A recalibrating of the purpose of financial and non-financial reporting is under way. But worries over how far the investment community is engaging with this remain. Two recent conferences in the UK underlined this. At the first one, run by consultant Black Sun, Deepa Raval, project director in the accounting and reporting policy team at the Financial Reporting Council, (FRC), emphasised just how far ahead the UK was in the use and development of narrative reporting. And how the recently issued FRC guidance on strategic reports should encourage companies to continue to experiment and be innovative in the way they developed their annual reports.

Meanwhile at the second conference, the Non-Financial Reporting Forum, there were doubts that all this innovation was reaching the consciousness of the investment community. Lucinda Bell, the finance director at British Land, made the point that analysts have only three minutes at their internal briefing meetings to present and communicate the essence of British Land’s results and inevitably, given the data-heavy nature of financial reporting, the non-financial information tended to get lost. Another panellist later in the day, Robert Miller-Bakewell, senior independent director with RPS Group, drew on his previous thirty-year experience as an equity analyst to provide an ever less-promising picture. Picking up on Bell’s point he said that analysts would usually have half-an-hour from first seeing a company’s results to the point where they delivered a three-minute report on them. And that half hour, he said, included the time it took to submit a written copy of what they intended to say and have it cleared by the compliance team. His conclusion was simple. There was not going to be much chance of any of the non-financial information getting into that.

And there were different views of how far investors and shareholders use annual reports. At the Black Sun conference Douglas Radcliffe, head of reporting and operations, investor relations, at Lloyd’s Banking Group pointed out that the bank had the largest shareholder base in the FTSE100 at around 2.7 million shareholders. This meant a huge operation involving 8,000 copies of a 396-page annual report, 75,000 copies of a 52-page annual review, and 2.6 million copies of an eight page performance summary. The scale of the task was enormous. And the scale of the battle to engage with as many people as possible was dramatized by one of the remarks at the Non-Financial Reporting forum. Charles Nichols, group controller at Unilever, remarked that it was quite depressing how few people read the formal report and accounts. The biggest audience, he said, was pensioner shareholders.

But the advantage of breaking out from the crowd and a greater emphasis on non-financial and narrative reporting was the comparative freedom it gave organisations to report a wider range of useful information. Lucinda Bell made the powerful point that financial reporting was very heavily regulated and thus it was much harder to communicate information which might be useful in assessing what the future might hold. Whereas non-financial reporting was not subject to the same stifling level of regulation and could be used to give users and investors a better idea of what they might expect.

Both events were broadly convinced that going on the offensive was the answer. 'The change has been intense’, said Sallie Pilot, director of research and strategy at Black Sun. The useful information was increasingly in the reports and the linkage, the connections between the different parts of the information, was on the increase. Black Sun’s most recent survey of trends in FTSE100 corporate reporting showed that a steadily increasing 83% of companies connect their strategy information with their key performance indicators. The push towards greater flexibility and greater emphasis on non-financial and narrative reporting is coming from within. And this cultural change, embodied by initiatives like integrated reporting, is gathering force as an inevitable consequence.

In answer to a question Charles Nichols made it clear that in Unilever integrated reporting was not just the responsibility of the finance function. It was a part of the overall business systems. By tradition the finance function had the role of measuring performance management but with integrated reporting the responsibilities had moved wider within the business. As British Land’s finance director Lucinda Bell put it, the finance function is now part of the conscience of the business. And that, she said, was sign of how mainstream all this had become.

EFRAG commends the IASB’s effort in comprehensively analysing banks’ risk management practices and developing new thinking in how to best reflect the effects of such practices on an entity’s financial position and performance. EFRAG supports the view that a new hedge accounting model for open portfolios, which are managed on a net risk basis, is needed.

However, EFRAG disagrees with the widening the scope of the project evidenced in the discussion paper and in contrast to the original objective when the project was decoupled from the project on general hedge accounting. The focus of the IASB is no longer on finding a hedge accounting solution for open portfolios but on the revaluation of all portfolios that are dynamically managed. EFRAG does not believe that revaluing all portfolios that are dynamically managed, regardless of whether or not they have been risk-mitigated through hedging, will lead to decision-useful information.

