The Bruce Column — Putting integrated thinking at the heart of business

30 Jun, 2017

The latest report from the International Federation of Accountants, (IFAC), puts the integrated thinking which lies at the heart of integrated reporting as one of the critical elements in building trust and confidence in business and government. Our regular columnist, Robert Bruce, reports.

Uncertain times need constructive thinking which can hold the hope of change and strength ahead. And in particular there is a need for public trust to help the process. IFAC, representing the global accountancy profession, has put together the thinking that it hopes will help. A new report, ‘Build Trust. Inspire Confidence’ (link to IFAC website), puts forward a call to action by G20 countries. In a joint statement its President and its CEO say that: ‘Governments must promote coherent public policy and a consistent, transparent regulatory environment that inspires confidence while enabling progress. Professional accountants continue to play a crucial role enabling capital flows, economic activity, and higher standards of living’. They call for a series of actionable recommendations, a policy consensus backed up by tangible implementation and cooperation amongst G20 countries. 

One of these recommendation is the use of integrated reporting.  ‘Integrated reporting’, says the report, ‘is an opportunity to focus on long-term value creation, and improve on a largely fragmented, complex, and compliance-driven system’. The way forward, says the report, is through harnessing the techniques of integrated thinking. ‘Integrated reporting’, says the report, ‘is founded on integrated organisational thinking and more likely to align capital allocation and corporate behaviours to the wider goals of financial stability and sustainable development’. It urges the G20 to action.

The report cites a recent survey carried out by the South African Institute of Chartered Accountants to illustrate how integrated thinking can improve decision making. 74% of executives, the report says, and 93% of non-executive directors were of the view that integrated thinking had improved decision-making at management level. And 72% of executives and 86% of non-executive directors thought integrated thinking had improved decision-making at board level.

Introducing the changes IFAC is advocating would, it says, ‘bring about a more coherent corporate reporting system, relevant to today’s business environment, that aligns outcomes with the G20 priorities of building resilience, improving sustainability, and assuming responsibility’.

Financial Reporting Lab publishes quarterly newsletter

30 Jun, 2017

The Financial Reporting Lab ("the Lab") has today published its quarterly newsletter providing highlights of its activities from the last three months.

The newsletter includes:

The full newsletter is available here.

FRC defers decision on updating FRS 102 to reflect major changes in IFRSs

30 Jun, 2017

The Financial Reporting Council (FRC) has today published a feedback statement summarising respondents views on its consultation Document containing proposals to update Financial Reporting Standard (FRS) 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’ to reflect recent changes in International Financial Reporting Standards (IFRSs).

The consultation, published in September 2016, formed part of the first triennial review of FRS 102 and proposed:

It was proposed that, subject to the responses to the September 2016 consultation, these more significant amendments would be consulted on ‘towards the end of the third quarter of 2017” as phase 2 of its triennial review.

However, following respondents comments, the FRC has decided not to issue an exposure draft of containing proposals for these more significant updates.  Although respondents’ feedback showed support for a long‑term aim of broad consistency with IFRSs, they questioned the proposed timetable and suggested more IFRS implementation experience is needed before an assessment of whether, and if so, how and when requirements based on the expected loss model of IFRS 9, IFRS 15 and IFRS 16 should be considered for incorporation into FRS 102. In addition, IFRS 17 Insurance Contracts has been issued since the FRC's consultation took place and the FRC has previously stated that “FRS 103 [Insurance Contracts] would be reviewed once the International Accounting Standards Board (IASB) had completed IFRS 17”.

The FRC has indicated that, at present, there is no target effective date for any changes to FRS 102 or FRS 103 and detailed proposals will be consulted on in due course.

The press release and feedback statement are available on the FRC website.

ICAEW and IFRS Foundation announce virtual IFRS 16 conference

30 Jun, 2017

The IFRS Foundation, along with the Institute of Chartered Accountants in England and Wales (ICAEW), will be hosting a virtual IFRS conference on the implementation of IFRS 16 'Leases' on 10 October 2017. ICAEW and IFRS Foundation have chosen this new format for their annual joint conference as it considerably brings down cost and can be attended from anywhere in the world.

The conference will cover topics on:

  • Overview of the new requirements
  • Definition of a lease
  • Transition to IFRS 16
  • Exemptions
  • Measurement
  • Other issues

More information on the conference is available on the ICAEW website.

EFRAG publishes June 2017 issue of 'EFRAG Update'

30 Jun, 2017

The European Financial Reporting Advisory Group (EFRAG) has published an 'EFRAG Update' summarising public technical discussions held and decisions made during June 2017.

