The issues paper reflects many observation from the sceptical cover letter attached to the FEE response to the December 2013 EU consultation, but describes in more detail why better public sector financial information is needed, the existing international standards and their perceived shortcomings, and possible issues that may arise in the development of European standards.

The issues paper can be accessed on the FEE website.

In the draft comment letter on the proposed guidelines, EFRAG comments that alternative performance measures (APMs) "can provide useful information to users when properly used and presented, and assist investors in gaining a better understanding of a company's financial performance". Therefore, EFRAG supports the idea of clearly defined and explained APMs that are presented consistently over time. However, EFRAG believes that the proposed definition of an APM is overly broad and does not work very well in the context of IFRS financial reporting.

EFRAG also believes that the scope of the proposed guidelines is much broader than appropriate and that the reference to 'all documents containing regulated information made publicly available' lacks a clear underlying principle. EFRAG especially recommends to keep prospectuses and part of prospectuses out of the scope as was the case with the CESR Recommendation the new ESMA guidelines are intended to replace.

Generally, EFRAG observes that ESMA "has not provided clear evidence on why the existing CESR Recommendation is no longer considered to provide adequate guidance and is in need of replacement". In some cases EFRAG even believes that the proposed guidelines could have negative effects. EFRAG states for example that the 'prominence' requirement regarding the presentation of APMs as currently drafted in the guidelines could result in imposing a form of 'ceiling' on the amount of voluntary information that an entity is allowed to disclose regardless of whether such information is beneficial to user. EFRAG also believes that ESMA is partly in danger of introducing requirements that may inadvertently result in clutter and boilerplate disclosures.

Comments on the EFRAG draft comment letter invited by 25 April 2014.

Please click for the following information on the EFRAG website:

• Draft comment letter
• Press release

The Cranfield report highlights that the increase has been driven by “considerable effort and a significant change in mindset” from investors, executive search firms and business leaders “all working together to bring about real change”.  However, although these results are positive, the Cranfield report warns that whilst there has been "good progress" in the proportion of new board appointments going to women this has "generally not been at the level required to reach the 25% target by March 2015".  To achieve this, would require that one third of all new board appointments go to women, a statistic that has recently been achieved in the last six months where female board appointments accounted for 35.5% of all board appointments.  Should the proportion stay at this recent level, the Cranfield report predicts that there will be 26.7% women on boards by 31 December 2015.

The Cranfield report has been published at the same time as Lord Davies publishes the third annual progress report into women on boards (link to BIS website) (‘Women on boards – Davies review annual report 2014’) (“the Davies report”) which outlines the progress achieved against each of the ten recommendations made in in his report ‘Women on Boards’ in February 2011 (link to BIS website).  These recommendations aimed to ensure that more women were appointed to boardroom positions.

The key findings in the Cranfield report, which are consistent with latest statistics released by the Professional Boards Forums’ BoardWatch (link to Professional Boards Forum BoardWatch website) are:

• The percentage of female-held directorships on FTSE 100 boards has increased to 20.7% in March 2014, up from 17.3% in March 2013 and 12.5 per-cent as of February 2011 when Lord Davies reported.
• The percentage of female-held directorships on FTSE 250 boards has increased to 15.6% in March 2014, up from 13.3% in March 2013 and 7.8 per-cent as of February 2011 when Lord Davies reported.
• There has been a decrease in the number of all-male boards in the FTSE 100 from seven in March 2013 to 2 in March 2014.   The number of all-male boards for FTSE 250 companies has decreased from 67 in March 2013 to 48 in March 2014.
• The number of companies with at least 25% women directors in the FTSE 100 as of March 2014 is 36 (up from 25 in March 2013) and the equivalent number for FTSE 250 companies is 51 (up from 36 in March 2013).

To further enhance the chances of achieving the 25% target, the Cranfield report proposes five strategies one of which is to increase the boards of FTSE 100 companies with less than 25% women directors to 11 members (the average size of FTSE 100 boards) and to fill those additional seats with women.  The Cranfield report highlights that “this strategy alone would add another 56 female directors” which would be more than the 48 required to achieve the target set by Lord Davies.

These findings support continued progress against the recommendations made by Lord Davies in 2011. The Cranfield report indicates that “we are within sight of the 25% target on the FTSE 100 boards in 2015".  Lord Davies comments that “the home straight is in sight”.  Whilst incorporating the findings of the Cranfield report in his report he comments that “over the last year we have seen many positive steps to improve women’s representation in the Boardroom”.  However he reiterates the message in the Cranfield report that “although we have come a very long way since 2011, continued and concerted effort is still needed if we are to reach the 25% target we set by 2015”. 