EFRAG recommends that the IASB develops a model for hedge accounting in accordance with the original objective of the project. Such a hedge accounting solution would mitigate the accounting mismatch inherent in a mixed measurement model where hedged items are measured at amortised cost and hedging instruments are measured at fair value. At the same time, such a solution would not override the measurement requirement in IFRS 9 Financial Instruments that amortised cost measurement is appropriate for some financial instruments (which the proposed scope in the discussion paper would).

Comments are due by 10 October 2014.

For more information, see:

• EFRAG draft comment letter (link to EFRAG website).
• Press release (link to EFRAG website).
• Our 17 April 2014 article on DP/2014/1.
• Our macro hedging project page.

Click through for direct access to the notes:

Thursday, 19 June 2014

• Conceptual framework

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

Highlights from the meeting include:

• Role of judgement.  There was strong support for principles-based accounting. The most members also felt that the use of judgement should be expected and that the IASB should consider this when developing its principles. Also, many members believed that the IASB should not include anti-abuse precautions in its Standards.  
• Conceptual framework.  There was support by the members for the decisions made on the scope, purpose and status this project, included its the proposed time line; however, some noted that significant issues should not be rushed for the sake of meeting this time line. The members also noted that the IASB should carefully examine the relationship between the Conceptual Framework and its Standards. In addition, the members expressed concerns with the reintroduction of prudence and warned against it conflicting with neutrality.
• Implementation support groups. There was support for the use of implementation groups; however, certain provisions should be considered. These provisions included: (1) any future group should be considered on a case by case basis and whether it is necessary at all, and (2) transparency is needed on the group's activities. In addition, the members asked for an evaluation of the implementation groups for revenue and impairments to occur in order to determine their effectiveness.
• Terms of reference. There were recommendations to revise the Council’s secondary objective in order to clear up any misconceptions regarding its independence and objectivity.

The next meeting of the IFRS Advisory Council is scheduled for 13-14 October 2014 in London.

The full report on the IFRS Advisory Council meeting is available on the IASB website.

The article provides information on (1) when to apply the new hedge accounting model, (2) the reasoning behind the amendments, and (3) the enhanced disclosure requirements.                    

Click to view:

• Investor Perspectives New Hedge Accounting Model Will Improve Investor Understanding of Risk Management (link to IASB website).
• UK Accounting Plus article on the hedge accounting amendments.
• Archive of the Investor Perspectives series on the IASB's website.

The objective of the consultation is to obtain examples where contracts or transactions could qualify as leases under a single-model approach (IASB) or a dual-model approach (FASB), but are viewed by constituents as in-substance services. In addition, the EFRAG and European standard setters are seeking input on which of the two alternative approaches is preferred.

During the March 2014 joint meeting, the IASB and FASB did not reach a consensus regarding lessee accounting. The IASB supported a single-model approach under which lessees would account for all leases as Type A (or finance-type) leases, while the FASB supported a dual-model approach; however, lessees would classify a lease by using criteria similar to the lease classification criteria in IAS 17. The FASB also indicated that they expect most current capital leases to be treated as “Type A” leases and most operating leases to be treated as “Type B” leases.

The public consultation will begin on 30 June 2014 and will last until 22 August 2014. The feedback received will be shared among the EFRAG and the National Standard Setters.

For more information, see:

• Press release (link to EFRAG website).
• Our leases project page.

Background

The IASB received feedback from stakeholders expressing concerns about the relevance and usefulness of information provided to users for certain biological assets accounted for at fair value. Especially mature bearer biological assets, which no longer undergo significant biological transformation and are used solely to grow produce, were perceived to be more akin to property, plant and equipment and their operation similar to that of manufacturing. Therefore, the IASB published Exposure ED/2013/8 Agriculture: Bearer Plants proposing to bring biological assets that meet the definition of a 'bearer plant' within the scope of IAS 16 Property, Plant and Equipment rather than using the fair value measurement approach prescribed by IAS 41 Agriculture. The amendments published today update and finalise proposals in the ED.