EFRAG discussion paper on goodwill impairment testing

30 Jun, 2017

In connection with the post-implementation review of IFRS 3, the European Financial Reporting Advisory Group (EFRAG) has been conducting research into a number of potential amendments to the goodwill impairment test with the view to enhancing its application and effectiveness and reducing complexity.

The new discussion paper completes EFRAG's current research activities on goodwill, which also saw a discussion paper on accounting treatment for goodwill published in July 2014 and a quantitative study on goodwill and goodwill impairment published in September 2016.

The scope of the publication is limited to impairment testing and it does not seek to address broader topics such as identification and measurement of acquired intangible assets in a business combination or the extent to which these should be separated from or subsumed into goodwill. Ideas presented in the paper focus on how to allocate goodwill to CGUs, when to determine the recoverable amount, and how to determine the recoverable amount. EFRAG asks European constituents for their views on the advantages and disadvantages of the potential amendments presented in this context.

The discussion paper and a press release are available on the EFRAG website. The deadline for comments is 31 December 2017.

On 14 March 2018, the EFRAG issued a feedback statement that summarises the responses received from constituents. In general, the constituents believed that the goodwill impairment test can be improved in certain areas. For more information, see the press release and feedback statement on the EFRAG's website.

ESMA seeks participants for ESEF field tests

30 Jun, 2017

European Transparency Directive requires that issuers listed on regulated markets in the EU must prepare their annual financial reports in a European Single Electronic Format (ESEF) from 1 January 2020. The European Securities and Markets Authority (ESMA) has concluded that Inline XBRL is the most suitable technology for issuers to report their annual financial reports in a single electronic format because it enables both machine and human readability in one document.

ESMA will now conduct field tests that will consist of transforming annual financial reports by issuers to Inline XBRL. ESMA is seeking participation from issuers on European regulated markets from all industries preparing IFRS consolidated financial statements. Participating issuers will receive free support to transform their annual financial report to Inline XBRL and thus be able to learn how the Inline XBRL format can be applied.

Plesae click for more information in the press release on the ESMA website.

IASB chair speaks on financial stability, insurance contracts and better communication in financial reporting

29 Jun, 2017

At the IFRS Foundation's conference in Amsterdam, IASB chair Hans Hoogervorst discussed how accounting standards can help financial stability, the new insurance contracts Standard (IFRS 17) and the IASB's effort to improve financial reports so they are a better communication tool between companies and investors.

Mr Hoogervorst began by noting that although fostering financial stability is not the primary goal of accounting standards, the transparency of financial statements resulting from the accounting standards is a "crucial ingredient for achieving financial stability". He discussed the work of the IASB in recent years to issue standards that lead to high-quality accounting, which then leads to better insights of a company's performance, the ability to discover problems more timely and an early warning system to detect changes in a company's risks and performance, amongst other benefits.

In addition, Mr Hoogervorst talked about IFRS 17 Insurance Contracts that was issued about one month ago and how it is finally an international standard that will reduce the incomparability between national GAAPs for insurance. He also noted that IFRS 17 will improve financial stability in six areas:

First of all, the insurance liability will be properly measured and regularly updated, giving much better information. The build-up of unsustainable equity positions will become visible much more quickly.

Second, the cost of options and guarantees will be regularly updated and fully reflected in the financial statements.

Third, companies will also provide updated information on the risk margin they hold for their insurance products.

Fourth, the losses embedded in onerous groups of contracts will have to be recognised immediately. Contracts can be grouped, but in a way that ensures that the losses embedded in onerous groups of contracts will not be averaged with groups of profitable contracts.

Fifth, IFRS 17 ends up-front profit taking and revenue will only be recognised as the service is provided.

Finally, IFRS 17 will also make it easier for investors to judge the performance of any insurance company. Currently, many investors base their analysis on Solvency II, which is the prudential standard for the European Union. But Solvency II is almost entirely focused on the balance sheet. It makes no distinction between profits earned in the past and profits to be earned in the future. It does not convey information about profitability over time. 

In his remarks about the IASB's role in improving communication through finacial reporting, Mr Hoogervorst noted that this will be a central theme in the IASB's work plan. Instead of working on major cross-cutting Standards, the Board will focus on improving the primary financial statements, making disclosures more effective and improving the comparability and use of non-GAAP measures.

A full transcript of Mr Hoogervorst's remarks is available on the IASB website.

The Bruce Column — Social and human capital accounting starts to accelerate change

29 Jun, 2017

It has been a slow burner. But, as our regular columnist Robert Bruce reports, the changed thinking that is being brought about by social and human capital accounting is now starting to take off. A new guide provides the detail required to put it into action and practical examples.

