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December 2019

Accountancy Europe releases paper on interconnected standard-setting for corporate reporting

Dec 24, 2019

In December 2019, Accountancy Europe published a paper describing and calling for a global solution to interconnected standard-setting that can meet the need for reliable, consistent information in non-financial reporting that is interconnected with financial reporting.

The introduction to the paper notes:

Global risks and opportunities mean that financial information alone cannot give a full picture of a company’s performance. Climate change, environmental degradation, social unrest and internally generated intangibles are addressed by non-financial information (NFI) reporting. However, the hundreds of NFI reporting initiatives available are leading to confusion and the potential for greenwashing. For an effective response to these global issues and stakeholder demands, NFI reporting needs to be harmonized and interconnected with financial reporting.

Therefore, the paper introduces nine criteria to assess approaches to interconnected standard-setting for corporate reporting. The criteria are:

  • urgency,
  • global or local solution,
  • oversight,
  • due process of standard-setting,
  • responding to stakeholder interests,
  • framework and metrics,
  • materiality lens,
  • legal embedding, and
  • role of technology.

These criteria are then applied to four approaches, being (1) an international non-financial reporting standards board within the IFRS structures, (2) regional consolidation, (3) separate governance structure for financial and NFI reporting; and (4) global corporate reporting structure.

Accountancy Europe concludes that the fourth approach offers the best solution with an enhanced monitoring body, a corporate reporting foundation that builds on the current IFRS Foundation Trustees and would be responsible for financial reporting and non-financial reporting oversight and two standard-setting boards (the IASB and a new international non-financial reporting standards board) that would be connected by a common framework for connected reporting.

Comments on the paper are invited by March 31, 2020.

Review the paper on the Accountancy Europe's website.

AcSB response – Deferred tax related to assets and liabilities arising from a single transaction (Amendments to IAS 12)

Dec 12, 2019

On December 12, 2019, the Accounting Standards Board's (AcSB) comment letter on the International Accounting Standards Board's (IASB) Exposure Draft issued in July 2019, was published by the IASB. The letter agrees with the intent of the proposals, but recommends that the drafting of the amendments should be revised to better communicate the guidance to stakeholders.

Due to the complexity of this topic, the AcSB also recommends that illustrative examples be provided in IAS 12 to demonstrate the application of the proposed guidance.

Review the letter on the IASB's website.

AICPA Revises Description of Materiality

Dec 05, 2019

On December 5, 2019, the American Institute of CPAs’ (AICPA) Auditing Standards Board published Statement on Auditing Standards (SAS) No. 138, Amendments to the Description of the Concept of Materiality, and Statement on Standards for Attestation Engagements (SSAE) No. 20 by the same name.

The new standards change the description of materiality used in AICPA Professional Standards to make it consistent with the definition used by the U.S. judicial system, PCAOB, SEC, and FASB (formerly, the definition was aligned with that used by the IASB and IAASB). The AICPA’s revised description of materiality states, in part, that “misstatements, including omissions, are material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.”

SAS 138 and SSAE 20 are effective for periods ending, or for practitioners’ examination or review reports dated, on or after December 15, 2020, respectively.

Review the press release on the AICPA’s Web site.

CAQ issues publication on company-prepared information

Dec 03, 2019

On December 3, 2019, the Center for Audit Quality (CAQ) of the American Institute of Certified Public Accountants (AICPA) released a publication "The Role of Auditors in Company-Prepared Information: Present and Future".

The report provides a foundational understanding of the current role of auditors in various types of company-prepared and publicly disclosed information and is intended to help investors and audit committees understand how auditors are positioned to help fill existing gaps in enhancing the reliability of decision-useful information. It argues that while today the role of auditors is largely limited to the audit of financial statements, changing business models and investor demand lead to companies increasingly providing information outside the financial statements. The report argues that auditors are poised to meet stakeholders’ needs in enhancing confidence in these other types of company-prepared information, which include non-GAAP financial measures, environmental, social, and governance information, cybersecurity reporting, and other communications about value-creation outside of financial statements.

Review the press release and publication on the CAQ's website.

Chairman of the IFRS Foundation Trustees speaks about Big Techs and financial stability

Dec 06, 2019

On December 6, 2019, the International Accounting Standards Board (IASB) released a keynote speech given on December 3 in Paris, by Erkki Liikanen, Chairman of the IFRS Foundation Trustees, where he spoke on the question of whether big tech is a threat to financial stability.

