FINANCIAL REPORTING DOSSIER

PCAOB: Inspection / Investigation of Registered Public Accounting Firms Located in a Foreign Jurisdiction
On 13th May, 2021, the Public Company Accounting Oversight Board (PCAOB) proposed a new rule, PCAOB Rule 6100, Board Determinations Under the Holding Foreign Companies Accountable Act (‘HFCAA’). The proposed rule provides a framework for the PCAOB’s determinations under the HFCAA Act (where the Board cannot inspect / investigate registered public accounting firms located in a foreign jurisdiction because of a position taken by one or more authorities in that jurisdiction). [https://pcaob-assets.azureedge.net/pcaob-dev/docs/default-source/rulemaking/docket048/2021-001-hfcaa-proposing-release.pdf?sfvrsn=dad8edcf_6]

IASB: Proposed New Framework for Management Commentary
On 27th May, 2021, the International Accounting Standards Board (IASB) published for public comments a proposed comprehensive framework for companies preparing ‘Management Commentaries’ (or Management Discussion and Analysis). The proposed framework represents a significant overhaul of IFRS Practice Statement 1, Management Commentary. It builds on innovations in narrative reporting, thereby enabling companies to bring together in one place information to assess a company’s long-term prospects. [https://www.ifrs.org/content/dam/ifrs/project/management-commentary/ed-2021-6-management-commentary.pdf]

IAASB: New Quality Management Guides
On 14th June, 2021, the International Auditing and Assurance Standards Board (IAASB) released two Guides: a) First-time Implementation Guide for International Standard on Quality Management (ISQM) 1, Quality Management for Firms that Perform Audits or Reviews of Financial Statements, or Other Assurance or Related Services Engagements, and b) First-time Implementation Guide for ISQM 2, Engagement Quality Reviews aimed at helping stakeholders understand the standards and properly implement requirements in the manner intended. [https://www.iaasb.org/news-events/2021-06/new-quality-management-implementation-guides-now-available]

FASB: Leases Standard – Proposed Improvements to Discount Rate Guidance for Lessees that are not Public Business Entities
On 16th June, 2021, the Financial Accounting Standards Board (FASB) issued an Exposure Draft, Discount Rate for Lessees That Are Not Public Business Entities, proposing amendments to Topic 842. The existing USGAAP provides lessees that are not public business entities with a practical expedient that allows them to elect, as an accounting policy, to use a risk-free rate as the discount rate for all leases. The proposed amendments would enable those lessees to make the risk-free rate election by underlying asset class rather than entity-wide. Further, the proposed amendments also require that when the rate implicit in the lease is readily determinable (for any individual lease), the lessee will use that rate (rather than a risk-free rate or an incremental borrowing rate), regardless of whether it has made the risk-free rate election. [https://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176176792230&acceptedDisclaimer=true]

IASB: Proposed New IFRS Standard – Reduced Disclosure Requirements for Subsidiaries
On 26th July, 2021, the IASB proposed a new IFRS standard and issued an Exposure Draft, Subsidiaries Without Public Accountability: Disclosures, that would permit eligible subsidiaries (subsidiaries without public accountability) to apply IFRS standards with a reduced set of disclosure requirements. [https://www.ifrs.org/content/dam/ifrs/project/subsidiaries-smes/ed2021-7-swpa-d.pdf]

IESBA: Proposed Quality Management-Related Conforming Amendments to the International Code of Ethics
And on 5th August, 2021, the International Ethics Standards Board for Accountants (IESBA) released for public comments an Exposure Draft, Proposed Quality Management-Related Conforming Amendments to the Code, aimed at aligning the International Code of Ethics with the IAASB’s suite of quality management standards, particularly ISQM 1 and ISQM 2. [https://www.ethicsboard.org/publications/proposed-quality-management-related-conforming-amendments-code]

International Financial Reporting Material
1. FRC: Thematic Review: Interim Reporting. [18th May, 2021]
2. FRC: Thematic Briefing: The Audit of Cash Flow Statements. [19th May, 2021]
3. FRC: Workforce Engagement and the UK Corporate Governance Code: A Review of Company Reporting and Practice. [24th May, 2021]
4. IFAC: Point of View: Greater Transparency and Accountability in the Public Sector. [19th July, 2021]
5. FRC: Research Report: Board Diversity and Effectiveness in FTSE 350 Companies. [20th July, 2021]

2. Evolution and Analysis of Accounting Concepts – Non-controlling Interests

Setting the Context
Non-controlling Interest (NCI) is the equity in a subsidiary not attributable, directly or indirectly, to a parent entity (an entity that controls one or more entities). NCI arises in the preparation and presentation of Consolidated Financial Statements when a parent has control over less than one hundred per cent of the investee subsidiary.

