April

EFRAG Update detailing March and April EFRAG developments

17 Apr, 2013

The European Financial Reporting Advisory Group (EFRAG) has released a new issue of its EFRAG Update newsletter summarising the discussions held at the EFRAG TEG meeting of 3 to 5 April 2013 and EFRAG TEG conference calls held on 8, 12 and 21 March 2013.

Highlights were the publication of

Click for the EFRAG Update (link to EFRAG website).

European Commission proposes ESG disclosure for large companies

17 Apr, 2013

The European Commission has published proposed amendments to European accounting legislation in order to require certain large companies to provide additional information on social and environmental matters. These companies would need to disclose information on policies, risks and results as regards environmental matters, social and employee-related aspects, respect for human rights, anti-corruption and bribery issues, and diversity on the boards of directors.

The latest development follows initial proposals published in October 2011 and two resolutions of the European Parliament in February 2013.

An Executive Summary of the Impact Assessment prepared by Commission staff notes that "the majority of large EU companies fail to adequately meet growing demand from stakeholders (including investors, shareholders, employees and civil society organisations) for non-financial transparency", both in terms of quantity (only around 2,500 out of a possible 42,000 EU companies formally disclose non-financial information each year) and quality (lacking in materiality, balance, accuracy and timeliness).  The Impact Assessment outlines the various options considered to address these concerns, including no policy change, requiring disclosure in an annual report, detailed reporting or setting up of a mandatory EU standard.

On the basis of the constituent feedback and analysis performed, it was determined the best policy option was to propose a combined approach, setting minimum disclosure requirements in annual reports, but permitting companies to provide more comprehensive reports if they wish.  The requirements would only apply to larger EU companies (around 18,000 in total) to avoid an administrative burden on small and medium-sized companies (SMEs).

To implement the requirements, the legislative proposals would amend the Accounting Directives (Fourth and Seventh Accounting Directives on Annual and Consolidated Accounts, 78/660/EEC and 83/349/EEC) to require the annual report to include a non-financial statement with the prescribed minimum information.

The draft wording of the key requirements is reproduced below:

 

For companies whose average number of employees during the financial year exceeds 500 and, on their balance sheet dates, exceed either a balance sheet total of EUR 20 million or a net turnover of EUR 40 million, the review shall also include a non-financial statement containing information relating to at least environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters, including:

  1. a description of the policy pursued by the company in relation to these matters;
  2. the results of these policies;
  3. the risks related to these matters and how the company manages those risks.

Where a company does not pursue policies in relation to one or more of these matters, it shall provide an explanation for not doing so.

In providing such information the company may rely on national, EU-based or international frameworks and, if so, shall specify which frameworks it has relied upon.

However, the statement is not required where the company includes in its annual report a comprehensive report relying on prescribed frameworks (such as the UN Global Compact, ISO 26000, the German Sustainability Code, or GRI guidelines) covering the information required.

Frequently asked questions accompanying the proposals clarify they do not require European companies to adopt integrated reporting:

The proposed directive focuses on environmental and social disclosures. Integrated reporting is a step ahead, and is about the integration by companies of financial, environmental, social and other information in a comprehensive and coherent manner. To be clear, this Directive does not require companies to comply with integrated reporting. The Commission is monitoring with great interest the evolution of the integrated reporting concept, and, in particular, the work of the International Integrated Reporting Council.

Click for EC press release (link to EC website).

EFRAG draft comment letter on the proposed impairment model

16 Apr, 2013

The European Financial Reporting Advisory Group (EFRAG) has issued a draft comment letter on the IASB's Exposure Draft ED/2013/3 'Financial Instruments: Expected Credit Losses' which was published on 7 March 2013.

EFRAG supported the 2009 exposure draft proposal for the integrated effective interest rate approach and the time proportionate approach indicated in the Supplementary Document. However, the EFRAG recognises that there were operational concerns by constituents when implementing those approaches.

Regarding the current exposure draft (ED/2013/3), the EFRAG preliminary position is that it:

  • "accepts the proposed approach that requires recognition of a 12-month expected credit loss at initial recognition and lifetime expected credit losses when there is a significant increase in credit risk,"
  • "the proposed approach strikes an acceptable balance between the cost of implementation and the underlying economics, while meeting the need to provide earlier for expected credit losses as expressed by financial regulators and other constituents, and"
  • "supports the proposed credit deterioration approach as it distinguishes between financial assets that have deteriorated in credit quality and those that have not because it provides relevant and useful information about the likelihood of the collection of future contractual cash flows and the effect of changes in the credit quality of an entity’s financial assets."

