Research activities
9 minute read
Introduction
The FRC’s Corporate Reporting Policy Research activities contribute to the FRC’s purpose by:
- stimulating debate on important financial reporting issues at an early stage in the standard-setting process, typically before the IASB has issued formal proposals;
- identifying possible improvements for UK financial reporting to investors and other stakeholders.
This page lists the Research projects we have undertaken.
Intangibles: How Can Business Reporting Do Better?
This project seeks to review current requirements and practice for the reporting of intangibles and to develop proposals for their improvement that can be implemented in the near future. The scope of the project includes the treatment of intangibles in both the financial statements and in narrative communications, such as the Strategic Report.
Preliminary Earnings Announcements
A project on Preliminary Earnings Announcements (PEAs) is being undertaken by the Corporate Reporting Research Team, in order to understand recent developments in PEAs; and to develop our understanding how investors use the information contained in preliminary statements to make investment decisions.
We have conducted outreach with investors, and the this will be broadened by outreach to auditors and preparers of financial statements.
In conjunction with this project, research is also being conducted by the Corporate Financial Information Environment Project (‘CFIE Research)’, the aim of which is to study the tone and other language properties of preliminary report narratives. The project also compares PEAs with annual financial reporting to determine the degree of alignment between the preliminary report commentary and annual financial report narratives.
We are co‑ordinating this work with that of the Audit Policy Team—see Discussion Paper - Invitation to comment: Auditors and Preliminary Announcements
Improving the Statement of Cash Flows
The FRC issued a Discussion Paper ‘Improving the Statement of Cash Flows’ in October 2016 to gather input on ideas to improve the usefulness of the statement of cash flows. The Discussion Paper, and the responses to it, was intended to contribute to the IASB’s project on ‘Primary Financial Statements’.
In July 2016, the FRC published a feedback statement summarising respondents’ comments. Most respondents welcomed the publication of the Discussion Paper and agreed with most or some of its suggestions.
The Discussion Paper, and the responses to it, are intended to contribute to the IASB’s project on Primary Financial Statements.
Getting a Better Framework
The FRC is contributing to IASB’s work to develop its Conceptual Framework for Financial Reporting by working in partnership with EFRAG and the national accounting standard-setters of France, Germany and Italy under the title “Getting a Better Framework”.
The aim of the partnership is to facilitate the participation of European constituents in the critical debate for the future of IFRS, to ensure ultimately that the revised conceptual framework will be widely supported and provide a basis that can assist in the production of high quality and effective financial reporting standards.
The partnership’s approach to its work is summarised in Getting a Better Framework: Our Strategy (PDF).
Bulletins in the Getting a Better Framework series are:
Investor Views on Intangible Assets and their Amortisation
In March 2014, the FRC published a paper detailing the results of research into investor views on accounting for intangible assets under International Financial Reporting Standards (IFRSs).
The report reflects the views of 27 investors on the accounting treatment of different classes of intangible assets in the statement of financial position and their amortisation in the income statement. Investors were asked to provide their views on:
- intangible assets acquired in a business combination
- internally generated intangible assets
- separately acquired intangible assets; and
- the adequacy of presentation and disclosure.
FRC ARP Staff Research Report: Investor Views on Intangible Assets and their Amortisation (PDF)
The Role of the Business Model in Financial Statements
In December 2013, the FRC published a Research Paper, ‘The Role of the Business Model in Financial Statements, which was the result of joint project between the FRC, The European Financial Reporting Advisory Group (EFRAG) and the Autorité des Normes Comptables (ANC).
The term ‘business model’ appeared in the IFRS literature for the first time when IFRS 9 Financial instruments was issued in 2009. The Research Paper considered the use of the term and shows that the notion has been an implicit part of IAS/IFRS for a long time. The business model provides insight into how value is captured and net cash flows generated through income in the normal course of a business and it is not clear why the notion is not been more broadly used in IFRS.
