Conceptual and Regulatory Framework (Advanced)

The IFRS Foundation is the not-for-profit international body responsible for issuing IFRS standards globally. Its governance structure ensures international standard-setting is carried out with public oversight, technical expertise, and due process.

IFRS Foundation governance structure:

The IASB due process for new standards:

1. Research / agenda decision: identify potential project; staff papers; consultation
2. Discussion paper (optional): preliminary views; broad public consultation
3. Exposure Draft (ED): detailed proposals; minimum 90-day public comment period
4. Redeliberations: IASB considers comments; may issue revised ED
5. Final standard: published with Basis for Conclusions explaining decisions
6. Post-implementation review (PIR): typically 2-3 years after effective date; assess whether standard is achieving objectives

Key principles of due process:

• TRANSPARENCY: meetings webcast; papers published
• FULL CONSULTATION: minimum comment periods; outreach in different jurisdictions
• ACCOUNTABILITY: Trustees oversee; Monitoring Board provides public oversight
• EVIDENCE-BASED: research, field tests, cost-benefit analysis
• VOTING: 8 of 14 IASB members must approve a final standard

Recent IASB developments:

• IFRS 17 Insurance Contracts effective 2023 (replacing IFRS 4)
• IFRS 18 Presentation and Disclosure in Financial Statements (effective 2027 — replacing IAS 1)
• IFRS 19 Subsidiaries Without Public Accountability (reduced disclosures option)
• Multiple amendments to IAS 1, IAS 12, IAS 8, IFRS 16
• Sustainability standards via ISSB

UK adoption process:

• UK adopted IFRS for listed companies' consolidated accounts since 2005
• Post-Brexit (1 Jan 2021): UK has its own endorsement process via UK Endorsement Board (UKEB)
• UKEB reviews each new IFRS for UK applicability before mandatory adoption
• Generally has aligned with IASB but can deviate
• FRC oversees UKEB

UK financial reporting framework:

Key differences — IFRS vs FRS 102:

1. Revenue Recognition:

• IFRS 15: detailed 5-step model
• FRS 102: simpler approach, but FRS 102 was AMENDED in 2024 to ALIGN with IFRS 15 (effective from accounting periods beginning 1 January 2026)

2. Leases:

• IFRS 16: ALL leases on balance sheet (right-of-use asset + lease liability)
• FRS 102: lessees split between operating and finance leases (operating off-balance-sheet) — DIFFERENT from IFRS 16
• FRS 102 amended in 2024 — converging WITH IFRS 16 but with simplifications. Effective 2026.

3. Financial Instruments:

• IFRS 9: complex classification (amortised cost, FVOCI, FVTPL); business model + SPPI tests; expected credit losses
• FRS 102: simpler classifications; basic incurred loss model historically (now moving towards expected credit losses)

4. Goodwill:

• IFRS 3: NO AMORTISATION; impairment testing only (annual)
• FRS 102: SYSTEMATIC AMORTISATION over useful life (default 10 years if not reliably estimable)
• Significant difference — IFRS may have higher goodwill on the balance sheet for longer

5. Investment Property:

• IAS 40: choice of cost or fair value model
• FRS 102: fair value model REQUIRED (where reliably measurable)

6. Retirement Benefits (Defined Benefit):

• IAS 19: complex measurement; remeasurements through OCI
• FRS 102: similar approach for medium-sized entities; some simplifications for small entities (group defined contribution treatment for participating in group plan)

7. Deferred Tax:

• IAS 12: temporary differences approach (full provision)
• FRS 102: timing differences approach + some "timing differences plus" — historically less aggressive than IAS 12
• Recent FRS 102 amendments aligning closer to IAS 12

8. Investment in Associates / JVs:

• IAS 28 / IFRS 11: equity method standard
• FRS 102: equity method or cost model permitted in individual entity accounts

Why use FRS 102 vs IFRS?