However, the EFRAG does not believe the recognition of a portion of expected credit losses at initial recognition is conceptual sound but due to the lack of a better approach, the IASB should use the approach developed in the exposure draft as a basis when finalising its impairment requirements.

In addition, EFRAG states:

[A]ny impairment model – such as the model proposed by the FASB – that uses a single measurement approach that recognises lifetime expected credit losses from initial recognition will inevitably remove the need to track any changes in credit quality to determine when lifetime expected credit losses should be recognised as a result of significant credit deterioration. Nevertheless, in our view, such a model would not be less subjective and not necessarily operationally simpler compared to the proposed approach in the ED. EFRAG believes that such an approach would provide less relevant information about the effects of changes in the credit quality subsequent to initial recognition, and does not result in an appropriate balance between the representation of the underlying economics and the cost of implementation as the double counting effect of expected loss recognition at inception is aggravated by the consideration at once of life time expected losses.

In an effort to gather more information, the EFRAG, along with other European National Standard Setters, are currently conducting a field-test designed to show whether it improves on the old model, whether its operational and determine the costs and impacts that will come with the new model.

Click for (links to EFRAG website):

    Our previous story on the Exposure Draft ED/2012/3 Financial Instruments: Expected Credit Losses offers a summary of the key proposals of the ED.

      Comments on the letter are invited by 17 June 2013.

      IIRC publishes 'Consultation Draft' on integrated reporting

      15 Apr, 2013

      The International Integrated Reporting Council (IIRC) has released the Consultation Draft of its proposed International Integrated Reporting (<IR>) Framework. The draft Framework seeks to create the foundations for a new reporting model to enable organisations to provide concise communications of how they create value over time.

      The draft Framework reflects input received by the IIRC in response to earlier consultation through a Discussion Paper (and feedback on a Prototype Framework), the findings to date from the IIRC’s Pilot Programme, and the results of other outreach activities.

      The information below covers the following topics:

      The ‘integrated reporting’ concept

      Integrated Reporting (stylised by the IIRC as ‘<IR>’) is considered a process that results in communications by an organisation about value creation over time.

      The most visible expression of <IR> is an integrated report, which the draft Framework proposes to define as:

      … a concise communication about how an organization’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value over the short, medium and long term.

      The draft Framework outlines three fundamental concepts as underpinning <IR>:

      • Capitals – stores of value that an organisation depends on for its success as inputs to its business model, and which are increased, decreased or transformed through its activities and outputs.  These broaden the current focus on financial and manufactured capital to include intellectual, human, social and relationship capital (all linked to human activity), and natural capital, which provides the environment for the other capitals.  Not all of these capitals would be relevant to all organisations and organisations may define additional capitals, or consider some items to be across capitals (see our earlier story for more information)
      • Business model – how an entity creates value, through a chosen system of inputs (resources), business activities, outputs (products and services) and outcomes (internal and external consequences both positive and negative).  See our earlier story for more information
      • Value creation – the concept of ‘value’  for <IR> purposes is broader than traditional meaning of value focused on financial performance, and includes other forms of value that are created through the increase, decrease or transformation of capitals, each of which may ultimately affect financial returns.  Accordingly, value is broad in its conceptual basis, encompasses different time horizons for different stakeholders, and requires a focus on all relevant capitals.

      <IR> is focused primarily on financial capital providers “in order to support their financial capital allocation assessments”, but also seeks to benefit other stakeholders including employees, customers, suppliers, business partners, local communities, legislators, regulators and policymakers.

      It does this through encouraging the use of ‘integrated thinking’ whereby an organisation actively considers relationships between its operations and the ‘capitals’ it uses and affects, with the objective of achieving integrated decision making that considers wider impacts and benefits over the short, medium and long term time frames.  For example, in addition to traditional measures of performance such as revenue, profit or loss or cash flows from operations, integrated thinking might consider the impacts of an entity's operations on employees, supplier and customer relationships, the local community and the environment, considering the trade-offs between each, and the impacts on the long term performance of the entity.  To this end, the draft Framework also promotes the alignment of external and internal reporting, particularly at the top level of an organisation, as being “nearly always appropriate, even for the most complex of organizations” (consistent with the requirements of IFRS 8 Operating Segments, but on a broader scale).