In general, an NCI originates in a transaction that qualifies as a ‘Business Combination’ for accounting purposes. On Day 1, upon acquisition of controlling interest in a subsidiary, the measurement and recognition of NCI are based on applying the ‘Acquisition Method’ of accounting (under IFRS, Ind AS, and USGAAP). Day 2 accounting requires using the ‘line-by-line consolidation’ method wherein, typically, the NCI picks up its share of change in net assets of the subsidiary post-acquisition.

One can see diversity across GAAPs in the Day 1 measurement of NCI, which could either be at ‘fair value’ or as a ‘proportion of the net assets of the acquiree’ resulting in recognition of either ‘full goodwill’ or ‘partial goodwill’ with attendant implications on subsequent impairment testing and accounting. The presentation of NCI on the balance sheet also varies across GAAPs – some consider it as equity. At the same time, some GAAPs treat them as a mezzanine item presenting it in between equity and liabilities.

There are various related facets to NCI accounting (e.g., situations that result in step acquisitions, changes in the proportion held by non-controlling interest, etc.). This section below delves only into, a) the Day 1 measurement of NCI, and b) the presentation of NCI in a consolidated balance sheet. It attempts to trace its historical developments, the current position under prominent GAAPs and the alternates that global accounting standards setters have considered since the accounting and presentation of NCI in group balance sheets have evolved under International GAAP.

The Position under Prominent GAAPs
US GAAP
Historical Developments
The Accounting Research Bulletin (ARB) No. 51, issued in 1959 by AICPA’s Committee on Accounting Procedure (CAP), dealt with Consolidated Financial Statements. The Bulletin, inter alia, laid down general consolidation procedures. It, however, did not delve into specifics of Day 1 accounting of NCI and presentation of the related line item in the group balance sheet. This limited guidance resulted in diversity in reporting practice. The reporting of NCI (then termed ‘minority interests’)
in consolidated balance sheets was either under liabilities or the mezzanine section (between liabilities and equity).

To eliminate the diversity in practice, in 2007 the FASB issued a Statement of Financial Accounting Standards (SFAS) No. 160, Non-controlling Interests in Consolidated Financial Statements, that amended ARB 51 establishing accounting and reporting standards for NCI. The existing USGAAP is a codification of SFAS No. 160. The new standard amended specific provisions of ARB No. 51 to make them consistent with the requirements of another related standard, SFAS No. 141 (Revised 2007), Business Combinations (a joint effort by FASB and IASB aimed at promoting international convergence of GAAPs).

Previously, the FASB had deliberated the related NCI accounting issues in two of its earlier projects, a) Consolidations Project (January, 1982): How should the NCI be displayed in the consolidated statement of financial position and the income statement? and b) Financial Instruments Project (May, 1986): to eliminate the classification of mezzanine items between the liabilities section and the equity section. The Board stated that there was no debate about whether NCI has an ownership interest in a subsidiary. The issue that required address was how to report that interest in consolidated financial statements. It considered three alternatives for presenting NCI: i) as a liability, ii) as equity, or iii) in the mezzanine between liabilities and equity.

The FASB concluded that an NCI represents the residual interest in the net assets (of a subsidiary) within the consolidated group held by owners other than the parent and therefore meets the definition of equity (as per Concept Statement CON 6). Paragraph 254 of Concepts Statement 6, Elements of Financial Statements (issued in December, 1985) stated, ‘Minority interests in net assets of consolidated subsidiaries do not represent present obligations of the enterprise to pay cash or distribute other assets to minority stockholders. Rather, those stockholders have ownership or residual interests in components of a consolidated enterprise. The definitions in this Statement do not, of course, preclude showing minority interests separately from majority interests or preclude emphasising the interests of majority stockholders for whom consolidated statements are primarily provided.’