Amendments

For the purpose of bringing bearer plants from the scope of IAS 41 into the scope of IAS 16 and therefore enabling entities to measure them at cost subsequent to initial recognition or at revaluation, a definition of a 'bearer plant' is introduced into both standards. A bearer plant is defined as "a living plant that:

1. is used in the production or supply of agricultural produce;
2. is expected to bear produce for more than one period; and
3. has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales."

The scope sections of both standards are then amended to clarify that biological assets except for bearer plants are accounted for under IAS 41 while bearer plants are accounted for under IAS 16.

The amendments also clarify that produce growing on bearer plants continues to be accounted for under IAS 41 and that government grants related to bearer plants no longer fall into the scope of IAS 41 but need to be accounted for under IAS 20 Accounting for Government Grants and Disclosure of Government Assistance.

Other considerations

The IASB explains in the Basis for Conclusion that it decided on a 'no-alternative-use model' for bearer plants instead of a 'predominant-use model' (thereby excluding from the amendments biological assets that have both bearer and consumable attributes) as a predominant-use model would be more difficult to apply because it would require judgement to be applied and as reclassifications between IAS 16 and IAS 41 might become necessary if the predominant use changes.

The IASB also excluded livestock from the scope of the amendments as a cost model would be more complex for livestock. Also, the IASB argued that an active market would usually exist for livestock, resulting in fair value information being readily available and easier to apply than cost measurement.

Dissenting opinions

Two IASB members dissented from the publication of the amendments because they believe that the amendments will eliminate information about the fair value changes in bearer plants and the underlying assumptions used to estimate those changes. They believe that the amendments are no improvement to IFRSs and lower the quality of the information available in the financial statements of entities engaged in agricultural activities. Therefore, they conclude that the amendments fail to meet the Board's own criteria for new or amended standards.

Effective date and transition

The amendments are effective for annual periods beginning on or after 1 January 2016. Earlier application is permitted.

On the initial application of the amendments, entities are permitted to use the fair value of items of bearer plant as their deemed cost as at the beginning of the earliest period presented. Also, an entity need not disclose the quantitative information required by paragraph 28(f) of IAS 8 for the current period. However, entities are required to provide these disclosures for each prior period presented.

Additional information

Click for:

• IASB press release (link to IASB website)
• Project summary and feedback statement (link to IASB website)
• Our project page outlining the history of this project

The research paper, published in December 2013, concludes that the business model should continue to play a role in financial reporting, that it is time for a change to the current ad-hoc use and that the concept of the business model should be included in the Conceptual Framework with appropriate guidance for standard-setting.

ESMA agrees that the use of the business model at a standard level “could result in more relevant information on the financial performance, financial position and cash flows of any entity and assist investors in their risk assessment and economic decisions”.  However ESMA comments that “the use of different accounting treatments for different business models could harm comparability amongst issuers”.  It argues that when deciding upon such an approach “there should be a duly justified trade-off between relevance and comparability of the information” and that this decision should be made at a standards level.

Regarding inclusion of the business model concept in the Conceptual Framework, ESMA believe that “a general provision that the ‘business model’ should be assessed when setting individual standards could be sufficient”.  It comments that introducing a too broad a definition of ‘business model’ “might lead to too many different accounting models not justified by fundamental differences between business models”.

The full comment letter can be accessed on the ESMA website.

With revenue as the ‘top line’ metric that is crucial to many investment decisions, the issuance of IFRS 15 Revenue from Contracts with Customers providing a single, principles based five-step model to be applied to all contracts with customers is a significant milestone in financial reporting.

Click to view Investor Perspectives — Revenue recognition: finally, a Standard approach for all (link to IASB website). All Investor Perspectives are archived on the IASB's website.