• FRS 102: simpler, less burden, less disclosure
• IFRS: required for listed; useful for international comparisons
• FRS 102 still produces "true and fair" view; not inferior — just different
• Most UK private companies use FRS 102; smaller entities use FRS 105

FRS 102 periodic review (2024):

• FRC conducted comprehensive review
• Major changes: revenue recognition aligned with IFRS 15; lease accounting aligned with IFRS 16 (with simplifications)
• Effective for accounting periods beginning on or after 1 January 2026
• Significant transition for FRS 102 reporters

UK financial reporting is overseen by multiple regulators with overlapping but distinct roles.

Financial Reporting Council (FRC):

• Independent regulator for accounting, auditing, and corporate governance
• Sets UK accounting standards (FRS 100-105)
• Oversees UK Endorsement Board (UKEB) for IFRS adoption
• Monitors quality of audit firms and audits (audit firm inspections)
• Sets the UK Corporate Governance Code (for listed companies) and UK Stewardship Code
• Enforces accounting standards via Audit and Actuarial Discipline (AAD) and Corporate Reporting Review
• Investigates failures (e.g., Carillion, BHS, Patisserie Valerie)

FRC enforcement powers:

• Reviews of corporate accounts: identification of poor reporting
• "Direction" to amend accounts (under s.456 Companies Act 2006)
• Penalties on auditors for poor work
• Disciplinary actions against accountants/auditors

Audit Reform — Towards ARGA:

• Following Carillion, BHS, Patisserie Valerie scandals: government-commissioned reports (Brydon, Kingman, CMA)
• Proposed: Audit, Reporting and Governance Authority (ARGA) to replace FRC
• Stronger powers: direct intervention; statutory force; enhanced auditor regulation
• Implementation timeline: legislation expected but delayed; specific date uncertain
• Goal: restore public confidence in audit and corporate reporting

Financial Conduct Authority (FCA):

• Conducts business regulator for UK financial services
• Listing Authority for the UK's primary listing markets
• Listing Rules: requirements for premium listing (most demanding) and standard listing
• Disclosure Guidance and Transparency Rules (DTRs): periodic financial reporting; market disclosures
• Listing Rules require IFRS adoption for premium listed
• Sanctions: censures, fines, restrictions on activities

Listing Rules — key reporting requirements:

• Annual report and accounts (PUBLISHED within 4 months of year-end)
• Half-yearly financial report (within 3 months of half-year end)
• Audited consolidated financial statements (IFRS)
• Compliance statement on UK Corporate Governance Code (premium listing)
• Sustainability disclosures (TCFD; planning for ISSB)
• Disclosure of related party transactions

Prudential Regulation Authority (PRA):

• Part of the Bank of England
• Prudential supervision of banks, building societies, insurers, major investment firms
• Sets capital and liquidity requirements (BASEL III implementation)
• Reporting requirements: detailed regulatory returns
• Reviews accounting policies for prudential implications (e.g., expected credit losses on loans)

Companies House:

• Registers UK companies; receives filed accounts
• Public access to filings
• Penalties for late filing
• Companies House reform (2024): improvements to data accuracy, beneficial ownership registers

HMRC:

• Tax authority — interest in financial reporting for CT purposes
• Some accounting policies have direct tax implications (e.g., revenue recognition; lease accounting)
• HMRC may request specific accounting treatments for tax purposes

International coordination:

• UK active in IOSCO (International Organization of Securities Commissions)
• International Forum of Independent Audit Regulators (IFIAR)
• Post-Brexit: UK retains close cooperation with EU regulators

Sustainability reporting has become a major frontier in corporate reporting. The IFRS Foundation established the ISSB in November 2021 to develop GLOBAL sustainability reporting standards.

