Written by Alex Perkins, Senior Statutory Analyst
This report details likely future developments in the regulatory and statutory environment, which are anticipated to impact on the Accounts templates produced and distributed by CaseWare UK Limited. Information is gathered from a number of publicly available sources. Timeframes may be speculative but are based on information publicly available.
At present, the focus is principally on Desktop products. However, while the process of developing Cloud solutions is ongoing, specifications will be reviewed to ensure that the Beta and full release templates represent the extant reporting landscape.
Details of recently implemented changes are included in the appendix.
DEVELOPMENTS IN 2021
|Academies Accounts Direction (AAD) 2020-21 Supplementary Bulletin|
|Background||To accompany the AAD for the last two years, ESFA has published a supplementary bulletin covering specific reporting requirements relating to COVID-19 activities. This year, this became available on 20 July.
The key impact centres on providing detailed information on COVID-19 related funding received.
|Impact on CW Accounts||
This has been reviewed in full and further changes will be included in an ePack, with a supporting tPack, scheduled for release in September. The most complex changes will be to the Funding for Educational Operations note (which was previously amended in EPCA4.05.03).
|Changes to UK Legislation resulting from exit from the EU|
|Background||An immediate impact of the United Kingdom leaving the European Union is that references in company law made previously to EEA entities will only apply to those registered in the UK. This affects companies and LLPs with reporting periods commencing on or after 1 January 2021.
The most significant aspects of the changes in law relate to exemptions from preparing consolidated accounts and from audit (subsidiary entities). In the first instance, the definition of an ineligible group has changed, while the subsidiary audit exemption will now only be available where the group is headed by a UK registered parent.
|Impact on CW Accounts||The changes in legislation impact all templates. However, the effect on content is minor – the majority of amendments will centre on guidance text. Updates are currently scheduled for release prior to the end of the year in EP4.05.04.|
|Market Outlook||In the absence of parent entities being relocated to the UK, the number of groups able to avail of the subsidiary entity audit exemption will be fewer. This should result in an increase in audit engagements.
At present, Companies House will not accept the electronic filing of accounts for entities taking advantage of this audit exemption. However, a reduction of the number of companies falling under this scenario and moving into the ‘audited accounts’ sphere should facilitate this approach.
|Interest rate benchmark reform|
The FRC is currently responsible for issuing reporting and auditing standards effective in the United Kingdom, as well as taxonomies for tagging of accounts and returns for submission to Companies House and HMRC. Over the course of the year, multiple projects will be concluded, leading to the publication of updates to standards or new taxonomy suites. At present, the following are expected to require action:
• Regular cyclical updates to FRS 101 Reduced Disclosure Framework – exemptions available to qualifying entities in scope to apply this standard are updated on an annual basis, based on the corresponding amendments to international standards. The 2020/21 cycle sees the removal of an obsolete exemption and the addition of an exemption relating to tangible fixed assets;
• Further updates to FRS 102 Section 20 Leases in respect of COVID-19 rent concessions – the eligible period has been extended by a year due to the enduring nature of the pandemic 1;
• A full suite of new XBRL taxonomies – updated versions are published periodically to reflect changes in reporting requirements. It is anticipated that Companies House and HMRC will both be in a position to accept accounts tagged under the 2021 suite by the summer. There is no change to Irish taxonomies.
1 A similar amendment has been made to IFRS 16; however, the standard wording in the accounting policy in the IFRS template did not reference the period in scope and therefore, no further change will be required in this respect.
|Impact on CW Accounts||
Minor changes will be made to the AccountsAdvanced template to incorporate the changes to FRS 101 and FRS 102 (the latter also affects the Charity-Academy template). These have an effective date of reporting periods commencing on or after 1 January 2021.
While Companies House and HMRC will continue to accept accounts tagged under the 2019 suite of taxonomies, we consider it best practice to make the latest version available as soon as is practicable. This involves liaison between the product management and development teams to ensure that the new suite can be accessed and that the level of auto-tagging applied to the various templates remains at a consistently high level.
These changes are scheduled for:
EP4.05.03 – rent concessions (Corporate). The corresponding change to the Charity-Academy template has already been released in EPCA4.05.03
EP4.05.03 - 2021 taxonomy availability (Corporate and IFRS templates)
EP4.05.04 – FRS 101 reduced disclosure exemptions
|Revised LLP SORP|
|Background||CCAB is unexpectedly consulting on an update to the LLP SORP. The summary information issued alongside this document specifies that this focuses primarily on interpretation of whether a division of profit is automatic or discretionary. There will also be additional guidance on the presentation of cash flows and other clarifications.
