June

The Bruce Column — Putting the emphasis on behaviour

19 Jun 2012

In a landmark lecture the Chairman of one of the world’s largest banks, HSBC, has made it plain that changing behaviours is the key issue in restoring faith in the post-crash financial landscape. Our regular, resident columnist, Robert Bruce, reports.

It is time for a bit more realism, thought and perhaps humility in the often circuitous debate over post-crash regulation and reform. Certainly a good start was made in the recent lecture* from Douglas Flint, Group Chairman of global banking heavyweight HSBC. Flint is well-placed to provide this. His father before him was, and still is, a highly influential Scots accountant who, with great charm, took no prisoners when blunt speaking was required. Flint made the point that his father ‘taught generations of accountants in Scotland the difference between a profession and a job, instilling in everyone the responsibility, as well as the privilege, of being in a profession’.

This was his starting point in an argument which stressed human behaviour and downplayed regulatory solutions. Flint’s point was that to bring long-term change, improvement and a change in the public’s perception to the financial sector behaviour had to be at the heart of everything. ‘Capital, liquidity and infrastructure enhancement will also play a role as will better governance and supervision but the greatest opportunity for improvement will come from defining, teaching, reinforcing, rewarding and enforcing values in terms of behaviour’, he said.

But this will always be hard to bring about. ‘If we learn anything from history’, he said, ‘it is that we are destined to repeat mistakes whenever we believe that we have solved definitively the cause of the most recent crisis’. People want solutions which will bring them certainty. Yet certainty is never going to be possible in a complex world. ‘Ever more today, society does not want to acknowledge unpredictability’, he said, ‘particularly around economic outcomes – we want to believe an unwelcome outcome is the cause of failings that need both to be compensated and cause revisions to be made to the system to reinforce predictability and so restore confidence in the future’.

The Eurozone problem, Flint observed, was a good example of this: ‘If only it were as simple as moving a toggle switch between “Austerity” and “Growth”’, he said.

The reasons behind the great financial crisis were, of course, as much human as technical. And that makes it all much harder to accept. It is easier to say someone else was at fault rather than we were all at fault. ‘Simply put’, he suggested, ‘we believed that which was comforting to believe and we believed those in authority whether political, financial or economic when they confirmed that our aspirations were realistic’.

As a result a whole range of unlikely possibilities were seen as easily achievable, such as growth without an improvement in productivity, a step on the housing ladder without the need for a down-payment, house price inflation well beyond wage growth, higher returns without higher risk, and so on. And then post-meltdown and armed with enormous amounts of hindsight, a large number of people announced that they had seen the flaws all the time. ‘The band of those who claim they saw the impending wreck’, he said, ‘grows daily’.

But realistically they did not see it coming, nor were they likely to, and nor could regulation have done much about it. ‘A good parallel’, he suggested, ‘might be that we are very skilled today in understanding the cause of earthquakes, how to calibrate their impact and in building infrastructure and buildings better able to withstand the shocks but we still cannot predict where and how severe the next earthquake will be’.

The important point is to understand the causes, learn the lessons, build barriers to protect us in the future, and restore confidence. And much of that has been done. The question now is to move the argument on. And that means putting more emphasis on human behaviour than on regulation. ‘There is a real need for leadership to call the point at which we have to stop adding to the reform agenda and observe whether the aggregate of all that has been done has been sufficient to change behaviour so that the system in aggregate is fit for a purpose that is universally understood and accepted’, he said.

This is the hardest part. It is much easier to juggle with the creation of regulations than to try to alter behaviours, and being easier people tend to follow that route. Flint devised a simple test to highlight where reformers were putting their efforts. ‘It is worth noting that a simple word search in the Independent Commission on Banking Report mentions capital 463 times, liquidity 140 times and behaviour 7 times’, he reported. ‘In the FSA’s report into the failure of RBS, the numbers are 1389 for capital, 733 for liquidity and 16 for behaviour respectively’.

Yet it is in the field of behaviours where effort should be concentrated. ‘It is the aggregate of behaviour evidenced within the system and in particular how it has changed that will change society’s perception of banks rather than thousands of pages of worthy new regulations designed to work in theory’.

‘So rather than obsess about whether an organisation can break down exposures by the hour, by product, by customer, by industry classification, by business line, by country, by region’, he said, ‘care more about tone from the top, how individuals are screened for behavioural characteristics when recruited or promoted, how ethics and values are taught and reinforced, how values are enforced and rewarded and how an organisation looks for and adapts to changing expectations within the communities it serves’.

In other words make everything rather more professional. And use that word in its original sense.

* David Flint was giving the annual lecture the Institute of Chartered Accountants of Scotland holds in memory of Aileen Beattie, who was its technical director when she died after a long illness almost seven years ago. And in those few short years the lecture has developed into something which is expected to deliver really solid and powerful thinking. It fits with the ICAS self-image of direct speaking from an intellectual base. There should be no nonsense or jargon in sight. Flint fulfilled all of that.