      The draft Framework is intended primarily for the for-profit companies in the private sector, but the Consultation Draft indicates that it “can also be applied, adapted as necessary, by public sector and not-for-profit organizations”.

      Building blocks for an integrated report

      The draft Framework develops the requirements for an integrated report through:

      • Guiding principles – these underpin the preparation of an integrated report.  These are: strategic focus and future orientation, the connectivity of information, stakeholder responsiveness, materiality and conciseness, reliability and completeness, and consistency and comparability
      • Content elements – the categories of information required to be included in an integrated report under the draft Framework, presented as a series of questions rather than a prescriptive list of disclosures.
      Requirements for an integrated report

      KEY REQUIREMENTS

      • An integrated report is prepared in accordance with the Framework
      • An integrated report applies all principles-based requirements in the Framework unless, and to the extent, the unavailability of reliable data, specific legal prohibitions or competitive harm results in an inability to disclose information that is material (in this case, additional information is provided)
      • An integrated report is a stand-alone and concise communication, linked to other reports and communications for those stakeholders who want additional information

      CONTENT ELEMENTS

      • Organisational overview and external environment – What does the organisation do and what are the circumstances under which it operates?
      • Governance – How does an organisation’s governance structure support its ability to create value in the short, medium and long term?
      • Opportunities and risk – What are the specific opportunities and risks that affect the organisation’s ability to create value over the short, medium and long term, and how is the organisation dealing with them?
      • Strategy and resource allocation – Where does the organisation want to go and how does it intend to get there?
      • Business model – What is the organisation’s business model and to what extent is it resilient?
      • Performance – To what extent has the organisation achieved its strategic objectives and what are its outcomes in terms of effects on the capitals?
      • Future outlook – What challenges and uncertainties is the organisation likely to encounter in pursuing its strategy, and what are the potential implications for its business model and future performance?

      OTHER REQUIRED DISCLOSURES

      • The organisation’s materiality determination process
      • The governance body with oversight responsibilities for <IR>
      • The reporting boundary and how it was determined
      • The nature and magnitude of the material trade-offs that influence value creation over time
      • The reason why the organisation considers any of the capitals to be immaterial given its particular circumstances, if this is the case

      Interaction with financial reporting

      The draft Framework does not seek to replace financial reporting, but seeks to build on it by broadening the key concepts disclosed and embedding integrated thinking into the organisation.

      The <IR> process is designed to be applied continuously in developing reports and communications, including a stand-alone integrated report prepared annually in line with the statutory financial reporting cycle.  Financial statements, and sustainability reports, are acknowledged in the draft Framework as additional reports that may be required “for compliance purposes or to satisfy the particular information needs of a range of stakeholders”.  The draft Framework additionally notes that technological advances “enable innovative approaches to reporting” and that web-based media and XBRL may be useful for <IR> in bringing connectivity of information between a concise integrated report and detailed and other information.

      The draft Framework notes:

      Although <IR> builds on developments in financial and other reporting, an integrated report differs from other reports and communications in a number of ways.  In particular, it has a combined emphasis on: conciseness, strategic focus and future orientation, the connectivity of information, the capitals, the business model, the ability to create value in the short, medium and long term, and providers of financial capital as the primary audience.

      In addition, the draft Framework provides guidance on the reporting boundary used for integrated reporting, explicitly linking it to the boundary used for financial reporting purposes (i.e., financial information about subsidiaries, joint arrangements and associates).  The draft Framework requires information provided in an integrated report to be prepared on the same basis, or reconciled to, information in an entity’s financial statements.

      However, an integrated report would also include information beyond the financial reporting entity to identify opportunities, risks and outcomes that may have a material effect on the ability of the financial reporting entity to create value over time.  This may include ‘related parties’ (such as defined in IAS 24 Related Party Disclosures), but may also extend to other parties which introduce opportunities, risks and outcomes (e.g., the labour practices of key suppliers may impact an entity’s ability to create value).  In some respects, this is conceptually similar to, but significantly broader than, the requirements in IFRS 12 Disclosure of Interests in Other Entities in relation to unconsolidated structured entities.

      Background papers

      In order to assist in understanding the key principles and background to the concepts in the Consultation Draft, the IIRC has also published ‘background’ papers on the capitals, materiality and the business model concept (links to our earlier stories on these papers), which were prepared by Technical Collaboration Groups formed by the IIRC.  These papers, which were used to develop the draft Framework, explore the key concepts in the draft Framework in more detail, summarise constituent feedback and the outcomes of the Pilot Programme, and include additional analysis and examples to assist in the understanding of <IR>.