The Board also decided that the NCI should be presented separately from the parent’s equity so that users could readily determine the equity attributable to the parent from the equity attributable to the NCI.

SFAS No. 160 aligned the reporting of NCI under USGAAP with the requirements in IAS 27 (then ‘Consolidated and Separate Financial Statements’). Previously, entities applying IFRSs (then IASs) reported NCI as equity, while entities applying USGAAP reported those interests as liabilities or in the mezzanine section between liabilities and equity.

Current Position
Non-controlling interest
Topic 810 of USGAAP that deals with Consolidation defines NCI as the ownership interests in the subsidiary that are held by owners other than the parent. [ASC 810-10-45-15]

Day 1 measurement
Topic 805 (Business Combinations) lays down the Day 1 accounting requirements for NCI: ‘The acquirer shall measure the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree at their acquisition-date fair values’. [ASC 805-20-30-1]

Balance sheet reporting
The NCI in a subsidiary is part of the equity of the consolidated group.

‘The non-controlling interest shall be reported in the consolidated statement of financial position within equity (net assets), separately from the parent’s equity (or net assets). That amount shall be clearly identified and labelled, for example, as non-controlling interest in subsidiaries.’ [ASC 810-10-45-16]

IFRS
Historical Developments
Day 1 measurement of NCI
Under International Accounting Standards (now IFRS) IAS 22, Business Combinations (issued in 1983 and revised in 1998) permitted the pooling of interests method or the purchase method of accounting for business combinations. Where the acquirer was not identifiable, the technique used was the pooling of interests method. In other circumstances, business combinations were presumed acquisitions necessitating the need to apply the purchase method of accounting. Under the purchase method of accounting, the benchmark approach required minority interests’ Day 1 measurement at the pre-acquisition carrying amounts with an allowed alternate to measure at the minority’s proportion of the net fair value of the assets acquired and liabilities assumed.

IFRS 3, Business Combinations (issued 2004) replaced IAS 22. All business combinations required accounting applying the acquisition method of accounting. The allowed alternate approach (Supra) in IAS 22 was the only basis to measure NCI at the acquisition date.

A revised version of IFRS 3 issued in 2008 introduced a choice (on a transaction-by-transaction basis) to measure Day 1 NCI: at fair value or its proportionate share of the acquiree’s net identifiable assets. Providing a choice was not a preference of the IASB but a compulsion.

The IASB’s considerations in arriving at the approach to the 2008 amendments were:
a) Whether the NCI’s share of goodwill is required to be recognised or not?
b) An acquirer can directly measure the fair value of NCI (based on market prices or with the application of a valuation technique). In contrast, the other plug variable, goodwill, cannot be measured directly but only as a residual.
c) The decision-usefulness of NCI information would be improved if the revised standard specified a measurement attribute rather than merely stating the mechanics for determining that amount. The IASB concluded that, in principle, that measurement attribute should be fair value.
d) The information about acquisition date fair value of NCI helps in estimating the value of the shares of the parent company (both at the acquisition date and at future dates).

It may be noted that ‘Introducing a choice of measurement basis for non-controlling interests was not the IASB’s first preference. [IFRS 3. BC 210] The IASB reluctantly concluded that the only way the revised IFRS 3 would receive sufficient votes to be issued was if it permitted an acquirer to measure a non-controlling interest either at fair value or at its proportionate share of the acquiree’s identifiable net assets, on a transaction-by-transaction basis. [IFRS 3. BC 216]’

Presentation of NCI
The revision to IAS 27 in 2003 by the IASB required minority interests to be presented within equity, separately from the equity of shareholders of the parent. The IASB concluded that minority interest is not a group liability because it does not meet the definition of a liability in the Conceptual Framework.