Click for:

• Press release (link to Cranfield School of management website)
• ‘The Female FTSE Board Report 2014 – Crossing the finish line’ (link to Cranfield School of Management website)
• Department for Business, Innovation and Skills (BIS) press release (link to BIS website)
• Latest annual progress report from Lord Davies into Women on Boards (Link to BIS website)
• Latest women on boards statistics (Link to Professional Boards Forum BoardWatch website)
• The original Lord Davies Women on Boards report from 2011 (Link to BIS website)
• Our previous UK Accounting Plus story on women on boards

The proposals are detailed in a report entitled Investor Listing Standards Proposal: Recommendations for Stock Exchange Requirements on Corporate Sustainability Reporting, and result from dialogue with institutional investors and stock exchanges around the world.  It follows an earlier consultation paper issued by Ceres' Investor Network on Climate Risk (INCR) in 2013.

In developing the proposals, feedback was received from over 100 investors, across all six continents, with the majority of the comments coming from the United States, United Kingdom, France, Germany, the Netherlands, South Africa and Australia. The development of the proposals also involved liaison with the World Federation of Exchanges, United Nations sponsored Sustainable Stock Exchanges (SSE) Initiative, the Principles for Responsible Investment's Sustainable Stock Exchanges Investor Working Group, the Friends of Paragraph 47, the International Corporate Governance Network and many other groups and networks involved in sustainability reporting.

The proposed listing requirements are as follows:

• Item 1 - ESG materiality assessment. All listed entities would discuss its process for determining the environment, social and governance (ESG) factors that are material to its business, as well as the outcome of the assessment, within its annual financial filings. This disclosure would have three key components: how the factors where determined, who was involved in the process, and which issues are determined as material and why - as well as a discussion of both risks and opportunities presented by the material issues and their connection to financial performance, accounting, growth, market position, or business strategy. Investors felt this area was the most important to be included in the proposed listing rule and is designed to help companies focus ESG reporting efforts and prioritise information gathering and analysis
• Item 2 - ESG issue disclosure. Disclosure, on a qualitative and quantitative basis, would be made in ten ESG categories, on a "comply or explain" approach for each category. The ten categories are (1) governance and ethical oversight (2) environmental impact (3) government relations and political involvement (4) climate change (5) diversity (6) employee relations (7) human rights (8) product and service impact and integrity (9) supply chain and subcontracting and (10) communities and community relations. Investors identified these categories as capturing areas of opportunity, broad systemic risk, and externalisation of costs to an investment portfolio across multiple industries and markets
• Item 3 - ESG disclosure index. Every company would provide a hyperlink in its annual financial filings to an 'ESG Disclosure Index', using either the Global Reporting Initiative (GRI) Content Index or a functional equivalent. The index is designed to address investor concerns that finding existing ESG data for each company is currently a time-consuming and frustrating exercise, by informing investors about the availability and location of a company's ESG data and key performance indicators. It is also designed to establish a more systematic method for evaluation gaps in ESG reporting and to move ESG reporting toward greater consistency and comparability. This requirement is designed to be flexible to accommodate revisions to the GRI, and other guidance such as the International Integrated Reporting Council (IIRC), the Sustainability Accounting Standard Board (SASB), CDP and others.

Additional guidance and rationale for each item is included in the report, outlining investors' reasons for including the requirement in the proposed rules, and recommendations for implementing each item.

In addition to the three key items, the report also contains a summary of additional recommendations for issuers, exchanges and regulators to consider in implementing sustainability disclosure requirements:

• Financial and ESG reporting timeframes should be aligned within three years of implementation of any ESG listing rule
• Investors would prefer that data presented in a company's ESG disclosures be independently assured within five years of any ESG listing requirement's issuance
• Large issues should comply immediately with the listing rules, with a goal of all companies reporting within a timeframe of three years
• Regulators are encouraged to work with exchanges to assess the overall level of ESG disclosure and reporting quality after two years, and then every three years thereafter, with systems developed to seek investor feedback on ESG disclosure quality, and occasional reports on emerging trends in ESG reporting produced
• Additional disclosure categories (Item 2) may be pertinent to specific markets and industry distributions
• A number of recommendations are made in relation to issuer education and capacity building.

The report also contains a summary of existing listing rule requirements on sustainability reporting from various exchanges.

The proposals are open for comment until 23 June 2014. Click for press release (link to Ceres website).

The report reflects the views of 27 (mainly UK-based) investors on the accounting treatment of different classes of intangible assets in the statement of financial position and their amortisation in the income statement.  Investors were asked to provide their views in the form of a questionnaire on accounting for:

• intangible assets acquired in a business combination;
• internally generated intangible assets;
• separately acquired intangible assets; and
• adequacy of presentation and disclosure. 

The main findings are as follows: 

Intangible assets acquired in a business combination.

