Response 3 - S.Hansen

The content on this page has been converted from PDF to HTML format using an artificial intelligence (AI) tool as part of our ongoing efforts to improve accessibility and usability of our publications. Note:

No human verification has been conducted of the converted content.
While we strive for accuracy, errors or omissions may exist.
This content is provided for informational purposes only and should not be relied upon as a definitive or authoritative source.
For the official and verified version of the publication, refer to the original PDF document.

If you identify any inaccuracies or have concerns about the content, please contact us at [email protected].

OFFICIAL - PUBLIC

Thank you for providing the opportunity to comment on your Draft Endorsement Criteria Assessment for IFRS 19.

Overall, I think it's a good idea for the UK's reporting landscape to include an IFRS-based reduced disclosure framework for subsidiaries because:

it makes consolidation easier if entities within a group have the same recognition and measurement requirements; and
some of the usual key users of accounts of ultimate parents, for example external owners and lenders, are not usually users of subsidiary accounts, and therefore information needs are different.

However, by primarily considering the narrow requirements of regulation 7 of 'The International Accounting Standards and European Public Limited-Liability Company (Amendment etc.) (EU Exit) Regulations 2019' I think that this DECA glosses over some important aspects of the UK's reporting framework that need to be addressed before IFRS 19 is made available for use.

At a fundamental level, I think there is only space for one IFRS-based reduced disclosure framework and that this should either be:

maintained by the IASB as part of IFRS Accounting Standards, and within the UKEB's remit; or
maintained as part of UK GAAP.

If the answer is 1), I think the route to get there is not as straightforward as this DECA supposes, and would require the UKEB, DBT and the FRC to work together to amend the UK's financial reporting framework and effect a smooth transition away from FRS 101. If the answer is 2), it is the FRC that needs to be considering IFRS 19 rather than UKEB.

The UKEB's remit

Regulation 5(a) of The International Accounting Standards and European Public Limited Liability Company (Amendment etc) (EU Exit) Regulations 2019 'explains that the UKEB's adoption of international accounting standards is with a view to the harmonisation of financial information presented in group accounts that are required to apply IAS. IFRS 19 is not relevant to such accounts because every company that is required to apply IAS under s403(1) of CA2006 would have public accountability.

Regulation 5(b) of the same explains that the UKEB is responsible for participating in and contributing to the development of a single set of international accounting standards. Whilst extant IFRS contains some accounting policy choices, I think the IFRS 19 option is so pervasive that it effectively creates a second framework within IFRS that is in substance a separate reporting framework.

In both these contexts, it is not obvious to me why the UKEB is considering IFRS 19 at all or on what statutory basis you intend to adopt it. As IFRS 19 is such a novel type of accounting standard I think the ECA needs to explain why you consider the standard is within your endorsement remit; footnotes 12 and 13 of the DECA are not enough here as they focus only on the definition of 'international accounting standards' rather than a more holistic analysis of the UKEB's statutory functions. The risk of you not explaining this issue clearly is that it would call into question the long-standing approach taken to the 'IFRS for SMEs Accounting Standard'. If you are able to endorse IFRS 19, why would you not consider endorsing the 'IFRS for SMEs Accounting Standard' on a similar basis?

Adoption approach

Regulation 6 of 'The International Accounting Standards and European Public Limited Liability Company (Amendment etc) (EU Exit) Regulations 2019' includes three options for endorsement (as-issued, in part, or with an extension of scope).

Paragraph 7(c) of the Introduction section of the DECA sets out that the reduced disclosure requirements set out under the subheading 'IFRS 14 Regulatory Deferral Accounts' in IFRS 19 have not been included in the scope of the adoption assessment. If you are intending to adopt IFRS 19 as-issued then I think that approach to considering the IFRS 14 disclosures is an error because you would need to consider the whole of IFRS 19. If you are intending to adopt IFRS 19 in part then, because the law is clear that this should only happen in exceptional circumstances, I think the ECA would need to explain what those circumstances are and how the criteria in regulation 6(3) are met.

I don't think that a part-adoption of IFRS 19 to omit the IFRS 14 disclosure requirements would be controversial, but the decision to do so should be explained.