Mr. Liikanen explained that today, a major push for innovation in global finance is coming from ‘big techs’, companies that are dominant platform providers that offer ubiquitous digital services. He summarized the impact of these big techs neutrally:

  1. The entry of big techs into financial services holds the promise of efficiency gains and can enhance financial inclusion.
  2. Regulators need to ensure a level playing field between big techs and banks, taking into account big techs’ wide customer base, access to information and business models.
  3. Big techs' entry presents new and complex trade-offs between financial stability, competition and data protection.

Based on this, Mr. Liikanen offered three observations. Firstly, policymakers need to decide how much to encourage big tech to enter finance — should policies promote big techs’ entry or restrict it? Secondly, big tech tests the regulatory perimeters of data protection, competition policy and now financial regulation. As such, regulation that is fit-for-purpose will require enhanced cooperation among multiple regulatory bodies. And thirdly, we need to recognize the cross-border nature of the big techs and fintechs challenge and respond appropriately. Mr. Liikanen also noted that among the initiatives in the field is the work by the IFRS Foundation to consider the accounting for crypto assets under IFRS standards.

Mr Liikanen closed his speech by noting: "Innovation is here to stay, and it will bring benefits and it will bring challenges. We need a balanced approach, where we reap the benefits of financial inclusion and efficiency and ensure a level playing field between big techs and banks."

Review the full speech on the IASB's website.

ESMA reports on EU issuers’ use of APMs

Dec 20, 2019

On December 20, 2019, the European Securities and Markets Authority (ESMA) published a report that builds on a desktop review of 2018 annual financial reports to assess issuers’ compliance with the guidelines.

In June 2015, the European Securities and Markets Authority (ESMA) published its final Guidelines on Alternative Performance Measures (APMs) for listed issuers that became effective in July 2016.

The assessment of issuers’ compliance with the guidelines shows that there is significant room for improvement as only a minority of issuers comply with all principles. The report also highlights that the use of APMs is widespread in all sectors and within all regulated documents. Significant diversity exists in the number and type of APMs used, as well as in their labels and definitions. ESMA notes that ratios and subtotals included inside financial statements may also fall within the definition of an APM and thus should comply with the guidelines.

ESMA will continue to monitor the application of the guidelines and take appropriate actions in case of infringements. ESMA will also submit the report to the IASB as part of its contribution to the IASB’s exposure draft consultation on General Presentation and Disclosures.

Review the report on the ESMA's website.

FASB Releases 2020 Taxonomies for U.S. GAAP and SEC Financial Reporting

Dec 20, 2019

On December 20, 2019, the Financial Accounting Foundation (FASB) released the 2020 U.S. GAAP Financial Reporting Taxonomy, the 2020 SEC Reporting Taxonomy, and the 2020 XBRL U.S. Data Quality Committee (DQC) Rules Taxonomy (DQCRT).

The 2020 U.S. GAAP taxonomy reflects updates as a result of accounting standards and other improvements. The 2020 SEC taxonomy meets the requirements for SEC financial schedules, guarantors’ condensed consolidating financial information, and disclosures about activities related to oil and gas production.

As explained in the FASB’s press release, the “DQCRT is a FASB taxonomy that includes in a derivative format XBRL US DQC Rules published by XBRL US as validation checks for XBRL filings with the SEC. The purpose of the DQCRT is to improve exposure to and compliance with the DQCRs. This initial implementation is limited to three DQCRs. Over time, additional DQCRs are likely to be included.”

The taxonomies are subject to final SEC approval, which is expected to be granted in early 2020.

Review the press releaseU.S. GAAP taxonomy page, and SEC taxonomy page on the FASB’s Web site.

IASB Chairman speaks on how high-quality accounting standards can help resist the incentives for short-termism

Dec 19, 2019

On December 19, 2019, the International Accounting Standards Board (IASB) released a speech by IASB Chairman Hans Hoogervorst given at the 9th Symposium on Accounting Research hosted by the French standard-setter ANC. In his speech, he talked about the importance of high-quality accounting standards in supporting long-term investment.

Mr. Hoogervorst's speech followed two tracks. First he showed how the IASB's projets on primary financial statements and on wider corporate reporting will help companies to better explain their long-term performance to investors. He then turned to the accounting treatment of equity investments.

