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News

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ACCA report concludes that the fragmentation of the sustainability reporting landscape undermines its potential

13 May 2016

A new report from the Association of Chartered Certified Accountants (ACCA) and the Climate Disclosure Standards Board (CDSB) suggests that despite progress made in sustainability reporting and its growing importance, the fragmentation of the landscape might mean that the discipline is "lost in the right direction".

The author of the report, who is the Founding Director of CDSB and responsible for CDSB’s work to develop a framework to report environmental information in mainstream corporate reports, examines the changing corporate sustainability reporting landscape, outlines its components, discusses current challenges and proposes development opportunities. She also considers the trends, levers and drivers influencing the reporting landscape and concludes that new and evolving expectations about corporate performance, new measurement criteria, and the means by which companies are assessed are calling into question the role of the corporation and the definition of corporate performance.

Please click to access the report on the ACCA website.

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Third phase of review of IFRSs in Saudi Arabia includes decision to adopt IFRS 9 without modifications

13 May 2016

In preparation for IFRS adoption in the Kingdom of Saudi Arabia from 2017, the Saudi Organization for Certified Public Accountants (SOCPA) has approved an IFRS transition plan for developing "national standards that are closely converged with full IFRSs". According to the plan, the SOCPA has now reviewed another twelve IASB pronouncements (including the financial instruments standards) plus the corresponding sections of the IFRS for SMEs.

The SOCPA is currently working with the IFRS requirements extant at 31 December 2014. The modifications the SOCPA makes (if any) generally regard alternatives or options allowed by the IASB standards, additional disclosures, or Saudi specific factors (for instance replacing in IAS 41 all examples that are contradictory to Shariah (pigs, vines) with more suitable examples (cattle, olive trees)). The IFRS Foundation will review the magnitude of the modifications made after the completion of the whole project and will then decide on the status of Saudi adoption of IFRSs.

The standards reviewed by the SOCPA in the third phase are the following:

Group according to transition planStandardmodifications?
Non-current assets II IAS 40 Investment Property yes
IAS 36 Impairment of Assets no
IAS 41 Agriculture yes
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations no
IFRS 13 Fair Value Measurement no
Financial instruments IAS 32 Financial Instruments: Presentation yes
IFRS 7 Financial Instruments: Disclosure yes
IFRS 9 Financial Instruments no
IFRIC 2 Members’ Shares in Co-operative Entities and Similar Instruments no
IFRIC 16 Hedges of Net Investment in a Foreign Operation no
IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments no
First-time adoption IFRS 1 First-time Adoption of International Financial Reporting Standards yes
The sections in the IFRS for SMEs that relate to the standards in the third stage of the transition project no

The newest issue of the SOCPA's newsletter مجلة المحاسبون ("Journal of Accountants") details the changes the SOCPA decided to make. Please click to access the newsletter on the SOCPA website and refer to pages 16-24 (bilingual table).

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Two Trustees of the IFRS Foundation reappointed

12 May 2016

The IFRS Foundation has announced the reappointments of Maria Helena Santana and Lynn Wood as Trustees of the IFRS Foundation. Both will serve a second three-year term from 1 January 2017.

Mrs Santana is a former Chair and President of the Brazilian Securities and Exchange Commission and Ms Wood is a former Chairman of the Australian Financial Reporting Council and member of the Foreign Investment Review Board.

Please click to access the press release on the IASB website.

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Inaugural forum for public sector standard-setters

12 May 2016

On 15-16 March 2016, the US Governmental Accounting Standards Board (GASB) and the International Public Sector Accounting Standards Board (IPSASB) jointly hosted an inaugural event that assembled key public sector standard-setters from around the world to build a dialogue, exchange ideas, and discuss critical issues in standard-setting.

The forum provided attendees with the opportunity to discuss current IPSASB projects with the board’s members and staff:

  • Social benefits;
  • Revenues;
  • Non-exchange expenses;
  • Heritage assets;
  • Infrastructure assets;
  • Public sector measurement; and
  • Leases.

Additionally, issues outside of the IPSASB work plan were also discussed:

  • “IPSAS lite” (IPSAS for small and medium-sized entities);
  • Tax expenditures;
  • Natural resources accounting;
  • Consolidation;
  • Financial performance measures;
  • Service performance reporting; and
  • Implementation issues.