Scope of IFRS 19

I think you should consider extending the scope of IFRS 19 by using regulation 6(4) of 'The International Accounting Standards and European Public Limited Liability Company (Amendment etc) (EU Exit) Regulations 2019' to amend paragraph 7(c) of IFRS 19 to allow the standard to be used if an entity "...has an ultimate or intermediate parent that produces consolidated financial statements available for public use that comply with IFRS Accounting Standards or equivalent accounting standards." Doing so would open up the application of IFRS 19 subsidiaries consolidated in to parent companies that apply US GAAP, or other accounting standards that have been declared to be equivalent, which I think could be useful and is already established practice in the UK with FRS 101.

I think you should also consider extending the scope of IFRS 19 by making it available for use in the individual financial statements of an ultimate parent. This approach is already established practice in the UK with FRS 101 and will have many benefits to those entities. It could also resolve some of the potential issues of consistency of financial reporting within a group that I mention next.

Consistency of financial reporting within a group

Section 407 of CA2006 discusses the consistency of financial reporting within a group. Throughout the DECA you state that IFRS 19 is a voluntary standard, but I think the impact of adoption on what might constitute a "good reason" under s407 needs to be established. I worry that directors could be forced to use, or not use, IFRS 19 by s407 rather than it being a truly voluntary choice. I think this issue needs to be explored and explained before you adopt IFRS 19. It would not be a good use of everyone's time for every company to independently consider this question and come to its own answer.

Paragraph 36(4) of the Regulations

Paragraph 36(4) of the 'Large and Medium-sized Companies and Groups Regulations 2008' requires companies preparing Companies Act accounts that measure certain financial instruments at fair value to provide the disclosures required by UK-adopted international accounting standards. I presume that if IFRS 19 is adopted then a company in that situation that is in scope of IFRS 19 could provide the disclosure requirements of IFRS 19 rather than full IFRS Accounting Standards. If that is the case, it would be helpful to explain that in the DECA and consider the impact.

DECA Invitation to comment

Q1+2 Do you agree that the technical accounting criteria assessment considers the main key aspects?

The regulations require you to assess the standard, but this section of the DECA also includes various requirements in company law in the assessment. I think those should not be part of your criteria for assessing the standard, but I do agree that legislative matters should be considered somewhere in the adoption decision-making process, perhaps in a new section of the DECA that also addresses the legal issues I mention above?

I think it is wrong to say in Table 5 that the IAS 19 section of IFRS 19 has no significant reductions in disclosures. The reductions in respect of defined benefit pension obligations are significant (and much more extensive than those in FRS 101). I think this warrants some further analysis because members of a pension scheme of an entity applying IFRS 19 will be users of that entity's financial statements (see Q11).

Q3+4 Do you agree with the draft assessment of IFRS 19 against the technical accounting criteria?

Overall, yes. I have a couple of minor comments on the drafting.

The criteria in paragraph 2.6 of the DECA suggest that if a section of IFRS 19 has one of those features it would be considered further, but IAS 41 and IFRS 5 are not identified as a key aspect despite having significant reductions in disclosure (paragraph 2.6(b) of the DECA). I don't think the disclosure reductions there are particularly interesting, so perhaps it is the description of the criteria in paragraph 2.6 that needs to change rather than further detailed analysis being done on those sections of IFRS 19.

In relation to paragraph 2.4, which says the UKEB is required to adopt an absolute, rather than relative, approach:

paragraph 2.8 implies that your assessment is carried out relative to extant disclosure requirements.
paragraph 2.5 says that IFRS 19 does not introduce new disclosure requirements, but on an absolute basis everything is new.

I think the subsequent assessment is done on an absolute basis, so this mismatch could be resolved with some redrafting of paragraph 2.5 and 2.8 of the DECA.

Q5+6 Do you agree with the initial overall assessment of the costs likely to arise from the implementation of IFRS 19?

Generally yes, but note Q17.

Q7+8 Do you agree with the initial overall assessment of the benefits likely to arise from the implementation of IFRS 19?

Generally yes, but note Q17.

Q9+10 Do you agree with the draft assessment that IFRS 19 is likely to be conducive to the long term public good in the UK?

Not yet. I do not think there is space in the UK financial reporting framework for two IFRS-based reduced disclosure frameworks (FRS 101 and IFRS 19). Having both adds needless complexity and leaves room for arbitrage, which is not in the public interest. Overall, I think that IFRS 19 is better than FRS 101, mainly because FRS 101's interaction with Schedule 1 to the Regulations is occasionally extremely complex and its exemptions from a cash flow statement and from any disclosure about financial instruments by non-financial institutions are outdated and fly in the face of users' need for information about solvency and liquidity. However, I do not think you should endorse IFRS 19 unless the FRC intends to withdraw FRS 101.