FEE seeks better financial reporting through audit committee improvements

19 Jun 2012

The Federation of European Accountants (Fédération des Experts-comptables Européens, FEE) has published a Discussion Paper calling for improvements to the functioning of audit committees, which are considered "essential for the quality of financial information provided by companies".

The Discussion Paper explores the role of audit committees in corporate governance, and divergence in audit committee functions and composition across Europe.  The paper recommends numerous legislative and other responses which would enhance the role of audit committees, such as requiring the audit committee to be a subcommittee of the board of directors with an independent chair.

Furthermore, the paper outlines the suggested roles of the audit committee, which would assist in improved financial reporting.  For example, transparency of audit committee work could be improved through formally advising the board on judgements and conclusions of the audit committee in relation to key or critical accounting policies and estimates.  Numerous other audit-related and corporate governance recommendations are included.

The Discussion Paper is open for comments until 28 September 2012. Click for FEE press release (link to FEE website).

Australian FRC explores complexity in reporting

19 Jun 2012

The Australian Financial Reporting Council (FRC) has released a report 'Managing Complexity in Financial Reporting'. The report explores the issue of complexity in financial reporting from an Australian perspective and makes recommendations of what might reasonably be done within the global accounting framework to address complexity concerns - including making better use of information technology (including XBRL), addressing legal impediments and urging the IASB to undertake reforms.

The FRC report arises from the work of the FRC Managing Complexity Task Force.  The report recognises the many benefits of Australia's early adoption of IFRS from 2005, but also notes increasing global calls for reductions in, and simplifications of, various requirements.

The report notes the following sources of reporting complexity:

  • Increasingly complex business operations - requiring complex reporting requirements
  • Complexities in the regulatory framework - including a "shifting mix of principles and rules, too often complicated by exceptions", the hybrid measurement model applied (cost and fair value), wide application of IFRS in the Australian context, and additional complexities being introduced as a result of the response to the global financial crisis
  • Changing attitudes of businesses and stakeholders - resulting from increased aversion to risk by company directors, preparers and auditors in response to a more litigious business environment
  • Developments in integrated reporting - hope for reducing the current reporting burden is tempered by "the potential for integrated reporting to become yet another complex set of requirements which which companies must comply".

In its wide ranging suggested strategies to better manage complexity, the report supports the Australian Accounting Standards Board (AASB) to call for the IASB to establish a framework for presentation and disclosure, that disclosures should be rationalised, and the nature of "other comprehensive income" lacks meaning and consistency.

In order for Australia to maintain and enhance its influence with the IASB, the report acknowledges the key role played by the AASB, Asian-Oceanian Standard-Setters Group (AOSSG) and global industry groups.  In addition, the FRC encourages Australian representation on international accounting and auditing boards.

Many of the themes in the report echo those expressed by others, and also provide guidelines that may be relevant in other jurisdictions.

The report is open for comment until 31 July 2012.  Click for FRC press release (link to FRC website).

Our summary of new and revised accounting pronouncements for June 2012

19 Jun 2012

We've updated our 'summary of new and amended pronouncements' document to provide a high level overview of new and revised accounting pronouncements that should be considered for financial reporting periods ending on or after 30 June 2012.

The resource provides a brief summary of each pronouncement, and indicates whether it must be mandatorily applied for the first time at 30 June 2012, or whether it may be optionally applied, for various quarter ends. This information can be used to ensure that all new financial reporting requirements have been fully considered in the reporting close process.

The information reflects developments to 19 June 2012 and will be updated through to September 2012, after which we'll produce an edition for September  2012 reporting. We'll include a permanent link to the most recent edition of the resource in the right-hand panel of our standards page. The summary is also available for each quarter for the past year.

Click for:

IVSC issues proposed guide to assist professional valuers who participate in the audit process

18 Jun 2012

The International Valuation Standards Council (IVSC) has issued for comment a draft guide, The Role of the Professional Valuer in the Audit Process. The draft guide is intended to provide professional valuers with a better understanding of an auditor’s role and how professional valuers can be more effective when assisting auditors and entities during the audit process.

IFRSs and many other financial reporting standards require valuation measurements for certain assets, liabilities and equity interests. Professional valuers are often involved in the calculation of these valuations or in assisting auditors in their determination of whether the values are reasonable and well supported. The draft guide notes the following on how to create effective interaction between the professional valuer and the auditor:

For the professional valuer engaged by the auditor, there needs to be an appreciation of:

  • the types of information that the auditor might request or discuss with the professional valuer,
  • the factors that significantly affect whether the professional valuer’s work will be adequate for the auditor’s purposes, and
  • the evaluations that the auditor is required to make on the professional valuer’s work.

Comments on the exposure draft are due by 15 September 2012.

Click for IVSC exposure draft (link to IVSC website).