Current Position
Non-controlling interest
IFRS 10, Consolidated Financial Statements, defines NCI as the equity in a subsidiary not attributable, directly or indirectly, to a parent. [IFRS 10. Appendix A]

Day 1 measurement
The Day 1 accounting requirements for NCI are laid down in IFRS 3, Business Combinations. As per the standard, ‘For each business combination, the acquirer shall measure at the acquisition date components of non-controlling interests in the acquiree that are present ownership interests and entitle their holders to a proportionate share of the entity’s net assets in the event of liquidation at either: a) fair value; or b) the present ownership instruments’ proportionate share in the recognised amounts of the acquiree’s identifiable net assets.’ [IFRS 3.19]

Balance sheet reporting
A parent shall present non-controlling interests in the consolidated statement of financial position within equity, separately from the equity of the owners of the parent. [IFRS 10.22]

Ind AS
Indian Accounting Standards (Ind AS 103, Business Combinations | Ind AS 110, Consolidated Financial Statements) and IFRS (Supra) are aligned concerning Day 1 measurement of NCI and reporting of NCI in consolidated balance sheets.

AS
Current Position
Non-controlling interest
The definition of minority interest contained in AS 21, Consolidated Financial Statements, is as follows: ‘Minority interest is that part of the net results of operations and of the net assets of a subsidiary attributable to interests which are not owned, directly or indirectly through subsidiary(ies), by the parent.’ [AS 21.5.7]

Day 1 measurement
Minority interests, in general, are measured at their proportion of the book values (carrying amounts) of identifiable net assets of subsidiaries. As per AS 14, Accounting for Amalgamations, under the purchase method of accounting the transferee company accounts for an amalgamation either by incorporating the assets and liabilities at their existing carrying amounts, or by allocating the consideration to individual identifiable assets and liabilities of the transferor company based on their fair values.

Balance sheet reporting
‘Minority interests in the net assets of consolidated subsidiaries should be identified and presented in the consolidated balance sheet separately from liabilities and the equity of the parent’s shareholders.’ [AS 21.13(e) | AS 21.25]

The Little GAAPs
US FRF for SMEs
As per AICPA’s US Financial Reporting Framework for Small and Medium-Sized Entities (FRF for SMEs), a self-contained framework not based on USGAAP, an entity is required to present separately the NCI component of equity in the body of the financial statements or in the notes. [Chapter 18, Equity. Para 18.8]

‘If an entity consolidates its subsidiaries, non-controlling interests should be presented in the consolidated statement of financial position within equity, separately from the equity of the owners of the parent.’ [Chapter 23, Consolidated Financial Statements and Non-controlling Interests. Para 23.33]
‘For each business combination, the acquirer should measure any non-controlling interest in the acquiree at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets.’ [Chapter 28, Business Combinations. Para 28.16]

IFRS for SMEs
Section 9, Consolidated and Separate Financial Statements of IFRS for SMEs, requires an entity to present NCI in the consolidated Statement of Financial Position within equity, separately from the equity of the owners of the parent. [9.20]

Section 19, Business Combinations and Goodwill, states that ‘At the acquisition date, any non-controlling interest in the acquiree is required to be measured at the non-controlling interest’s proportionate share of the recognised amounts of the acquiree’s identifiable net assets.’ [19.14]

In January, 2020, the IASB released a Request for Information – Comprehensive Review of the IFRS for SMEs Standard (with a comment deadline of 27th October, 2020). The Objective of the RFI was to seek views on whether, and how, aligning
IFRS for SMEs Standard with the full IFRS Standards could better serve users. The IASB sought views to align Section 19, Business Combinations and Goodwill, with certain parts of IFRS 3. However, it categorically stated that it was not seeking views on aligning IFRS for SMEs with improvements in IFRS 3 (2008) that introduced the option to measure NCI at fair value.

3. Global Annual Report Extracts: ‘Part of Director’s Remuneration Report That is Subject to Audit’

Background
The UK Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations, 2008 mandate certain sections of the Director’s Remuneration Report to be audited and reported by the statutory auditors. Paragraph 411 of Part 5 of Schedule 8 (The Quoted Companies [and Traded Companies]: Director’s Remuneration Report) states that ‘The information contained in the Director’s Remuneration Report which is subject to audit is the information required by paragraphs 4 to 17 of Part 3 of this schedule.’
_______________________________________________
1 https://www.legislation.gov.uk/uksi/2008/410/schedule/8

The information in the Director’s Remuneration Report that is subject to audit includes: a total figure of remuneration for each director setting out separately salaries, taxable benefits, remuneration based on achievement of performance measures and targets, pension benefits, total fixed remuneration and total variable remuneration; total pension entitlements; scheme interests awarded during the financial year; payments to past directors; payments for loss of office; and a statement of director’s shareholdings and share interests.