Based on the success of the inaugural event, the IPSASB is planning a second forum. This is to be held in Zurich, Switzerland July 3-4, 2017.

Please click for the press release on the event including a short video on the IPSAB website.

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IASB Chairman discusses non-GAAP measures

11 May 2016

At the annual conference of the European Accounting Association in Maastricht, the Netherlands, IASB Chairman Hans Hoogervorst gave a speech titled ‘Performance reporting and the pitfalls of non-GAAP metrics’. He discussed (1) how the academic community can continue to help improve IFRS and (2) performance reporting and non-GAAP measures.

Mr Hoogervorst encouraged the academic community to continue providing the Board with its research; he noted that cooperation in the past has been very effective in helping the Board “separate out evidence from opinion.” He cited lease accounting, the IFRS 8 post-implementation review, and comment letter submissions as examples of effective cooperation between academia and the IASB, and he invited academics to become even more involved in years to come.

In the second half of his speech, Mr Hoogervorst discussed non-GAAP measures and explored “whether IFRS Standards provide sufficient criteria by which performance can be judged by users of financial statements.” He noted the increasing use of non-GAAP measures and research showing that these measures are becoming increasingly misleading. Mr Hoogervorst said:

The fact is that IFRS Standards prescribes very little in the way of formatting the income statement. Companies have considerable freedom in the way they present the components of income that make up profit or loss. As a result, there is little comparability above the bottom line, making it difficult for users to judge performance.

He went on to say that securities regulators are primarily responsible for cutting back the use of non-GAAP measures but that the IASB “should also look at its own role in this matter.” He admitted that the IASB provides “too little guidance” in formatting the income statement. He also suggested “potential remedies” for IASB consideration:

  • Defining more subtotals in the income statement;
  • Providing a principle-based definition of operating income which does not allow for obfuscating restructuring or impairment charges;
  • Creating a “rigorous definition” of earnings before interest and tax (EBIT);
  • Looking for better solutions for some elements of income and expense that are currently parked in other comprehensive income;
  • All of the above and more.

Mr Hoogervorst concluded:

[U]ltimately the number that counts most is the unadjusted bottom line, where all elements of income come together, both recurring items and exceptional items, whatever those may be. No-one can predict the extent to which seemingly extraordinary elements of income are recurring and not. That is why it is important that the bottom line is as inclusive as possible and that it shows everything, warts and all.

The full text of Mr Hoogervorst’s speech is available on the IASB’s website.

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May 2016 IFRS Interpretations Committee meeting notes posted

11 May 2016

The IFRS Interpretations Committee met in London on 10 May 2016. We've posted Deloitte observer notes for the technical issues discussed during this meeting.

Please click through for the notes relating to the following issues:

It is worth noting that on the contentious issue around the derecognition of modified financial assets the Interpretations Committee approved issuing an agenda decision but also agreed that the staff would inform the Board about the concerns raised during the discussion.The Interpretations Committee members noted that the issue should be given more priority from the Board as the issue was considered to be of high importance.

The preliminary and unofficial notes taken by Deloitte observers for the entire meeting are also available.
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The Bruce Column — Focusing on the factors which bring you a reputation dividend

10 May 2016

In a world where intangible assets have become the largest part of a company’s market value attitudes to risk and reputation need to change. Our regular, resident columnist, Robert Bruce, explains why and how.

Intangible assets and reputation have been making increasingly larger contributions to company value. US corporate reputations, across the S&P 500, amounted to USD$3,329bn, some 17% of total market capitalization, in 2015. Some £790bn of UK shareholder value was attributable to a ‘reputation dividend’ at the start of 2016, amounting to some 36% of market capitalization in the FTSE 350, all according to recent research.

This is a relatively new world. And explaining the value of a company or organisation now has to be a subtler exercise. It is all about how a company presents itself to the public. It is no longer just about the financials and what, after careful analysis, they may show. It is about how a company reacts to something going wrong, for example. It is about the more general drivers of growth. In the US Apple topped the tables with a 49.5% reputation contribution, some $320,317m in January 2015. The Walt Disney Company had a reputation contribution of 49.4%, some $78,758m, while Nike had a reputation contribution of 40.7% representing $33,256m.