There is a time when everything suddenly comes into focus. This is what appears to be happening in the field of social and human capital accounting. The business benefits are becoming clear and the practical ways to achieve them are moving into the mainstream. Social and human capitals are, inevitably, seen as more subjective than other capitals like financial, natural and manufactured capitals. It was always going to take more time before they reached broad acceptance and ease of practical usage. But the launch and publication of the CFO Leadership Network’s Essential Guide to Social and Human Capital Accounting, under the aegis of the Prince of Wales’ Accounting for Sustainability project, looks to be the long-awaited catalyst. It provides the tools and the guidance but, more importantly, it details case studies of what businesses have already achieved. This is the body of practical experience that organisations and business need. 

It is a question of recognising the role of social and human capital accounting, measuring its effects, and bringing it forward into decision-making. Done properly this creates a revolution. In the words of Judith Batchelar, Director of Sainsbury’s Brand: ‘This is not the icing on the cake. It is the cake’. It deals with risk. It deals with reputation, cost savings, stronger stakeholder relationships, better access to and retention of talent, staff and workforce. It deals with how the core skills of finance teams are essential for the integration of social and human capital information into decision-making. At the launch of the guide Sabina Nealon, Finance Director, Sustainable Business at Unilever, described how her role was ‘a bridge’ between the finance and sustainability teams. ‘By putting social and human capital into the heart of our strategy we are building a stronger platform for long-term sustainable value creation’, she said. 

It can work at a simple and logical level. Judith Batchelar outlined the Sainsbury’s ‘Greenest Grocer’ programme, which led to energy savings of £1.7m in electricity in under a year. The company has just under 200,000 people. Over 2,000 people went through training programmes and what started as leadership from the CFO spread wide through the company. ‘It became’, as she said, ‘the leadership and judgement of many’. A simple but well thought through and implemented action brought lasting change. ‘That is the value your people can bring to the business’, she said. 

It is also about risk. It is the simple risk of not doing something or not taking something into account. What would that something cost? And how would it impact on reputation? Connect that with the figures which show that market value is overwhelmingly made up of intangibles and you have changed the way people think. When the power company SSE first calculated the value of its human capital in 2014 it came out at £3.4bn. ‘It is so important to monetise it as that drives decision-making’, said George Cobb, SSE’s Group Sustainability Accountant. ‘We are uncovering new insights into our workforce that are leading to real business benefits,’ he said. And it works outside the business as well. ‘It has been a real eye-opener to our investors’, he said. ‘It is showing that we have invested in people’. 

Previously unseen figures and factors change the thinking around a business. Examples abound in the guide. British Land tackled skill shortages. National Grid invested in employee wellbeing and found that for every £1 invested it was getting back more than £2 return in reduced sickness absence costs. The Crown Estate set up a partnership to help jobseekers into sustainable employment. It produced some £40m of societal value through savings on welfare and tax credits, increased tax and national insurance payments, and boosting local economies.  All of these came from looking at the business from a different standpoint, through a new lens. 

In the words of Kate Bowyer, CFO at the Crown Estate, and a member of the A4S CFO Leadership Network, they have seen ‘many benefits from investment in social and human capital and realised how investment in one capital often helps to transform others’. It is this transformation in the thinking that has brought about the changes which are still only the beginning of what can be achieved.

TCFD published final recommendations on climate-related financial disclosures

29 Jun, 2017

The Task Force on Climate-related Financial Disclosures (TCFD) set up by the Financial Stability Board (FSB) to develop voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to lenders, insurers, investors and other stakeholders has published its final recommendations for effective disclosure of climate-related financial risks.

In the introduction to the final report, TCFD Chairman Michael R. Bloomberg notes:

The risk climate change poses to businesses and financial markets is real and already present. It is more important than ever that businesses lead in understanding and responding to these risks — and seizing the opportunities — to build a stronger, more resilient, and sustainable global economy.

The final report follows on a consultation document published in December 2016. The consultation document saw 320 unique responses from respondents in 30 countries, including 15 of the G20 jurisdictions. The four widely adoptable recommendations on climate-related financial disclosures that are applicable to organisations across sectors and jurisdictions were widely supported and remain unchanged:

  • Governance: Disclosure of the organisation’s governance around climate-related risks and opportunities
  • Strategy: Disclosure of the actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning
  • Risk management: Disclosure of how the organisation identifies, assesses, and manages climate-related risks
  • Metrics and targets: Disclosure of the metrics and targets used to assess and manage relevant climate-related risks and opportunities

Key features of the recommendations are that they are adoptable by all organisations, should be included in mainstream financial filings, are designed to solicit decision-useful, forward-looking information on financial impacts, and have a strong focus on risks and opportunities related to the transition to a lower-carbon economy. The TCFD also recommends the disclosure of potential impacts of climate-related risks and opportunities under different potential scenarios, including a 2° Celsius scenario.

The following additional information is available on the FSB website:

Also see Deloitte's Need to know on the final report.

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