In the exposure draft of a new standard on general presentation and disclosures in financial statements the IASB published earlier this week, the IAS proposes defining operating profit, which will enhance comparability and become a powerful instrument for companies to explain their long-term performance to investors. The exposure draft also proposes a note in which companies will have to identify elements of income and expense which are ‘unusual’ in the sense they have limited predictive value. The IASB believes that the proposals will help investors gain insight into the persistence of earnings and will also help companies better explain their long-term strategy.

The IASB also believes that the work around updating the Management Commentary Practice Statement is important in helping companies tell their long-term story to investors. Elements that may be essential to a company’s long-term strategy often escape the financial statements, such as its business model, its intangible resources, the business environment it operates in, and more forward-looking information. Especially on information on intangibles and sustainability, which are becoming critical a company’s long-term viability, the current practice statement says little.

Mr. Hoogervorst then turned to short-term volatility vs. the long-term perspective. He explained that looking at the long term does not imply that that short-term economic phenomena can be ignored:

If short-term volatility in the financial statements reflects real economic volatility, it should not be discarded or ironed out in an artificial way. [...] Companies or investors that take a long-term view, must be able to withstand the inevitable short-term fickleness of the marketplace. 

Mr. Hoogervorst noted that in IFRS 9 the IASB abolished the available-for-sale (AFS) category for equity investments and fair value through profit or loss became the default requirement for equity investments. He stated that ever since, some stakeholders have suggested this accounting treatment is a disincentive for long-term investment in equity instruments as it could lead to more short-term volatility in the income statement. And he noted that he could perfectly well understand these comments as "the AFS category for equity investments in IAS 39 [...] provided a perfect instrument for companies to smooth their income statement over time".

Mr. Hoogervorst actually provided an example of an actual company that tended to release larger quantities of AFS reserves when its net earnings before AFS were under pressure. This form accounting was perfectly in accordance with the requirements of IAS 39, yet it did not fully reflect the performance of the company: The deteriorating performance of the company was less clearly visible to investors. Therefore, Mr Hoogervorst stated, he strongly believed in accounting standards that minimise the scope for earnings management. Nevertheless, stated the belief that AFS will probably be one of the hot topics in the post-implementation review of IFRS 9, which will be able to draw on the experience of companies around the world that have already adopted IFRS 9.

Mr. Hoogervorst concluded his speech by stating that: "Long-term goals should also be subject to the scrutiny of shorter-term performance measures. Otherwise, how would you know that you are on track?"

Review the full speech on the IASB's website.

IASB proposes new standard on general presentation and disclosures in financial statements

Dec 17, 2019

On December 17, 2019, the International Accounting Standards Board (IASB) published the exposure draft of a new standard "General Presentation and Disclosures" that is intended to replace IAS 1, "Presentation of Financial Statements". Comments are requested by June 30, 2020.

 

Background

The Agenda consultation 2015 revealed that respondents wanted the Board to prioritize projects that are important to users of financial statements, including the disclosure initiative and the primary financial statements project. The Board took up discussions in the project in April 2016.

The Board decided to focus on four main areas:

  • Introduction of defined subtotals and categories in the statement of profit or loss
  • Introduction of requirements to improve aggregation and disaggregation
  • Introduction of Management Performance Measures (MPMs) and accompanying disclosures in financial statements
  • Introduction of targeted improvements to the statement of cash flows

In May 2019, the Board also decided that a discussion paper is not required and that as a next project step, the Board will develop an exposure draft for a new standard replacing IAS 1, Presentation of Financial Statements. The related requirements in IAS 1 will be brought forward to the new standard with limited wording changes. Other requirements of IAS 1 will be moved to IAS 8 (which would be renamed to Basis of Preparation, Accounting Policies, Changes in Accounting Estimates and Errors) and IFRS 7.