International Sustainability Standards Board (ISSB):

• Sister board to IASB under IFRS Foundation
• Develops IFRS Sustainability Disclosure Standards
• Building on TCFD (Task Force on Climate-related Financial Disclosures), CDSB, VRF, IIRC
• Aims for global consistency in sustainability reporting

IFRS S1 — General Requirements for Disclosure of Sustainability-Related Financial Information:

• Effective for annual reporting periods beginning 1 January 2024
• Establishes the FOUNDATION for sustainability disclosures
• Four pillars (aligned with TCFD):
  • Governance: oversight of sustainability risks/opportunities
  • Strategy: how sustainability matters affect business
  • Risk management: identification, assessment, management of risks
  • Metrics and targets: data to evaluate performance
• Materiality: investor-focused (financial materiality — what affects enterprise value)
• Reporting boundary: same as the financial statements
• Connectivity: sustainability info connected to financial statements

IFRS S2 — Climate-Related Disclosures:

• Effective same date as S1 (1 January 2024)
• SPECIFIC requirements for climate-related disclosures
• Builds on TCFD:
  • Physical risks (acute weather events; chronic temperature changes)
  • Transition risks (regulatory; technology; market; reputation)
  • Climate-related opportunities
• Required disclosures:
  • Greenhouse gas emissions (Scope 1, 2, 3 — reporting all three)
  • Climate scenario analysis
  • Transition plans
  • Industry-specific metrics (drawing on SASB standards)
  • Capital deployment and management of climate-related risks

UK adoption:

• UK Sustainability Disclosure Standards (UK SDS) being developed
• Expected to broadly endorse IFRS S1 and S2 for UK companies
• UK Sustainability Disclosure Requirements (SDR) being implemented for retail investors and asset managers (FCA)
• UK Streamlined Energy and Carbon Reporting (SECR): mandatory for large companies (since 2019)

EU comparison:

• EU CSRD (Corporate Sustainability Reporting Directive): mandatory for large EU companies and EU subsidiaries of non-EU groups
• EU ESRS (European Sustainability Reporting Standards): more comprehensive than ISSB; double materiality (financial + impact materiality)
• UK has chosen the more focused investor-led ISSB approach
• Multinationals may need to comply with both regimes

Other major sustainability frameworks:

Integrated reporting (<IR>):

• Holistic single report covering both financial and sustainability matters
• Six "capitals": financial, manufactured, intellectual, human, social/relationship, natural
• Tells the "value creation story"
• Now part of the ISSB framework
• Voluntary in most jurisdictions

Corporate reporting is a constantly evolving area. Recent developments and ongoing issues:

Recent IFRS amendments (2022-2024):

1. IAS 1 amendments — Classification of Liabilities (2020, effective 2024):

• Clarifies when liabilities are classified as current or non-current
• Based on rights existing AT END of reporting period (not subsequent events)
• Conditions met after period end: assess as if existed at year-end
• Only "substantive" rights count

2. IAS 1 amendments — Disclosure of Accounting Policies (2021, effective 2023):

• Requires disclosure of MATERIAL accounting policies (not "significant")
• Less repetition of standard policies
• More entity-specific and useful disclosures

3. IAS 8 amendments — Definition of Accounting Estimates (2021, effective 2023):

• Clearer distinction between accounting policies (changed retrospectively) and estimates (changed prospectively)
• Helps consistency in applying changes

4. IAS 12 amendments — Deferred Tax on Single Transactions (2021, effective 2023):

• Clarifies deferred tax accounting on transactions giving rise to BOTH a deferred tax asset and a deferred tax liability (e.g., leases — IFRS 16 right-of-use asset and lease liability)
• Recognise both DTA and DTL even though net effect may be small

5. IAS 12 amendments — Pillar Two (2023):

• Temporary mandatory exception from recognising deferred tax assets/liabilities for Pillar Two top-up taxes
• Practical relief due to complexity of computing deferred tax for global minimum tax

6. IFRS 18 — Presentation and Disclosure (effective 2027):

• Replaces IAS 1 entirely
• New SOPL structure with categories (operating, investing, financing)
• Subtotals for "Operating profit" and "Profit before financing and tax"
• Management-defined performance measures (MPMs) — required disclosure of how derived
• Aimed at improving comparability