The consultation is open for comment until 24 September 2021, with the revised version of the SORP will be effective for periods commencing on or after 1 January 2022.
|Impact on CW Accounts||While a full review of the proposals will be undertaken later in the year, the indications are that we will be required to make updates to the cash flow statement and accounting policies. This is unlikely to require a separate full ePack to ensure continued compliance with the SORP, although it may be appropriate to capture other LLP-specific bugs and requests at the same time.
We should expect to see the final version of the SORP in Q4 2021/Q1 2022. As an early adoption window is usually provided, development should be scheduled for Q2 2022.
|Market Outlook||While the focus is on migrating our Desktop suite to the Cloud, the effective date of these revisions is likely to be too early to act as a trigger for a full transition to the new platform for LLPs.|
|Irish Auditing Standards|
|Background||IAASA issued revisions to a number of ISAs (Ireland) and the Ethical Standard for Auditors (Ireland) towards the end of 2020. These will be mandatory for audits of financial statements for periods commencing on or after 15 July 2021. The amendments are similar to those made to the UK versions of equivalent standards.|
|Impact on CW Accounts||The audit reports available specifically for Irish companies in the AccountsAdvanced Corporate and IFRS templates will require updates. We expect to make these available in Q2 2022.|
|Mandatory Climate-related Financial Disclosures (UK)|
|Background||BEIS has also been consulting on proposals for mandatory climate-related financial disclosures to be included in the Strategic Reports of publicly quoted companies and large private companies. Large LLPs will also be required to publish these disclosures. The definition of ‘large’ in this context is an annualised turnover of more than £500million and employee numbers exceeding 500. This is significantly different to ‘large’ as defined by the Companies Act 2006.
The proposals are to mandate companies and LLPs in scope to explain the interaction between governance, strategy, risk management processes and the metrics and targets used and climate-related risks and opportunities.
Feedback is currently being analysed with regulations to be written into statute through a Statutory Instrument. These disclosures will be mandatory for reporting periods commencing on or after 6 April 2022.
|Impact on CW Accounts||The Strategic Report (see Members’ Report for LLPs) is largely user input and any changes enforced by the upcoming legislation are likely to be easily incorporable. We may, however, wish to consider allowing a custom or freeform Strategic Report to be included, as a way of improving the user experience, particularly when this document is produced outside the software.|
|Market Outlook||These additional disclosures follow those introduced from 2019 for energy and carbon reporting. In view of pressure from governments and investors to address and explain the likely impacts of climate change, we should expect to see further expansion in disclosure requirements of this nature.|
The FRC has committed to review the UK reporting standards on a periodic basis, likely to be every four to five years. The first such review took place in 2017, leading to amendments to FRS 102 and FRS 105 effective for reporting periods commencing on or after 1 January 2019.
In March 2021, the FRC requested views from stakeholders on areas to be considered as part of the second periodic review, indicating that an exposure draft for public consultation would be released in 2022 and the effective date for any amendments would be 1 January 2024 (although we fully expect early adoption to be available from the date of publication of the final updates).
|Impact on CW Accounts||
While the scope of this review is unknown, developments in the IFRS environment in the period since 2017 inform the expected content. As it is a stated aim that UK GAAP should align with international reporting standards, we anticipate significant changes to the accounting for and reporting of financial instruments, revenue from contracts and leases.
As well as updates to FRS 102 and FRS 105, we expect SORP-making bodies to issue new versions of their statements (which may include amendments over and above those in the main standard). Among the current Desktop product suite, this is likely to lead to significant levels of change being applied to the Corporate, Charity-Academy and Pension templates. Given the timeframe, we will also need to consider Cloud templates.
|Market Outlook||With the transition towards Cloud-based solutions for statutory accounts beginning to gain traction, significant changes in the reporting landscape may act as the trigger for users of existing Desktop functionality to look to switch to the Cloud.|
|IFRS 17 Insurance Contracts|
|Background||IFRS 17 is designed to replace the interim standard IFRS 4 and marks the conclusion of the IASB project on insurance contracts. It will lead to less variability in the principles for recognition, measurement, and disclosure of insurance contracts in accounts.
The standard is effective for reporting periods commencing on or after 1 January 2023, although early adoption is available.
Note that the FRC has amended FRS 101 to state that any entities with contracts within the scope of IFRS 17 will no longer be considered as ‘qualifying entities’ and cannot apply the reduced disclosure framework standard i.e. they must produce full IFRS accounts.
|Impact on CW Accounts||
Following a conversation with the Product Manager, we have concluded that no updates are planned to the IFRS template in respect of IFRS 17.