 

Key proposals

On the four above mentioned areas, ED/2019/7 General Presentation and Disclosures proposes the following:

  • The introduction of defined subtotals and categories in the statement of profit or loss aims at additional relevant information and a P&L structure that is more comparable between entities. The proposals include:
    • Require all entities to present an operating profit or loss subtotal in the statement of profit or loss, which is defined as profit from continuing operations before tax and before investing (defined as returns from investments that are generated individually and largely independently of other resources held by an entity), financing (defined as income and expenses from assets and liabilities related to an entity’s financing), and the share of profit of integral associates and joint ventures; whether an item is ‘unusual’ does not affect whether it is included in operating profit; there is a separate proposed approach to operating profit for financial entities.
    • Require entities to present separately ‘integral’ and ‘non-integral’ associates and joint ventures in statements of financial performance and cash flows, where a significant interdependency between an entity and an associate or joint venture would indicate that the associate or joint venture is integral to the main business activities of the entity (the definition would be supplemented with indicators for determining whether a joint venture or associate is ‘integral’ or ‘non-integral’).
    • Not to define EBITDA, but to use ‘operating profit or loss before depreciation and amortisation’, which would provide similar information to many of the EBITDA measures that are currently being used and is clearly understood.
  • The introduction of requirements to improve aggregation and disaggregation aims at additional relevant information and insuring that material information not being obscured. The proposals include:
    • Remove the free choice whether the analysis of operating expenses is by nature or by function; instead the Board proposes to provide a set of factors for entities to consider when making this assessment; remove the option to present an analysis of expenses in the notes only; if the statement of profit or loss presents an analysis by function, there is no requirement to analyse each functional line item by nature in the notes (analysis would be of total operating expenses).
    • Require the entities to identify assets, liabilities, equity, income and expenses that arise from individual transactions or other events and classify them into groups based on shared characteristics, resulting in line items in the primary financial statements that share at least one characteristic, then separate them based on further characteristics, resulting in the separate disclosure of material items in the notes; there may be a need to aggregate immaterial items with dissimilar characteristics to avoid obscuring relevant information; companies should use a descriptive label or, if that is not possible, provide information in the notes about the composition of such aggregated items.
    • Define unusual income and expenses as income and expenses with limited predictive value when it is reasonable to expect that income or expenses that are similar in type and amount will not arise for several future annual reporting periods; income and expenses from the recurring remeasurement of items measured at a current value would not be expected to be classified as unusual; unusual income and expenses would be disaggregated by line items presented in statement of profit or loss and line items disclosed in the analysis of operating expenses by nature, if the entity analyses expenses by function in the statement of profit or loss.
  • The introduction of Management Performance Measures (MPMs) and accompanying disclosures in the financial statements aims at transparency and discipline in the use of such measures and disclosures in a single location. The proposals include:
    • Require disclosure in the notes of subtotals of income and expenses that are used in public communications with users of financial statements, outside financial statements, complement totals or subtotals included in IFRSs, and communicate management’s view of an aspect of an entity’s financial performance; they would be accompanied by disclosures in a single note to enhance transparency.
    • MPMs can be non-financial performance measures or financial performance measures; they would be accompanied by disclosures in the notes offering a description of why the MPM provides management’s view of performance, how the MPM has been calculated, how the measure provides useful information about an entity’s financial performance, a reconciliation of the MPM to the most directly comparable subtotal or total specified by IFRSs, a statement that the MPM provides management’s view of an aspect of the entity’s financial performance, the effect of tax and non-controlling interests separately for each of the differences between the MPM and the most directly comparable subtotal or total specified by IFRSs; if there is a change in how the MPM is calculated, an explanation would be provided to help users understand the reasons for and effect of the change.
    • Specify that as regards adjusted earnings per share, the numerator of adjusted EPS can only be either a subtotal specified by IFRSs or a management performance measure.
  • The introduction of targeted improvements to the statement of cash flows aims at improved comparability between entities. The proposals include:
    • Require entities to use operating profit as the single starting point for the indirect reconciliation.
    • Remove the classification options for interest and dividends.

Comments on the proposals are requested by 30 June 2020.

 

Effective date and transition

The ED does not contain a proposed effective date as the IASB will decide on the effective date only upon completion of its redeliberations. The expectation is currently that the standard will become effective approximately 18-24 months after being published in its finalized form.

The standard would be applied retrospectively and early adoption would be permitted.

 

Additional information

 

IASB releases podcast on IFRS 17

Dec 13, 2019

On December 13, 2019, the International Accounting Standards Board (IASB) released a podcast featuring IASB member Darrel Scott and technical staff member Vitalina Kobernik as they discuss the developments at the December 2019 Board meeting related to the amendments to IFRS 17 "Insurance Contracts".

The podcast discusses the amendments tentatively finalised during the meeting and focuses on the expected recovery of insurance acquisition cash flows and the accounting for reinsurance contracts held.

Review the press release and podcast on the IASB's website.

Correction list for hyphenation

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