      The background papers are available on the IIRC website. Further background papers are expected later in the year on the concepts of connectivity, value and assurance.

      Comment period and the way forward

      The Consultation Draft is available on IIRC’s website at www.theiirc.org/consultationdraft2013. In addition to English, approved translations will progressively be made available in the following languages: Arabic, Chinese, French, Italian, Japanese, Portuguese, Russian and Spanish.

      The Consultation Draft is open for comment for a three-month period, with comments due by 15 July 2013.  The IIRC hopes to receive comment in a prescribed format through their website, but will accept alternative responses.

      The IIRC hopes to publish a first version of its finalised Framework by the end of 2013.  The adoption of <IR> will depend upon legal, regulatory and other developments, although individual organisations may choose to voluntary adopt the Framework.

      Click for IIRC press release (link to IIRC website).

      Agenda for April 2013 IASB meeting

      13 Apr, 2013

      The International Accounting Standards Board (IASB) will meet at the IASB offices on 23-26 April 2013. Discussions will include the comprehensive project on the Conceptual Framework, comprehensive review of the IFRS for SMEs, narrow-scope amendments to IAS 36, annual improvements (2010-2012 cycle and 2012-2014 cycle), hedge accounting, post-implementation review of IFRS 8, the forthcoming Interpretation on levies, and current projects of the IFRS Interpretations Committee.

      Consistent with recent meetings, the focus of the meeting is the IASB comprehensive Conceptual Framework project, with more than half of the time devoted to this project as the IASB seeks to publish a Discussion Paper by the end of June 2013.

      In conjunction with the release of the agenda, the IASB has cancelled the education sessions originally scheduled for 17-19 April 2013.  Instead, a brief education session on the comprehensive review of the IFRS for SMEs has been included on the first day of the meeting.

      There are currently no joint IASB-FASB sessions scheduled for this meeting, and accordingly, the meeting with be an IASB-only meeting.

      The full agenda for the meeting, as of 12 April 2013, can be found here.  We will post any updates to the agenda, and our Deloitte observer notes from the meeting, on this page as they are available.

      Agreement on the revision of the EU Accounting Directives

      12 Apr, 2013

      On 9 April 2013, the European Council, Parliament and Commission informally agreed on the finalisation of a new Accounting Directive that aims at reducing the administrative burden of accounting and at enhanced transparency in the extractive industry. Detailed information on the content of the new Directive is not available yet.

      In October 2011, the European Commission published proposals for the revision of the Accounting and Transparency Directives that aimed at introducing mandatory country-by-country reporting for multinationals in the extractive and forestry industries and new, simpler and (largely) harmonised accounting requirements for SMEs.

      Although it is known that agreement has been reached, details are difficult to come by:

      • The Irish Presidency of the Council of the EU has published a press release (available on the Presidency's website) which offers the following pieces of information:
        • "Among the measures contained in the draft Directive are the reduction of reporting requirements for SMEs and the introduction of an exemption from preparing consolidated financial statements for small groups."
        • "The Directive also incorporates a number of measures designed to enhance financial transparency. The provisions made for Country-by-Country Reporting will dramatically increase the transparency of payments made to governments by European companies involved in the extractive industries."
      • The European Commissioner for Internal Market and Services, Michel Barnier, has published a statement (available in English and French on the EU website) that explains which companies will be subject to the country-by-country reporting requirements (listed and large non-listed companies with activities in the extractive industry and loggers of primary forests) and how reporting will be structured:
        • "The new agreement establishes rules ensuring that these companies disclose payments to governments (e.g. taxes on profits, royalties, and licence fees) on a country and project basis. Reporting would also be carried out on a project basis, where payments have been attributed to specific projects. The text requires the Commission to review the possibility of extending the disclosure requirements to other sectors."
        • "The revised Accounting Directives defines a large company as one which exceeds two of the three following criteria: Turnover €40 million; total assets €20 million and employees 250."
      • The German Ministry of Justice has published a press release (available in German only on the Ministry's website) offering the following slightly more detailed information (our translation):
        • "The new Accounting Directive introduces a mandatory country-by-country reporting for large and capital market oriented entities with activities in the extractive industry and  the primary forest industry. [...] The materiality threshold is set at €100,000."
        • "The Directive also offers the possibility to raise the thresholds below which companies are classified as small by roughly 20% compared to today."
        • "Furthermore, the future amount of mandatory disclosures will be limited to a common European level."