• A number of respondents expressed a preference for an accounting treatment in the statement of financial position (52%) and income statement (59%) different from that currently required under IAS 38 Intangible Assets and IFRS 3 Business Combinations.  IFRS 3 requires all intangible assets acquired in a business combination to be treated in the same way (i.e. all identifiable assets should be capitalised separately from goodwill if they are separately identifiable or they arise from a legal or contractual right in line with the requirements of IAS 38).  IAS 38 requires intangible assets with finite lives to be amortised over their useful lives and intangible assets with indefinite lives to be subject to an annual impairment review in accordance with IAS 36 Impairment of Assets.
• Of those respondents who preferred a different accounting treatment in the statement of financial position, 37% made a distinction between what they termed “wasting” intangible assets (which they felt were separable from the entity, had finite useful lives and lead to identifiable future revenue streams) and “organically replaced” intangible assets (effectively the opposite of “wasting” intangible assets).  They believed that “wasting” intangible assets should be separately identified and capitalised but felt that “organically replaced” intangible assets acquired should be accounted for within goodwill.  IAS 38 does not permit a different accounting treatment for this distinction drawn by respondents. 
• Respondents also expressed a view for a different accounting treatment subsequent to initial recognition than that required under IAS 38.  Some (33%) were of the view that “wasting” intangible assets should be amortised over their useful lives but “organically replaced” intangible assets should be subject to an annual impairment view.  On the other hand, 26% were of the view that all intangible assets should be subject to annual impairment reviews only.  

Internally generated intangible assets

• The majority of respondents (63%) agreed with the requirement in IAS 38 that development costs should be capitalised as internally generated intangible assets.
• However, there were mixed views from investors with regards to research costs which IAS 38 requires to be expensed – 15% expressed the view that research costs should be capitalised and 19% expressed the view that research and development costs should be expensed.
• Investors also expressed concern over disclosure in this area and that companies did not appear to have a consistent approach to capitalisation.  They indicated that it was not clear from disclosures given how the accounting policy in respect of research and development was applied in practice especially how research was distinguished from expenditure.  

Separately acquired intangible assets 

• Nearly all (89%) of investors agreed with the capitalisation of separately identifiable intangible assets and 56% agreed that such intangible assets should be amortised annually in the income statement. 

Disclosures

• Investors expressed “concerns” over the quality of disclosures.  The report highlights that as many of the areas that investors requested additional disclosure on are already contained within IFRSs this may suggest that “either preparers are failing to comply with these requirements or that the information provided is not presented with sufficient detail and/or clarity to meet user needs”. 

The report is published at a time when the International Accounting standards Board (IASB) is undertaking a post-implementation review of IFRS 3.  The FRC comment that the research “is intended to capture investors’ views for the IASB to consider in identifying areas for further analysis and investigation”.  They also highlight that it “is also relevant to preparers as it highlights areas of potential improvement in communication with investors within the current frameworks”. 

The full report can be accessed from the FRC website.

Background

The IASB formally added an initiative on disclosure to its work programme in December 2012 to complement the work being done in the Conceptual Framework project. The initiative is made up of a number of smaller projects that aim at exploring opportunities to see how presentation and disclosure principles and requirements in existing Standards can be improved. Among them is a narrow scope project on IAS 1 Presentation of Financial Statements to ensure that entities are able to use judgement when presenting their financial reports as the wording of some of the requirements in IAS 1 had in some cases been read to prevent the use of judgement.

Suggested changes

The IASB proposes in ED/2014/1 Disclosure Initiative (Proposed amendments to IAS 1) amendments in four areas that seem to impede the use of judgement:

• Materiality. The IASB proposes clarifications that are aimed at emphasising (1) that information should not be obscured by aggregating or disaggregating information, (2) that materiality considerations apply to the all parts of the financial statements, and (3) that even when a Standard requires a specific disclosure materiality considerations do apply.
• Statement of financial position and statement of profit or loss and other comprehensive income. The IASB proposes to introduce (1) a clarification that the list of line items to be presented in these statements can be disaggregated and aggregated as relevant and (2) additional guidance on subtotals in these statements.
• Notes. The IASB proposes to clarify (1) that the understandability and comparability should be considered when determining the order of the notes and (2) that the notes need not be presented in the order listed in paragraph 114 of IAS 1.
• Accounting policies. The IASB proposes to remove guidance and examples with regard to the identification of significant accounting policies that are perceived as being potentially unhelpful.

The IASB has also included one proposal that arose from a submission to the IFRS Interpretations Committee:

• Presentation of items of OCI arising from equity-accounted investments. The IASB proposes to clarify that an entity's share of OCI of equity-accounted associates and joint ventures should be presented in aggregate as single line items based on whether or not it will subsequently be reclassified to profit or loss.

Transition requirements and effective date

The ED does not contain a proposed effective date. Also, no specific transition provisions are included in the ED.

Additional information

Please click for:

• IASB press release (link to IASB website)
• Access to the exposure draft on the IASB website
• Our UK Accounting Plus project page on IAS 1 — Disclosure initiative

Click through for direct access to the notes:

Tuesday, 18 March 2014

• Insurance contracts

You can also access the preliminary and unofficial notes taken by Deloitte observers for the entire meeting. Notes from the remaining sessions will be posted in due course.