The Research Paper argued that the business model should play a role in financial reporting and be part of the revised Conceptual Framework. Therefore, all standards must be capable of representing faithfully the business model, and, where applicable, the business model should explicitly be incorporated on a standard-by-standard basis. Its consequences for recognition, measurement, and presentation and disclosures should be assessed, and decisions should be taken whether and how the business model should affect financial reporting.
In September 2014, the FRC published a Feedback Statement that can be downloaded here (PDF).
How Credit Analysts View and Use the Financial Statements
This research paper was conducted to identify if credit analysts’ views and use of the financial statements differs from those of equity analysts’. The research for the paper was conducted in the spring of 2012. The recommendation of the paper is that the FRC should:
- seek to influence the IASB to spend more time talking to credit analysts’ as a separate class of user; and
- in developing UK financial reporting standards, the needs of debt financiers rather than solely equity financiers should be considered.
Improving the Financial Reporting of Income Tax
The Accounting Standards Board (ASB) of the FRC and the European Financial Reporting Advisory Group (EFRAG) published a paper in order to solicit views on how the financial reporting of income tax could be improved.
Tax is an important expense for most companies, and transparent and complete financial reporting is complex because the tax effects of transactions do not always fall in the same period as they are reported in the financial statements.
Requirements for the financial reporting of income tax are currently set out in IAS 12 ‘Income Taxes’. Some consider that the information that is provided in compliance with that standard is not as useful as it might be, and that the standard is cumbersome and difficult to understand and apply in practice.
The new paper discusses ways in which the usefulness of information prepared in accordance with IAS 12 could be enhanced. In particular it discusses possible changes to the reconciliation of tax expense to a standard rate; revisions to the requirements in respect of uncertain tax positions; and whether deferred tax should be discounted.
The paper also discusses alternative approaches that could form the basis for a new accounting standard that would replace IAS 12. These are the flow-through approach (under which only the tax payable on taxable income for the period is reported as an expense); the partial allocation approach (under which only those tax effects likely to affect the tax payable for future periods is deferred); the valuation adjustment approach (under which tax effects are dealt with as part of the carrying amount of related assets and liabilities); and the accruals approach (under which the tax effect of all transactions are recognised and allocated to the period to which they relate).
In February 2013 EFRAG and the FRC published a Feedback Statement on the discussion paper, which provides an analysis of comment letters received on this consultation.
Respondents generally welcomed the Discussion Paper as an introduction to an important debate. Most agreed that the current accounting standard, IAS12, is complex to apply and supported attempts to simplify its requirements. Almost all respondents said that its deficiencies were on both a conceptual and an application level. However, they also felt that the standard is not fundamentally flawed and is generally well-understood by preparers and users of financial statements. A fundamental change to the existing model for the accounting for income tax may therefore add further complexity and may not satisfy user needs. The best way forward would be to address the deficiencies through limited improvements to the standard.
The few respondents that supported a complete rethink of IAS 12 expressed support for the accruals approach outlined in Part 2 of the Discussion Paper. According to them, income tax accounting should be based on a principle that requires tax assets and liabilities to be recognised in accordance with the recognition criteria under the IASB’s Conceptual Framework.
Feedback Statement: Improving the Financial Reporting of Income Tax (Joint with EFRAG)
Considering the Effects of Accounting Standards
Position Paper and Feedback Statement for proactive project ‘Considering the Effects of Accounting Standards
The European Financial Reporting Advisory Group (EFRAG) and the Accounting Standards Board (the ASB) of the FRC published the Position Paper: Considering the Effects of Accounting Standards (PDF) and the related Feedback Statement (PDF) . The Position Paper has been developed as part of EFRAG’s proactive agenda to contribute to improving the way in which accounting standard setters develop and implement standards throughout their due process, from start to finish.