Extracts from an Annual Report
Company: Anglo American PLC [FTSE 100 Constituent] (Y.E. 12/2020 Revenues – US $30.9 billion)
Extracts from Director’s Remuneration Report:

Annual Report on Director’s Remuneration
Audited Information
Under schedule 8 of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations, 2008, elements of this section of the report have been audited. The areas of the report subject to audit are indicated in the headings2.

• Executive director remuneration in 2020 (audited)
• Benefits in kind for 2020 (audited)
• Annual bonus outcomes for 2020 (audited)
• Annual bonus performance assessment for 2020 (audited)
• 2018 LTIP award vesting (audited)
• Pension (audited)
• Payments for past directors (audited)
• Payments for loss of office (audited)
• Other director remuneration in 2020 (audited)
• Scheme interests granted during 2020 (audited)
• Total interests in shares (audited)

Extracts from Independent Auditor’s Report:
Section: Other required reporting
Companies Act, 2006 exception reporting
Under the Companies Act, 2006 we are required to report to you if, in our opinion:
…
…
certain disclosures of directors’ remuneration specified by law are not made; or
…
We have no exceptions to report arising from this responsibility.

The Public Company Accounting Oversight Board (PCAOB)

A. Enforcement actions
The US PCAOB imposes appropriate sanctions in settled and litigated disciplinary proceedings against audit firms and auditors. Provided herein below is a summary of a select recent order.

1. RBSM, LLP
The Case: From 2014 through 2019, the PCAOB inspection staff notified the audit firm of repeated significant audit deficiencies that raised concerns about its engagement performance. The initial instances of these deficiencies provided the firm with notice of engagement performance issues. Subsequent findings of deficiencies provided continuing notice and indicated the firm’s system of quality control had failed to adequately address the deficiencies noted in previous inspections.

PCAOB Rules / Standards Requirement: PCAOB rules require a registered public accounting firm to comply with PCAOB quality control standards. These standards require that a registered firm have a system of quality control for its accounting and auditing practice – ‘A firm’s system of quality control encompasses the firm’s organisational structure and the policies adopted and procedures established to provide the firm with reasonable assurance of complying with professional standards.’

The Order: The PCAOB censured the audit firm, imposed a monetary penalty of $50,000 and required it to engage an independent consultant for a period of three years to review and make recommendations concerning the firm’s quality control policies and procedures. [Release No. 105-2021-004 dated 9th August, 2021]

B. Deficiencies identified in audits
The PCAOB annually inspects registered audit firms that issue more than 100 audit reports (and all other firms, at least once every three years). Such inspection assesses compliance with applicable laws, rules and professional standards applicable to a firm’s audit work. Reported herein below are some audit deficiencies identified by the PCAOB from its recently released inspection reports:

1. Sassetti LLC, Illinois
Audit area: Revenue – The firm’s approach for testing revenue included selecting a sample of transactions from certain months during the year.

Audit deficiency identified: In determining the sample size, the firm did not consider the relevant factors, including the firm’s established tolerable misstatement for the population, the allowable risk of incorrect acceptance, and the characteristics of the population of sales transactions. As a result, the sample size the firm used in its test of details was too small to achieve the planned audit objective. Further, the firm’s selection of transactions for testing was confined to transactions from certain months of the year, not the entire population of net sales. Therefore, the results of these audit procedures could not be projected to the entire population. [Release No. 104-2021-102 dated 12th May, 2021]

2. Sadler, Gibb & Associates, LLC, Utah
Audit area: ICFR related to certain assets – The client held certain assets at multiple locations. The audit firm selected for testing a control related to certain assets that was being performed quarterly at all locations.

Audit deficiency identified: The audit firm did not test whether 1) the control operated consistently at all locations; 2) all such assets at each location were subject to the control; 3) variances that exceeded threshold were appropriately investigated and resolved; and 4) adjustments made by the client as a result of the control were appropriately approved and recorded. [Release No. 104-2021-101 dated 12th May, 2021]

The Securities Exchange Commission (SEC)
The US SEC institutes public administrative proceedings against audit firms and securities issuers under the Securities Exchange Act of 1934. Here is a summary of a select recent order.

