financial Report (May 2012)

KPMG IFRG Limited also publishes In the Headlines, which provide information in relation to new exposure drafts and standards issued by the IASB, as well as any other relevant developments affecting current and future IFRS reporters, including summaries of IASB meetings on a monthly basis.

In the Headlines Issue 6 – IASB/FASB update status of convergence projects
In the Headlines Issue 7 – Proposed guidance on accounting for levies - when to recognise a liability
In the Headlines Issue 8 – The subsequent measurement of NCI put liabilities
In the Headlines Issue 9 – Effective dates of IFRS 
In the Headlines Issue 10 – Increasing the value of auditor reporting
In the Headlines Issue 11 – Adopting the consolidation suite of standards



Financial Reporting Council structure »

Sharman Panel reports on going concern and liquidity »

Proposal for single figure for remuneration »

Agreement reached on way forward for lease accounting project »

Adopting the consolidation suite of standards: transition simplified »

Amendments to IFRSs issued »

News in Brief »

2012 UK GAAP Checklist »

IFRS newsletters and other publications »