This decision is informed by the markedly different financial reporting requirements for entities in the insurance sector, and while companies in other sectors may have insurance contracts in scope, the current template does not cater for IFRS 4 and due to its limited use it is not commercially viable to include it in the scope of the template design. The range of customisation options available in the template will however enable any required disclosures to be added by clients.
The IASB undertakes multiple projects simultaneously. Many of these centre on specific technical aspects of the international standards and either result in minor amendments or the publication of implementation guidance or cover broad conceptual projects with a long lead time before a change to an existing standard or publication of a new standard is effective.
• Amendments to IAS 1 Presentation of Financial Statements resulting from the Disclosure Initiative – Accounting Policies project – this is effective for reporting periods starting on or after 1 January 2023. This has been reviewed and the requirements understood.
• Primary Financial Statements – General Presentation and Disclosures is expected to lead to a replacement for IAS 1; however, no timeframe is currently attached;
• Goodwill and Impairment – the IASB intends to present its position on the treatment of goodwill in business combinations and its subsequent impairment. We await this and information on any amendments to existing standards;
• A new approach to developing and drafting disclosure requirements is being piloted in conjunction with proposed changes to IFRS 13 Fair Value Measurement and IAS 19 Employee Benefits. An exposure draft was published in March 2021 and is open for comment until October;
• A minor amendment to IAS 12 Income Taxes in respect of accounting for deferred taxation was issued in May 2021, with effective date 1 January 2023;
• Disclosure Initiative – Subsidiaries that are SMEs – a reduced-disclosure IFRS Standard is being developed as an option available to subsidiaries which are SMEs. An exposure draft was published at the end of July and is under consultation until 31 January 2022.
|Impact on CW Accounts||
Where the IASB has issued finalised publications for the above initiatives, our work programme will encompass the following:
• Amendments to IAS 1 Presentation of Financial Statements – this alters the disclosure requirement from including ‘significant accounting policies’ to ‘material accounting policy information’. At a simplified level, we will be required to update wording in this respect e.g. in the audit report, any preamble to the accounting policies themselves. In terms of accounts preparation, we currently do not distinguish significant policies meaning that user tailoring will still be necessary;
• Amendment to IAS 12 Income Taxes – update standard wording in the Taxation accounting policy for the IFRS template.
|Market Outlook||A key theme evident from the IASB’s current work programme is that after a period of issuing new standards with a focus on recognition and measurement principles, there is now a shift towards enhancing the quality of disclosures. We should expect a higher number of amendments across a greater range of our standard disclosures. There is a stated desire amongst standard setters to improve narrative reporting and this is likely to translate into requirements to provide additional and more detailed explanations of factors surrounding financial disclosures.
The initiative to provide optional disclosure exemptions appears very similar to that currently in existence with FRS 101. There is the possibility that this will result in companies currently reporting under the UK GAAP standard moving across to IFRS (a change in accounting framework is permitted once every 5 years); however, the new IFRS standard will firstly need to be endorsed for adoption in the UK and/or the EU.
|UK Government consultation on the companies' register|
|Background||The Department for Business, Energy and Industrial Strategy (BEIS) and Companies House initiated a joint consultation in December 2020 to garner opinion on the Government’s proposals to reform the powers and role of Companies House. The key themes centre on requiring companies to file all accounts electronically, a single submission to all government agencies, the options available to small companies in view of balancing minimal burden with valuable information, and additional checks to be carried out on accounts when filing.
Feedback is currently being analysed with further information expected to be published later in 2021
|Impact on CW Accounts||Although yet to be concluded, the initiative is likely to result in significant changes being required to the Accounts templates and supporting infrastructure. A single submissions gateway is likely to be created with associated validations to be met. The requirement for all accounts to be filed electronically with Companies House will impact on the level of auto-tagging we make available, while changes to the small companies filing regime will require the content of final accounts to be revisited.|
APPENDIX - RECENT IMPLEMENTATIONS
|Academies Accounts Direction (AAD) 2020-21|
|Background||The annual update published by ESFA was finalised on 31 March 2021, although will again be accompanied by a supplementary bulletin covering specific reporting requirements relating to COVID-19 activities with likely publication date of June/July 2021. The AAD has been reviewed in full and the required work programme identified. This encompasses now-familiar adjustments and is not considered to be onerous for Development and QA departments.|
|Impact on CW Accounts||Updates to the Charity-Academy template with an accompanying tPack were released in July (EPCA4.05.03) in line with our traditional schedule.|
*Please note that this is an interpretation of the standards and should not be relied upon when offering advice.