In the UK Unilever chalked up a reputation contribution of 57.8%, some £48,356m at the start of 2016. Shell came in at 53.8%, some £62,061m. And AstraZeneca posted a 47.4% reputation dividend, amounting to some £25,198m.

However you look at these figures, all from recent reports, they point in one direction. Shareholders and the markets are no longer looking at just the financials. They look at how companies have dealt with or are anticipating risk, and where and how companies are adding value. It is not all about financial success. And reports are starting to appear which also measure the disasters when everything goes belly up and a company’s reputation, share price, and ability to operate, plummets. Finding themselves listed in the top ten Most Controversial Companies 2015 are Volkswagen, Sony, General Motors, Honda, and HSBC Private Bank (Suisse). The state of a company’s reputation and either the added value or its suddenly shredded value are increasingly what investors focus on. People, in short, want to know what is driving value.

We live in different times. Manufacturing companies are very different from technology driven companies. Now, if reputations drop, it is probably as much to do with a technology company simply running out of ideas and hence losing its ability to dominate its market, as it is with a manufacturing company having, for example, to recall defective cars. The difference between good news and bad news can be as much a factor of perception as a factor of failings on the production line or in the testing process.

The ratio of intangible to tangible assets in the US is probably the most telling. In the report from consultants Ocean Tomo it shows 1975 values relying heavily on tangible assets, some 83%. These were the days of heavy industry, when investors wanted to see the heft of the engineering, the production lines, the range of extractive possibilities. In 2015 all that had fallen to just 16% of market value. The service sector in the UK, for example, now provides almost 80% of the UK economy. The revolution may have been slow but it is with us.

Now, say the reports from consultants Reputation Dividend, in both the US and the UK, the important components that influence corporate value are very different. ‘Perceptions of people management’, comes out on top in the US, followed by ‘quality of management’, and ‘long-term investment potential’. In the UK you are looking for ‘financial soundness’, followed by the ability ‘to attract, develop and retain talent’, followed by ‘quality of leadership’.

The other side of the coin comes in the Most Controversial Companies 2015 report from RepRisk AG. As its CEO puts it in the report’s Foreword: ‘The aim of this report is to outline the sequence of events that can lead a corporation to an unforeseen crisis, causing it to suffer a major fall in stock prices, face substantial product recalls and record fines, and in some cases, even result in the removal of the company’s senior officials’.

What now often brings manufacturing companies to their knees are not the tangible building-blocks of yesteryear going awry but the intangible, the least-expected factors, which suddenly rear out of an empty road ahead. It can be as much about the speed of change as about the change itself. The report shows that sometimes it can be the tangible effect of economics, as the failings of a dam in Peru impacted on a Grupo Mexico gold mining project. And the report also shows clearly how problems in the supply chain, for example, and the linkage which spreads across particular sectors can bring about serious reputational damage. The failures in air bags at their manufacturer, Takata, didn’t just harm the Takata reputation but also impacted manufacturers like General Motors, Honda and Volkswagen which suffered accordingly. All the examples show how easy it is to damage or lose a well-built reputation. Reputation failure is not just an in-house risk. It can spread from suppliers like a contagion. As examples of integrated reporting show, you need to understand the risks at your suppliers as much as where any home grown problems may lie.

All this matters. Companies need to burnish their reputations and manage them but at the same time they need to also tell the world what they are doing. There is a strong link between corporate reporting and the building and protecting of reputation.

It is worth sitting up and taking notice. After all, as the 2014 reputation dividend report showed, on average in cash terms, a 1% improvement of reputation at a FTSE100 company delivered around £266m of additional value.

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IFRS Foundation updates its pocket guide to IFRS

10 May 2016

The IFRS Foundation has published the 2016 version of 'Pocket Guide to IFRS Standards: the global financial reporting language'. The guide provides an overview of the adoption of IFRS in 143 countries and other jurisdictions around the world.

The summaries on the use of IFRS are derived from information obtained by national standard-setters and other organisation that have responded to a survey by former IASB member, Paul Pacter.

Pocket Guide to IFRS Standards: the global financial reporting language can be downloaded free of charge from the IASB's website. It is accompanied by The Global Financial Reporting Language, an analysis of what can be learned from the jurisdiction profiles that form the basis for the pocket guide. For more information, see the press release on the IASB's website.