1. Retail company and its former CFO | CEO charged for accounting, reporting and control failures
The Case: Tandy Leather Factory Inc. (a specialty retailer) had accounting, reporting and control failures: a) its inventory tracking system failed to properly maintain the historical cost basis for individual inventory items that resulted in every new price input of a purchased inventory item changing the historical cost for all earlier purchases, and the system could therefore not support the company’s FIFO inventory accounting methodology disclosed in public reports; b) despite knowledge of the system’s limitations, the management failed to design and maintain a system of internal accounting controls; c) the company failed to properly design, maintain and evaluate its Disclosure Control Procedures (DCP) and Internal Control over Financial Reporting (ICFR). These deficiencies resulted in a multi-year restatement in Tandy’s financial statements concerning, among other things, inventory, net income and gross profit.

The Violations: As per the SEC order, Tandy violated, and Shannon Greene (its former CFO and CEO) caused Tandy’s violations of, the reporting, record-keeping and internal controls provisions of the Securities Exchange Act of 1934 and the Rules made thereunder. The SEC found Greene to have violated the certification provisions of the Exchange Act Rules.

The Penalty: Without admitting or denying the findings, Tandy and Greene each consented to cease and desist from further committing or causing these violations and pay civil money penalties of $200,000 and $25,000, respectively. [Press Release No. 2021-133 dated 21st July, 2021]

The Financial Reporting Council (FRC)
The FRC (the competent authority for statutory audit in the UK) operates the Audit Enforcement Procedure that sets out the rules and procedures for investigation, prosecution and sanctioning of breaches of relevant requirements.

Summarised below are key adverse findings from a recent Final Decision Notice following an investigation:

1. UHY Hacker Young LLP and Julie Zhuge Wilson (Audit engagement partner)

Key adverse findings:
• Acceptance, planning and resourcing of the audit
The structure of the client’s operations meant that the audit would be potentially complex and logistically challenging. Such a structure necessitated audit planning completion in advance of the year-end. Had this been followed, it would have allowed sufficient time for the audit firm to: meet with management; understand changes to the business; assess risks; adequately resource the Audit Team; brief the Engagement Quality Control Review (EQCR); evaluate the competence of the Component Auditors; instruct the Component Auditors and participate in the risk assessment of the Component Auditors. Inadequacy in achieving all this resulted in multiple significant shortcomings in the execution of the audit work.

• EQCR
The EQCR had commenced its substantive review of the audit file only four days before the signing
deadline. There was also no evidence of related discussion on any significant matters arising on the audit; consequently, the review was largely ineffective and therefore inadequate.

• Signing of audit report
The Annual Report was approved by those charged with governance just after midnight on 29th April, 2017. The audit report was signed following that approval, with the result that the audit report was incorrectly dated 28th April, 2017.

The Sanctions:
• Severe reprimand and imposition of non-financial sanctions (requiring remedial actions to prevent recurrence of breaches) against the audit firm,
• Declaration that the F.Y. 2016 audit report did not satisfy the relevant requirements, and
• Prohibiting the audit engagement partner from acting as a statutory auditor of a PIE (Public Interest Entity) for two years.

[Final Decision Notice dated 13th May, 2021 – https://www.frc.org.uk/getattachment/6e80eb04-2193-4f34-930b-b0112d4e5b75/UHY-Hacker-Young-LLP-Decision-Notice.pdf]

FRC’s Annual Inspection and Supervision Results
On 23rd July, 2021 the FRC published its Annual Audit Quality Inspection and Supervision Results3 for 2020/21 that covered the seven largest audit firms (involving the review of 103 audits). Summarised herein below are select audit review findings and audit good practices.

BDO LLP
In an audit, the FRC observed that insufficient substantive audit procedures were performed over the valuation of pension scheme assets, in particular over unquoted assets, including equities and bonds, property and assets held in Pooled Investment Vehicles.

Deloitte LLP
In two audits, the FRC noted that the audit teams did not sufficiently evidence their consideration and challenge of the period used in goodwill impairment assessment. One of these related to where a short-term forecast period of ten years had been used (which was above the commonly-adopted five-year period). Another one related to the assumption that an extension to the useful life of a material asset to support the carrying value was appropriate.

