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UK FRC gives evidence to government committee

It was expected to be a grilling, but appearing in front of the UK House of Lords' economic affairs committee, UK Financial Reporting Council (FRC) chairman Sir Win Bischoff and chief executive Stephen Haddrill managed a convincing double act giving them a few months respite.

Bischoff and Haddrill were giving evidence to the committee following the closure of the FRC third consultation on proposed change on going concern based on Lord Sharman's report published in 2012.

Haddrill said the latest FRC draft on going concern responded to two of the three main objectives Lord Sharman set to the UK watchdog.

The first objective was to clarify the meaning of going concern as well as the material risks and uncertainties affecting going concern. Many users of accounts wrongly apply going concern to the future rather than the particular moment when the accounts are signed, Haddrill explained.

The second objective was to get businesses to adopt a longer prospective view on the direction their company is going in. To that effect Haddrill said the FRC was proposing an additional statement where the company board would explain its expectations of meeting its solvency and liquidity requirements over a period of time, this period of time being defined by the company directors themselves.

"This raises a question of subjectivity," a committee member opposed. "No one will say that their company will disappear in five years."

There is a part of subjectivity, Bischoff conceded. "But companies will have to disclose the reasons for choosing the particular period of time they have chosen as well as the assumptions which lead to their conclusion and these will make for valuable information for investors."

"We tried to come up with something which doesn't necessarily please everyone but gives trustworthy information to shareholders," Bischoff added.

The third objective was for the FRC to lobby the International Accounting Standard Board (IASB) for an international framework for going concern reporting.

"Frankly we struggled with this one," Haddrill confessed. "The IASB hasn't decided to go down that route which leaves us with the decision as to whether the UK does something quite ground-breaking that no-one else has done."

Two sets of accounts for banks
Committee member and former Chancellor of the Exchequer Lord Lawson asked Haddrill and Bischoff what they thought of the opinion of the banking standards committee which believes that banks should have two sets of accounts one serving the needs of investors and one for the regulatory body.

"I would prefer to see only one set of accountants which would meet the standards set out by the banking standards committee," Bischoff said.

Haddrill added that it was important not to have too many regulatory accounts as this could clutter up the picture for investors.

"We are a bit nervous about creating two sets of accounts for lots of different sectors, because that undermines the principle that there should be comparability between companies," he said.

Size of the financial report
During the hearing committee members were very critical of the size of the financial report. "Why do we need 600 and 700 page reports that no one understand," a committee member asked. "Why can't we have a 60 to 70 page reports which is understandable by all?"

Bischoff admitted he liked the idea of an executive summary which offered the core information to all shareholders. "Who is going to read 700 pages," he argued. "But standards and regulations require companies to produce those 700 pages report."

Haddrill added that clarity and conciseness should not be mistaken and suggested that the strategic report companies have to produce as part of their financial report since October 2013 aims to address this issue.

2008 type crisis will not come back
Asked if he believed the mistakes that led to the 2008 financial crisis had been dealt with and if they were likely to reoccur, Haddrill said: "I am confident we won't see a repetition of the mistakes that were made then."

To back this assumption Haddrill pointed to the resurgence of competition for quality. "We have now auditors thinking, how do I win an audit by doing the best job possible rather than the cheapest job," he said.

The committee ended the hearing asking when they could expect an announcement by the FRC on their third consultation on going concern which ended last month. "We are now considering the responses we've received and we expect to be able to make an announcement mid-September," Haddrill replied.

Related links:

UK FRC

The Sharman Inquiry

 

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