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FASB clarifies revenue guidance on practical expedients

10 May 2016

The US Financial Accounting Standards Board (FASB) has issued Accounting Standards Update (ASU) No. 2016-12 'Narrow-Scope Improvements and Practical Expedients', which amends certain aspects of the Board’s new revenue standard, ASU 2014-09 'Revenue From Contracts With Customers'.

The amendments, which were issued in response to feedback received by the FASB–IASB joint revenue recognition transition resource group (TRG), include the following:

  • Collectibility — ASU 2016-12 clarifies the objective of the entity’s collectibility assessment and contains new guidance on when an entity would recognise as revenue consideration it receives if the entity concludes that collectibility is not probable.
  • Presentation of sales tax collected from customers — Entities are permitted to present revenue net of sales taxes collected on behalf of governmental authorities (i.e., to exclude from the transaction price sales taxes that meet certain criteria). A similar policy election does not exist under the IASB's new revenue standard, IFRS 15 Revenue from Contracts with Customers.
  • Noncash consideration — An entity’s calculation of the transaction price for contracts containing noncash consideration would include the fair value of the noncash consideration to be received as of the contract inception date. Further, subsequent changes in the fair value of noncash consideration after contract inception would be subject to the variable consideration constraint only if the fair value varies for reasons other than its form. IFRS 15 does not prescribe the measurement date.
  • Contract modifications at transition — The ASU establishes a practical expedient for contract modifications at transition and defines completed contracts as those for which all (or substantially all) revenue was recognised under the applicable revenue guidance before the new revenue standard was initially applied.
  • Transition technical correction — Entities that elect to use the full retrospective transition method to adopt the new revenue standard would no longer be required to disclose the effect of the change in accounting principle on the period of adoption (as is currently required by ASC 250-10-50-1(b)(2)); however, entities would still be required to disclose the effects on preadoption periods that were retrospectively adjusted. IFRS 15 defines a completed contract as one for which an entity has transferred all goods or services identified in accordance with existing IFRS. IFRS 15 also provides an additional practical expedient that permits an entity electing the full retrospective method to apply IFRS 15 retrospectively only to contracts that are not completed contracts as of the beginning of the earliest period presented. No such expedient is included in Topic 606.

Last month, the IASB published final clarifications to its revenue standard, IFRS 15. The FASB’s ASU states:

Although the amendments in this Update are not identical, and some are incremental, to the amendments the IASB decided to make to its final standard, Clarifications to IFRS 15, the FASB expects that the amendments generally will maintain the convergence that was achieved with the issuance of Update 2014-09 and IFRS 15 by reducing the potential for diversity arising in practice. Significant diversity in application could substantially reduce the benefits achieved by converged guidance.

The amendments in this Update do not change the core principle for revenue recognition in Topic 606. Instead, the amendments provide clarifying guidance in a few narrow areas and add some practical expedients to the guidance. The amendments are expected to reduce the degree of judgment necessary to comply with Topic 606, which the FASB expects will reduce the potential for diversity arising in practice and reduce the cost and complexity of applying the guidance.

The ASU’s effective date and transition provisions are aligned with the requirements in the new revenue standard, which is not yet effective. For more information, see the ASU on the FASB’s website.

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Recent sustainability reporting developments

10 May 2016

A summary of recent developments at the CDSB & CDP and GRI.

The Climate Disclosure Standards Board (CDSB) and the CDP (previously the ' Carbon Disclosure Project') have commented on the Phase I report of the Task Force on Climate-related Financial Disclosures (TCFD) set up by the Financial Stability Board (FSB). In their joint response CDSB and CDP highlight among other things new accounting rules by the IASB, which may be relevant to reporting climate-related transition risks as well as IFRS 9 requires entities to measure expected credit losses of a financial instrument using factors that are specific to the entity, general economic conditions and an assessment of both the current and forecasted direction of conditions at the reporting date. Please click to access the full response on the CDSB website.

The Global Reporting Initiative (GRI) has published questions and answers about transitioning from the GRI G4 Guidelines to the modular, interrelated GRI Sustainability Reporting Standards (GRI Standards): the new format, the public comment process, and ultimately how the transition will benefit reporting organisations and report users. Please click to access the Q&A document on the GRI website.

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