Q11 In our [Draft] ECA, we described a set of users who may use the financial statements of subsidiaries without public accountability. Do you agree that the UKEB has not overlooked any user category that could be substantially affected by the reduced disclosure requirements of IFRS 19?

I think that employees could be substantially affected, for example in respect of the reduced IFRS 2 and IAS 19 requirements, and members of a defined benefit pension scheme in which the entity is a sponsor, for example in respect of the reduced IAS 19 requirements.

Q13 IFRS 19 provides a definition of “public accountability" to set the scope for a subsidiary's eligibility to voluntarily apply the Standard. The IFRS 19 definition differs from the definitions of “public interest entity” and “public interest company" set out in Part 16 of the Companies Act 2006, which relate to audit. As the definitions in the Act do not relate to reporting under UK-adopted international accounting standards, do you agree that this issue is not relevant to the UKEB's endorsement assessment of IFRS 19?

I agree it is a matter of fact that definitions in legislation apply only to the legislation to which they relate.

However, regulation 5(a) of 'The International Accounting Standards and European Public Limited Liability Company (Amendment etc) (EU Exit) Regulations 2019' means that the UKEB's remit is the harmonisation of financial information presented by companies required by section 403(1) of CA2006 to apply IAS; such companies are those whose securities are admitted to trading on a UK regulated market; therefore, every company relevant to the UKEB's remit is also a public interest entity as defined in s519A(1) of CA2006. And so I can see why the concept could have some relevance to your work.

As I set out earlier, I do not think the UK 's reporting framework was designed with IFRS 19 in mind and the fact the 'IFRS for SMEs Accounting Standard' has never been considered for endorsement as an 'IAS' means there are questions that need to be answered about what the UKEB's remit is, or is intended to be: does the limited scope of IFRS 19 place it outside of your remit?

Q15 Do you agree with the draft assessment that IFRS 19 is not contrary to the true and fair view requirement?

As I say earlier, I do not think there is space in the UK reporting framework for two IFRS-based reduced disclosure frameworks (FRS 101 and IFRS 19). One of the complexities in having both is that there would be two competing standards with extremely similar scope and objectives and which both claim to give a true and fair view (or equivalent), but which have very different presentation and disclosure requirements. There is an obvious conflict there and I think it would be much more helpful for there to be a single IFRS-based reduced disclosure framework available for use in the UK that can be used to satisfy the 'true and fair' legal requirements.

But I agree that IFRS 19 is not contrary to the true and fair view requirement. The solution is for FRS 101 to be withdrawn.

Q17 Do you agree with the tentative assessment in the [Draft] ECA that IFRS 19 is not likely to lead to a significant change in accounting practice?

No.

I think there is a significant mismatch in the DECA between the statements made in paragraph 5.8 and 5.9(b) and the discussions and conclusions in Section 3. If it is true that IFRS 19 will not significantly change accounting practice because application will be minimal, then I think that most of section 3 could be entirely replaced with a simple statement that there will be no meaningful improvement to the quality of financial reporting, no meaningful costs and benefits, and no meaningful effect on the UK economy. In that case, I think you would struggle to argue that the long-term public good assessment test has been met.

I suggest you take a different perspective: if you are to endorse IFRS 19 then it must be the case that you anticipate IFRS 19 being used by many UK subsidiaries, substantially increasing the number of companies preparing IAS accounts and being directly affected by the UKEB's work. I think this would therefore be a significant change in accounting practice, worthy of you carrying out a post-implementation review to test those assumptions, the conclusions in Section 4 of the DECA, and to gain insight on actual quantitative measures of impact.

I also think the assessment approach in paragraph 5.5 of the DECA omits to consider other important impacts of the standard, for example impacts on users of financial statements and benefits to a wider corporate group as well as the subsidiary entity applying IFRS 19; the IASB's Effects Analysis has lots more detail in this regard that you could repurpose.

The UKEB's due process handbook says that a new standard would usually be a significant change in accounting practice and I think it is surprising that for both IFRS 18 and IFRS 19, which are new standards, you have concluded otherwise. If the statement of the UKEB's policy in paragraph 8.6 of the Due Process Handbook is not accurate it should be updated.

Steven Hansen

Search