Post-implementation reviews:

• IFRS 9 (Financial Instruments): PIR completed 2022; refining classification, ECL model
• IFRS 15 (Revenue): PIR completed 2024; mostly working well; clarifying license accounting
• IFRS 16 (Leases): PIR underway 2024-2026

Cryptocurrency and digital assets:

• No specific IFRS standard yet — applies existing standards by analogy
• IAS 38 (Intangible) most commonly applied — but limitations
• Inventory if held for trading; financial asset if cash-like
• FASB (US) recently updated to fair value for crypto held by non-traders
• IFRS likely to follow with specific guidance

Rate-regulated activities:

• Long-running IASB project
• Regulated industries (utilities) have unique business model
• "Regulatory deferral accounts" recognise impact of rate regulation
• IFRS 14 currently allows existing GAAP for first-time adopters; permanent solution being developed

Management commentary / strategic report:

• UK strategic report (Companies Act 2006 s.414C): narrative including business model, KPIs, risks
• IASB Practice Statement 1 on Management Commentary (revised draft)
• FRC has issued guidance on strategic report content
• Increasing focus on non-financial information and sustainability

Digital reporting (XBRL):

• Inline XBRL (iXBRL) mandatory for UK Companies House since 2011 for most entities
• FCA requires structured European Single Electronic Format (ESEF) for listed companies' annual reports
• Tagging requirements increasingly detailed

Alternative Performance Measures (APMs) are non-GAAP measures used by companies to provide additional information about performance. Common examples: EBITDA, "underlying profit", "adjusted earnings", "constant currency", "like-for-like".

Why companies use APMs:

• Show "core" or "underlying" performance excluding "one-off" items
• Compare performance year-on-year on a consistent basis
• Strip out non-cash items (depreciation, amortisation) for cash-generation analysis
• Industry-specific measures (e.g., RevPAR for hotels, like-for-like sales for retail)
• Highlight metrics they want investors to focus on

Concerns and abuses:

• "Cherry picking" what to exclude — often excluding bad news, including good
• "Underlying profit" often consistently higher than statutory profit
• Inconsistency over time (definition changes)
• Difficulty comparing across companies (different definitions)
• Excluding "non-recurring" items that recur every year
• Promoting non-GAAP over GAAP measures

ESMA / FCA / FRC Guidelines on APMs:

• ESMA Guidelines on APMs (2015) — applied by FCA in UK
• Apply to companies with publicly traded securities
• Supplemented by FRC guidance

Key requirements:

1. Define: explain how the APM is calculated
2. Reconcile: to nearest GAAP measure
3. Explain why used: relevance to investors
4. Consistency: same definition each period (changes explained)
5. NOT MORE PROMINENT than GAAP measures: GAAP must come first
6. Comparatives: at least one year of comparative APM
7. Identify items excluded: explain what makes them "exceptional" or "underlying"

Common APMs and considerations:

FRC concerns:

• Annual review reports highlight common APM weaknesses
• Frequent issues:
  • "One-off" items recurring year after year
  • Reconciliation not clear or complete
  • APM more prominent than GAAP figures
  • Inconsistent application across periods
  • Misleading labelling
• FRC reviews can require amendments

IFRS 18 impact (effective 2027):

• Introduces concept of "Management-defined Performance Measures" (MPMs)
• Required to disclose IF an MPM is used in PUBLIC communications
• Reconciliation, definition, why used
• Brings APMs into the audited financial statements (rather than just narrative report)
• Should improve transparency and discipline around APMs

Best practice for APMs:

• Define clearly and consistently
• Reconcile fully to GAAP
• Apply consistently each period
• Explain rationale
• Don't make them more prominent than GAAP
• Apply judgement honestly — don't systematically exclude bad news
• Audit committee review