Ernst & Young LLP
In one audit reviewed by the FRC, there was inadequate consultation and evidence of a) consideration over the use of certain assets, which were not yet under the control of the group, and b) Deferred Tax Asset (DTA) recoverability assessment. It also noted that the auditor’s analysis did not adequately evidence the connection between DTA recoverability and management’s calculations and forecasts.

Grant Thornton UK LLP
The FRC found in an audit insufficient assessment of a lender’s ability to provide funding as and when required. The working capital forecasts assumed this funding would be available to support the going concern conclusion.

KPMG LLP
In three audits reviewed by FRC, it reported non-performance of sufficient audit procedures related to the audit of expected credit losses that included the following: a) procedures relating to the assessment of significant increases in credit risk and related testing, b) individually assessed exposure credit file review procedures, and c) the testing of models and related data elements.

Mazars LLP
In one audit, the FRC found weaknesses relating to Expected Credit Losses (ECL) testing. In particular, it had concerns about the nature and extent of audit procedures performed and the sufficiency of audit evidence. These were primarily related to the Significant Increase in Credit Risk (SICR) and the appropriateness and adequacy of the audit approach over all the SICR criteria (including management judgement) and specific stage allocation. As per the FRC, the audit team performed inadequate procedures and did not retain sufficient evidence to support its testing of multiple economic scenarios.

PricewaterhouseCoopers LLP
Risk of Management Override – The FRC reported that in five audits with journal testing based on determined risk criteria, there was insufficient evidence of the audit team’s evaluation of the residual aggregated risk in the remaining untested population. These included two cases with inadequate evidence of assessment of the residual higher risk journal population after targeted testing.

b. Good Practice Observations by the FRC

BDO LLP: Assessment of going concern and viability – The audit teams clearly evidenced: challenge of going concern disclosures, assessment of management’s historical budgeting accuracy, and the use of computer-aided audit techniques to check the integrity of management’s going concern cash flow model.

Deloitte LLP: Use of bespoke data analytic procedures – The FRC saw a good example of the use of bespoke data analytic procedures to obtain audit evidence and provide assurance over unbilled revenue. This is an effective way of auditing the related estimates generated from a diverse set of data.

Ernst & Young LLP: First-year audits – Thorough first-year procedures were observed, including one audit where the audit team identified several prior year adjustments. As part of the consultation about each prior year adjustment, the audit team evidenced a thorough challenge of the root cause of each matter to understand the potential for the underlying causes to have a pervasive impact.

Grant Thornton UK: LLP Consultation on certain audit matters – In two audits, there was detailed consultation on accounting policy adoption and disclosure where alternative treatments were possible.

KPMG LLP: Challenge of management – In addition to going concern, the identified best practices included examples on three audits where there had been a robust challenge of the judgements made by management for impairment, PPE residual values and deferred revenue.

Mazars LLP: Delayed sign-off – The engagement partner delayed signing the auditor’s report to ensure that sufficient audit evidence was obtained. Furthermore, the reporting to the Audit Committee in relation to the difficulties encountered during the audit was robust.

PricewaterhouseCoopers LLP: Robust assessment of management’s going concern assumption – The FRC observed examples of good practice in two audits where there was a heightened going concern risk as a result of Covid-19. On one audit, there was detailed evidence of audit review and challenge by the firm’s technical panel in the case of a material uncertainty relating to going concern. On another audit, the audit team demonstrated enhanced professional scepticism by developing a ‘traffic light system’ to assist with the assessment of key assumptions used in management’s going concern assessment.

5. COMPLIANCE: Presentation of a Third Balance Sheet under Ind AS

Background
Under Ind AS, an entity is required to present a third balance sheet (i.e., at the beginning of the preceding period) under certain circumstances taking into consideration relevant requirements of Ind AS 1, Presentation of Financial Statements, and Ind AS 8, Accounting Policies, Changes in Accounting Estimates and Errors. The same is summarised in Table A below.

