My Lords, these regulations, which were laid before the House on 1 February, aim to address matters relating to company reporting arising from the UK’s exit from the EU. I shall refer to these regulations as the delegation SI.
International financial reporting standards—IFRS—are a set of international accounting standards used in over 125 countries around the world, including Australia, Canada and across the EU. In a world with growing economic interconnectivity, accounts prepared in accordance with high-quality international accounting standards provide the consistency and reassurance that investors require to confidently invest in capital
markets. The Government are committed to IFRS as standards that drive improvements in the quality and comparability of financial reporting, facilitate investment across borders and build links for investors and regulators between capital markets. The UK is the largest single user of IFRS, with over 15,000 economically significant UK companies now using the standards. This includes all publicly traded companies, which are required to use them to prepare their consolidated accounts.
Legislation made in 2019 provided post-transition period continuity for IFRS by transferring all existing EU-adopted IFRS into UK law to form “UK-adopted international accounting standards”. I shall refer to these regulations as the principal regulations. The principal regulations also provided a mechanism for IFRS to be adopted for use in the UK after the end of the transition period. This action meant that the Secretary of State has been able to adopt crucial amendments to IFRS for use in the UK, including amendments relating to the ongoing interest rate benchmark reform. This was, however, intended only as an interim measure. The principal regulations also provided for the delegation of the adoption functions to an expert body.
The purpose of the delegation SI is straightforward. In line with the intent of the principal regulations, it will delegate decision-making powers on the adoption of IFRS to the recently established UK Endorsement Board. The board will have two primary responsibilities: it will be responsible for the analysis and adoption of IFRS for use in the UK, and for influencing the development of IFRS by the International Accounting Standards Board.
To adopt a standard, the endorsement board will need to be satisfied, first, that its application is likely to be conducive to the UK’s long-term public good; secondly, that the standard meets the criteria of understandability, relevance and comparability; and thirdly, that its application would not be contrary to the principle that accounts provide a “true and fair” view. In addition, decisions on the adoption of IFRS can be taken only following consultation with stakeholders with an interest in the quality and availability of accounts.
I turn to the endorsement board’s influencing work. While it is beneficial for the UK to maintain alignment with international standards, it is also important that those standards work for the United Kingdom. That is why influencing the development of IFRS by the International Accounting Standards Board is one of the board’s key responsibilities. Effectively performed, this will mean that UK interests are addressed during the development process and final standards reflect the needs of UK stakeholders.
These are substantial responsibilities, but the endorsement board has been equipped to meet those needs. Clearly, the calibre and expertise of those involved in the decision-making process is vital. The appointed board, led by Pauline Wallace, is talented, experienced and diverse. Its membership includes preparers of accounts, members of accounting firms and academics and investors; an economist will also be recruited over the coming months.
Further, we recognise that the board’s decision-making, although independent, cannot overlook the regulatory context. As such, those in attendance at endorsement
board meetings will also include representatives from the relevant government departments, the FCA and the Bank of England. These observers will be involved in discussions but not the final decision-making stage, in order to maintain the board’s independence.
The endorsement board’s terms of reference were adopted at its first meeting in March and are available on the board’s website. The terms of reference are structured around guiding principles of accountability, independence, transparency and thought leadership. They provide for an active and transparent adoption process that is receptive to the views of stakeholders and reflects the long-term public interest. In drafting the terms of reference and the establishment of the endorsement board, we involved a broad range of stakeholders with an interest in IFRS, including regulators, at each stage of development. We are grateful for their insight and commitment.
I now move to the oversight of the endorsement board. The board is an independent unincorporated association supported by a subsidiary of the FRC via a service-level agreement. This agreement will include support in the areas of HR, finance and IT equipment to enable the board to carry out its work.
I have already stressed that the endorsement board’s decision-making will be independent. However, this does not mean that it should be beyond the reach of those with wider responsibilities for the integrity of company reporting. As such, a key principle of the adoption process will be transparency, with both the discussions and the outcome of adoption decisions being made publicly available.
The endorsement board will be accountable to the Secretary of State for how it performs its delegated functions, and the Secretary of State will, in turn, lay the endorsement board’s annual report before Parliament. The board will also report, in a publicly available document, on its governance and due processes to the FRC. I should add that the Secretary of State will also retain the ability to make regulations to amend or withdraw the delegation if it appears to the Secretary of State that the delegation is no longer in the public interest.
With the appointment of an interim chair, board members, the recruitment of a secretariat and adoption of the terms of reference, we have completed important steps to establish the endorsement board. The cost of this has been approximately £2 million over the past two years and we expect future ongoing costs of £2.9 million per year. These ongoing costs will be funded using the FRC’s levy on preparers of accounts. This will put the cost of the endorsement board to those who benefit most from IFRS.
In conclusion, I hope noble Lords will agree that delegating statutory powers to the UK Endorsement Board will support the UK’s long-term public interest and maintain high standards of UK company reporting. I commend the regulations to the Committee and ask it to support and accept them. I beg to move.
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