EFRAG and the ASB have finalised the position paper and the feedback statement that they jointly developed on ‘Considering the Effects of Accounting Standards’. Comment letters were received from Europe, but also from a wider audience, in the public consultation to the Discussion Paper ‘Considering the Effects of Accounting Standards’, published in January 2011, and that input has proven to be invaluable to EFRAG and the ASB.
EFRAG and the ASB express the view that ‘effect analysis’ should be integrated into the standard setting process over the life-cycle of projects, from the agenda proposal stage through to the final standard stage, so as to further enhance the transparency of the due process and to increase the accountability and credibility of the standard setter. Effect analysis may be used to assess the extent to which a standard will meet its intended outcomes, as defined at the outset of the project.
The paper affirms that the standard setter should primarily assess the effects of a standard from the standpoint of whether it contributes to the delivery of improved financial reporting. Micro-economic effects, that is the effects on investors and reporting entities, should be the focus of the standard setter. Potential macro-economic effects, if identified, should trigger communication with relevant authorities, so that appropriate actions or coordination can take place.
Reflecting on comments received, EFRAG and the ASB have limited their recommendations to setting out an outline process (objective and key steps) for effect analyses. A detailed methodology should be developed by the standard setter, after gaining benefit from practical experience. The IFRS Foundation has asked the IASB to take action to that end. EFRAG and the ASB are ready to contribute to this effort.
EFRAG and the ASB would like to thank all the respondents to the Discussion Paper, and the National Standard Setters in Europe who supported the positions reached in the Position Paper, for their contribution to influencing the development of IFRS.
Financial Reporting of Pensions
This page was last reviewed in December 2011.
The Accounting Standards Board (ASB) completed its research project into the Financial Reporting of Pensions and issued its final report ‘The Financial Reporting of Pensions: Feedback and Redeliberations’ in November 2009. The objective was to provide the International Accounting Standards Board (IASB) with recommendations on matters it might consider in developing a future financial reporting standard on pensions.
The report was a follow-up to the January 2008 Discussion Paper (DP) ‘The Financial Reporting of Pensions’. It sets out the ASB’s redeliberations and recommendations following the comments received during the consultation process. A total of 103 responses were received to the DP and the ASB spent considerable time in reviewing the issues raised.
The report was published under the Pro-active Accounting Activities in Europe (PAAinE) initiative by the ASB, the European Financial Reporting Advisory Group (EFRAG), the Accounting Standards Committee of Germany (ASCG) and the French Conseil National de la Comptabilité (CNC). The recommendations were, however, only those of the ASB. The other bodies consider the report a useful contribution to the debate on the financial reporting of pensions, but do not express a view as to the recommendations.
The report, in the main, affirmed the views set out in the DP, acknowledging that a number of them cover difficult issues and are controversial. In particular, on the measurement of liabilities, it affirmed the view that the discount rate used should reflect the time value of money, and therefore should be a risk-free rate. The ASB reiterated that it is not possible to make a reliable estimate of the risk arising from the size and variability of the liability to pay pension benefits. In its view, users of financial statements are better served by disclosures regarding the risk than through adjustment of the underlying liability.
Liabilities and how to account for them
This essay explores the application of the value to the business (or ‘deprival value’ model and suggests that it may provide a rationale for stating liabilities at entry values in many cases, including those in respect of payments received from customers.
Discounting in Financial Statements
Our work on discounting in financial statements aims to provide greater clarity on the conceptual basis that should govern the use of discounting in financial statements. It currently focuses on two issues.
The first is how income and expenses relating to discounted amounts should be presented and described in the profit and loss account and/or in other comprehensive income (OCI). Interest is one example of such income and expense, and is significant as it is part of the calculation of Earnings Before Interest and Tax (EBIT). This part of our work will include outreach to investors, to gain an understanding of the presentation that they find most useful.
The second issue within this work is that of considering the significance and relevance of measuring assets and liabilities by discounting, other where the objective is to estimate fair value. If a factor that would be reflected in a fair value estimate are excluded (for example, liquidity risk) what does the resulting measurement (and changes in it) mean?