Table A: Presentation requirements
(Third balance sheet)

6. Integrated Reporting

a. Key Recent Updates

GRI: Double Materiality Crucial for Reporting Organisational Impacts
On 31st May, 2021, the Global Reporting Initiative (GRI) released a white paper, The Double Materiality Concept – Application and Issues, that investigates the application of materiality in sustainability reporting. Key findings include, a) identification of financial materiality issues is incomplete if companies do not first assess their impact on sustainable development; and b) reporting material sustainable development issues can enhance financial performance, improve stakeholder engagement and enable more robust disclosure. [https://www.globalreporting.org/media/jrbntbyv/griwhitepaper-publications.pdf]

IIRC and SASB Merger: Value Reporting Foundation
On 9th June, 2021, the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB) announced their merger to form the Value Reporting Foundation (VRF). The VRF supports business and investor decision-making with three key resources: Integrated Thinking Principles, Integrated Reporting Framework and SASB Standards.

FRC: Statement of Intent on ESG Challenges
And on 7th July, 2021, the FRC published the FRC Statement of Intent on Environmental, Social and Governance Challenges. The paper sets out areas in which there are issues with ESG information if companies report in a manner that meets the demands of stakeholders; how to address such issues; and the FRC’s planned activities in this area. [https://www.frc.org.uk/getattachment/691f28fa-4af4-49d7-a4f5-49ad7a2db532/FRC-LAB-ESG-Paper_2021.pdf]

b. Reporting Sustainability Roadmap
Background:
The 2030 Agenda for Sustainable Development issued by the United Nations in 2015 is a plan of action for people, the planet and prosperity. The 17 Sustainable Development Goals (SDGs), adopted by all UN member states, provides the blueprint for a more sustainable future by tackling big-ticket and urgent global challenges that include poverty, inequality, climate change and environmental degradation. Goal 13 pertains to climate action, namely, ‘Take urgent action to combat climate change and its impacts’.

The International Federation of Accountants (IFAC) has promoted ‘Sustainable Development Goal Disclosure (SDGD) Recommendations’ that provide an opportunity for organisations to establish best practices for corporate reporting on SDGs, thereby enabling more effective reporting and transparency on social impacts. One of the recommendations on the related governance aspect includes ‘Disclose the time period over which the organisation intends to implement the SDGD Recommendations and where any SDGD Recommendation is not, or will not, be disclosed, explain why not.’ [G3 SGSD Recommendations]

Extracts from Annual Report of The Weir Group PLC (a premium mining technology group) [Y.E. 12/2020 revenue: GBP 1,965 million]
Sustainable Development Goals (SDGs)
We support the UN Sustainable Development Goals and our sustainability priority areas can meaningfully support the achievement of eight of the seventeen SDGs.

Sustainability Roadmap – Key Climate Milestones

c. Integrated Reporting Material
• IFAC: Enabling Purpose Driven Organizations – PAIBs (Professional Accountants in Business) Leading Sustainability and Digital Transformation. [19th May, 2021]
• IIRC: Integrated Thinking in Action: A Spotlight on Munich Airport. [25th May, 2021]
• ACCA: Invisible Threads: Communicating Integrated Thinking. [26th May, 2021]
• GRI and SASB: Five Tips for GRI and SASB Reporters. [29th June, 2021]
• IIRC: Purpose Drives Profit: How Global Executives Understand Value Creation Today. [28th July, 2021]

7. From the Past – ‘Without professional accountants, growth in almost any country would be stymied’

Extracts from a speech by Graham Ward (the then IFAC President) at the World Congress of Accountants, 2006 held in Turkey:

‘There are not, of course, any specific statistics that demonstrate our profession’s effectiveness in generating economic growth, so I will present it to you in another light: Without professional accountants, without reliable and credible financial information that is independently reviewed and verified, growth in almost any country would be stymied. Where our profession flourishes, so, too, does the potential for real and meaningful economic growth.

Having a strong accountancy profession is a key aspect of having a strong financial infrastructure in a country and relates to the ability of that country as a whole, and also to the individual companies within that country, to raise capital at a favourable cost.

For developing nations, having a strong financial infrastructure, or, as I like to call it, an investment climate of trust, means that not only can you attract private sector capital more easily and at a better price, but you can also attract assistance from development partners. Therefore, having a strong accountancy profession is a real help in the fight against poverty, in that it can help to finance programmes for education, health, energy, clean water and food, as well as financing business and growth, thereby enabling standards of living to improve.’