Agenda for the Capital Markets Advisory Committee meeting

18 Jun 2012

The Capital Markets Advisory Committee is meeting in London on 20 June 2012. The agenda for the meeting is now available.

The agenda for the meeting is set out below:

Agenda for the meeting

Wednesday, 20 June 2012

  • Work plan update
  • Leases project update
  • Disclosure framework (introduction - breakout sessions - feedback)
  • Revenue Recognition project – onerous contracts
  • Agenda consultation – next steps
  • Narrow scope amendments
  • Financial Instruments
    • Classification and measurement
    • Impairment

Click for access to the full agenda and agenda papers (link to IASB website).

IASB issues updated work plan with slight clarification of timings and a new project on the IFRS for SMEs

18 Jun 2012

The International Accounting Standards Board (IASB) has publicly released a revised work plan updating the expecting timing of various due process steps in its projects. The expected timing of a revised ED in the leases project has been clarified, and a new project added on the comprehensive review of the IFRS for SMEs.

The following is a summary of the changes in the revised work plan, which is dated 14 June 2012:

  • Leases - the target date for the re-exposure of the proposals is now fourth quarter of 2012 (previously second half of 2012)
  • IFRS for SMEs - comprehensive review 2012-2014 - the updated work plan formally includes this new project which was confirmed at the June 2012 IASB meeting.  An Invitation to Comment (later retitled to a Request for Information) is expected in late June or early July, with further due process steps to occur over 2013-2014, and 2015 set as the target effective date for any amendments resulting from the review.

The work plan confirms the following milestones are expected to be reached by the end of June:

Click for IASB work plan as of 14 June 2012 (link to IASB website). We have updated our project pages to reflect the updated work plan and other known developments.

Final notes from June IASB meeting

17 Jun 2012

We have posted the Deloitte observer notes from the IASB-only insurance session held during the IASB's 12-14 June 2012 meeting. The session was an education session to discuss the treatment of acquisition costs in insurance contracts.

Click through for direct access to the notes:

Thursday, 14 June 2012

You can also access the preliminary and unofficial notes taken by Deloitte observers for the entire meeting.

Japan's BAC continues deliberations on IFRS

17 Jun 2012

The Business Accounting Council of Japan (BAC) met on 14 June 2012 to continue its deliberations over the possible use of IFRSs in Japan. This BAC meeting was the first meeting after the new Japanese Minister for Financial Services took office earlier this month.

After discussing the two last topics out of 11 specific aspects identified in the BAC paper of August 2011 (i.e. voluntary early adoption , and the impact on the regulatory environment), the BAC proceeded to discuss a draft interim discussion paper that is to summarise discussions at the BAC over the past year.

Topics discussed included:

  • Voluntary early adoption: One of the Japanese companies that early adopted full IFRS presented 1) its objectives of IFRS adoption, 2) activities conducted toward adoption, 3) impact on financial statements (major differences from Japanese GAAP), and 4) future agenda. Related questions were asked and answered, and views were expressed by members of the BAC.
  • Impact on regulatory environment: The BAC discussed the impact of IFRS on financial reporting by regulated industries as well as regulation over public bidding/government procurement and pricing. The discussions in foreign countries were also reviewed.
  • Draft interim discussion paper:  The 13-page draft paper was presented for discussion. The paper admits that 1) there are divergent views on a few issues, 2) no final conclusion has been made, both of which would require further deliberation to deepen discussions. In addition, the paper summarises the major points of past discussions at the BAC as follows:
    • The effort toward international harmonisation of accounting standards should be continued
    • In doing the above, the best approach of using IFRS is to be developed based upon the following, by sufficiently considering its objective and impact on the economy and systems in Japan:
      • It should be permitted that accounting standards used for consolidated financial statements could be different from Japanese GAAP used in separate financial statements that are more closely linked to company laws and taxes
      • IFRSs should not impact accounting by non-public small-medium sized entities
      • Positive measures are to be taken for convergence to ensure Japanese GAAP is of high quality and internationally recognised
      • Voluntary early adopters of full IFRS is to be accumulated further
    • It is important to contribute to development of IFRSs and to communicate Japan's view as appropriate.

Members responded to the draft paper with divergent views. The Chair of the BAC intends to collect further views from BAC members off-line in deciding whether to hold a live meeting to finalise the paper.

The handouts for the meeting including the draft interim discussion paper (in Japanese only) are available on the FSA website.

The next session is yet to be scheduled.

Deloitte comment letter on discussion paper on income taxes

15 Jun 2012

Deloitte's IFRS Global Office has submitted a letter of comment responding to the European Financial Reporting Advisory Group's (EFRAG's) and the UK Accounting Standards Board's (ASB's) Discussion Paper, Improving the Financial Reporting of Income Tax.

In the comment letter, we agree with the discussion paper's observation that a focus on user needs when re-assessing financial reporting of income taxes, such as the need for additional clarity on current and likely future tax payments, should be a central consideration.

Click for a full summary and our comment letter on the EFRAG's discussion paper.

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