Technical update

Sustainability assurance

The Financial Reporting Council (FRC) has issued ISSA (UK) 5000, General Requirements for Sustainability Assurance Engagements. The standard provides companies, investors and assurance providers with a consistent, internationally aligned standard for voluntary use in sustainability assurance engagements. Read guidance from AB ‘Get ready for ISSA 5000’ and ‘Standardising sustainability assurance’.

Cybersecurity toolkit

The National Cyber Security Centre has launched a cyber action toolkit: a single destination for sole traders, micro businesses and small organisations to start building their cyber defences. The toolkit asks the user several questions and then provides a checklist of matters to address. It has guidance covering everything from how to change a Gmail password to how to turn on automatic updates for your apps.

SME accounting

The FRC has published a review of reporting by the UK’s smaller listed companies. It focuses on four key areas where investors pay close attention and where the FRC has historically identified room for improvement:

• revenue recognition (the goal is to ensure clear, company-specific accounting policies)
• cashflow statements (to encourage accurate classification and consistency with other disclosures)
• impairment of non-financial assets (to enhance the transparency disclosure of assumptions and sensitivities)
• financial instruments (to tailor policies and risk disclosures to the company).

Audit best practice

Following inspections of the 12 largest audit firms in the UK, the FRC has published key findings and a good practice report. It has previously reported on areas of weakness in audits, and this report looks at some of the best practices in audit in those areas where weaknesses were identified.

Those weaknesses include impairments, provisions, revenue recognition, valuation of assets and liabilities, inventory, ISQM1, planning and risk assessment, IT testing and group audit oversight. See also the AB article ‘SME auditors seek reform’.

Interest rate risk

The International Accounting Standards Board (IASB) has proposed a new accounting model to better reflect how financial institutions manage interest rate risk. Its ‘risk mitigation accounting’ tackles concerns that current hedge accounting requirements do not adequately reflect how interest rate risk is managed. The standard-setter says its proposed amendments to IFRS 9, Financial Instruments, and IFRS 7, Financial Instruments: Disclosures, will bring greater transparency to how interest rate risk management affects financial performance and cashflows.

Reporting uncertainties

The IASB has released illustrative examples demonstrating how companies can apply IFRS Accounting Standards when reporting effects of uncertainties in financial statements. The examples use climate-related scenarios to illustrate underlying principles characterising all uncertainties.

Assurance

The International Auditing and Assurance Standards Board has published illustrative assurance reports to help practitioners implement ISSA 5000, General Requirements for Sustainability Assurance Engagements. The example reports address real-world scenarios and include unmodified assurance conclusions, sustainability disclosures and multiple reporting frameworks. There are also example reports with modified conclusions illustrating qualified conclusion, adverse conclusion and disclaimer of conclusion.

Public sector

The International Public Sector Accounting Standards Board (IPSASB) has updated IPSAS 33, First-time Adoption of Accrual Basis International Public Sector Accounting Standards. The update explains how public sector entities can start using IPSASB accrual standards consistently and credibly, and offers temporary exemptions and accommodations to standard IPSASB rules. It also includes more user-friendly guidance as well as relief provisions to encourage earlier recognition and measurement of items.

Investment schemes

The International Organization of Securities Commissions is consulting on changes to the valuing of collective investment schemes. Planned revisions cover oversight arrangements, governance under stressed market conditions, conflicts of interest management, fair value, backtesting, the use of third-party valuation service providers, stale valuations and record-keeping.

Academic studies

The International Association for Accounting Education and KPMG International have launched a new round of their joint research grant programme, which funds academic studies delivering objective and evidence-based insights relevant to IASB projects. US$20,000 will be awarded to each of up to four projects investigating the following topics: how digitisation and other analytical tools affect how investors collect, access and process financial statement information; how IFRS 17, Insurance Contracts has affected insurer-investor communication; and how the IFRS for SMEs standard supports lenders and users of SME financial statements.

Sustainability

The European Union has further reduced the range and responsibilities required by its sustainability reporting legislation. The EU Council of Ministers and the European Parliament have struck a provisional deal that increases the threshold for companies covered by the EU Corporate Sustainability Reporting Directive (CSRD) to a minimum of 1,000 employees and a net turnover exceeding €450m. Ministers and MEPs also removed listed SMEs and financial holding organisations from the directive’s scope.

The EU’s co-legislators have also agreed to amend the Corporate Sustainability Due Diligence Directive (CSDDD), raising implementation thresholds to 5,000 employees and a net turnover of €1.5bn. Requirements on these larger companies to assess the sustainability impact of their value chains have been eased so that checks have to be made only on ‘chains of activities where actual and potential adverse impacts are most likely to occur’. The deadline for member states’ transposition of the directive into national law has been postponed by a year to July 2029.

These EU scope reduction moves have been criticised by the Global Reporting Initiative (GRI), whose models have influenced reporting under the CSRD. It argues that significantly cutting the number of companies that must comply with the CSRD and CSDDD ‘runs counter to business interests’. The GRI also warns that the EU’s goal of simplification may not be achieved as ‘it leaves thousands of companies in limbo about how to satisfy stakeholder interest in their sustainability performance’.

Meanwhile, the European Financial Reporting Action Group has sent a draft version of simplified European Sustainability Reporting Standards to the European Commission. The simplifications include substantial flexibility, reliefs, phasing in and a 61% cut in mandatory datapoints. There will also be enhanced interoperability with IFRS Sustainability Disclosure Standards, promoting common disclosures.