      The preliminary agreement requires final approval by the Committee of Permanent Representatives.

      We will inform you on IAS Plus if more detailed information becomes available and as soon as the full text of the Accounting Directive is published in the Official Journal.

      European field-test on the IASB's expected credit losses model for financial instruments

      12 Apr, 2013

      On 7 March 2013, the International Accounting Standards Board (IASB) published its long-awaited proposal for a new accounting model for impairments of financial assets. Today, EFRAG and the National Standard Setters of France, Germany, Italy and the United Kingdom have launched a field-test designed to show whether the proposed new model addresses the weaknesses of the old model, whether the new model is operational and what costs and impacts will come with the new model.

      Exposure Draft ED/2013/3 Financial Instruments: Expected Credit Losses proposes a model according to which credit losses are no longer recognised if incurred; rather, entities would recognise expected credit losses on financial assets and on commitments to extend credit based upon current estimates of expected shortfalls in contractual cash flows as at the reporting date.

      The field-test launched today is designed to shed light on the following aspects of the proposed new model:

      • How does the expected credit losses model reflect the amount, timing and uncertainty of future cash flows?
      • Are the requirements clear and operational?
      • What is the impact of the proposed expected credit losses model?
      • What are costs and benefits of the proposed expected credit losses model?

      The field-test is conducted through a questionnaire developed by EFRAG and National Standard Setters. In addition European workshops will be held for participants by industry, in which IASB staff will participate. These will be held during May and June 2013. Participation to the workshops will be limited to the respondents of the questionnaire. The workshops will be based on written case studies provided by respondents.

      EFRAG and the National Standard Setters encourage all entities that believe they are significantly impacted by the proposals to participate in the field-test. Entities registering as participants will be supplied with a copy of the questionnaire. Completed questionnaires should be returned by 2 June 2013. Please see the press release on the EFRAG website for more details.

      Inaugural ASAF meeting notes

      11 Apr, 2013

      Deloitte observer notes are now available for the inaugural Accounting Standards Advisory Forum meeting held in London on 8-9 April 2013. The meeting included discussions on the IASB's conceptual framework project and summaries on the IASB and FASB Impairment projects.

      The assessment of our Deloitte observer was that the overall tone of this meeting was positive, collaborative and constructive. Personalities did not get in the way, but that did not preclude lively and pointed discussions. Although it is difficult to extrapolate on the basis of one meeting, it did seem that ASAF members brought their richly diverse experience to the table with a shared objective of helping the IASB develop high-quality products—in this case a Framework that would support standard-setting and be informed by it for some time to come.

      A listing of the topics discussed at the meeting follows (click through to access detailed Deloitte observer notes for each topic):

      Monday 8 April (11:05-16:00)

      Tuesday 9 April (09:00-16:00)

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

      April 2013 IFRS Foundation Trustees and Monitoring Board meetings notes

      11 Apr, 2013

      Deloitte observer notes are now available for the IFRS Foundation Trustees and the Monitoring Board meetings held in London on 11 April 2013. The Monitoring Board meeting, held jointly with the Trustees, featured a review of the Monitoring Board, updates on recent developments within the IASB, ASAF, financials and funding, DPOC activities, profile projects and transparency. Afterwards, the IFRS Foundation Trustees held its meeting which consisted of reports from IFRS Foundation, IASB, and the DPOC.

      A listing of the topics discussed at the meeting follows (click through to access detailed Deloitte observer notes for each topic):

       

      Thursday, 11 April 2013 (9:30-13:00)

      Meeting of the Monitoring Board with the IFRS Foundation Trustees (09:30-11:00)

      Meeting of the IFRS Foundation Trustees (11:15-13:00)

      You can also access the preliminary and unofficial notes taken by Deloitte observers for both meetings.

      IASB podcast on expected credit losses (ED)

      11 Apr, 2013

      The IASB staff has made available a podcast to clarify certain aspects of Exposure Draft 'Financial Instruments: Expected Credit Losses'. The podcast answers the most frequently asked questions that the IASB staff has received on the proposal.

      The podcast is intended to further develop the understanding of the exposure draft to interested parties and assist in providing feedback to the IASB.

      The podcast (mp3, 42.8 MB) is available on IASB website.

      A summary of the exposure draft is available on our 7 March 2013 article.

      Correction list for hyphenation

      These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.