July

The Bruce Column — Ensuring Climate-related financial disclosure goes mainstream

18 Jul, 2017

The final Report of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures has now been published. Our regular columnist Robert Bruce reports on its recommendations and how it is likely to move this issue into the mainstream.

The focus on climate-related concerns has changed. It has moved away from simple worries about global resources to a much more tangible concern about risks and opportunities. The final Report from the Financial Stability Board’s Task Force on Climate-related Financial Disclosure is expected to change attitudes to the quality of and responsibility for climate-related corporate reporting fundamentally. The old idea that such issues can be downplayed as simply high-minded concerns rather than being seen as the arena for serious risk assessment and resulting action will then, in turn, change. The Report focuses on the information that investors need.

It starts from the position that climate-change risks are one of ‘the most significant, and perhaps most misunderstood, risks that organisations face today’. Its recommendations and disclosures aim to ensure that investors, lenders and insurance underwriters are provided with a full understanding of those risks. And while the disclosure recommendations may be voluntary the clear expectation is that momentum and the market will demand their implementation.

The Task Force makes it clear that its recommendations ’aim to be ambitious, but also practical for near-term adoption’. The Report says that organisations already reporting climate-related information should be able to implement the recommendations ‘immediately’ and are ‘strongly encouraged to do so’. Others can begin ‘by disclosing climate-related issues as they relate to governance, strategy, and risk management practices’. The Report says the Task Force ‘recognises that this may be challenging but believes that by moving climate-related issues into mainstream annual financial filings, practices and techniques will evolve more rapidly’.

There are four fundamental areas of disclosure. First an organisation’s governance around climate-related risks and opportunities, then the actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses, strategy and financial planning. Thirdly the processes used by the organisation to identify, assess, and manage climate-related risks; and finally the metrics and targets used to assess and manage relevant climate-related risks and opportunities. 

The Report highlights that the Task Force ‘expects the governance processes for these disclosures would be similar to those used for existing public financial disclosures and would likely involve review by the chief financial officer and audit committee, as appropriate’. In other words the disclosures are clearly tied to the more general responsibility to present a clear, balanced and understandable discussion by publicly-listed organisations. The disclosure of climate-related risks and opportunities is firmly placed in mainstream financial reporting. 

Support has been swift from the asset owners and asset managers’ community. And it is clear they intend driving a swift and widespread adoption of the framework. For example, Stuart Gulliver, CEO at HSBC, said that: ‘These recommendations are very welcome. The impact of climate change and the transition to a lower-carbon economy deserve board-level scrutiny and governance. Independent research commissioned by HSBC shows that less than a quarter of companies currently disclose their environmental impact. This makes it very difficult for analysts and investors to assess and compare how sustainable these companies are. These recommendations are a practical and pragmatic response to the need for consistent and comparable climate-related financial disclosure’. 

More than a hundred firms around the world with a total market cap of some $3.3 trillion have agreed to actively support implementation and encourage others to do so. The Task Force will remain in place until at least September 2018 to promote and monitor adoption and to evaluate ‘the extent to which the recommended disclosures are meeting the interests of users’. With the backing it has, the move mainstream of climate-related financial disclosure is well under way.

FSB issues statement in support of IFRS 17

17 Jul, 2017

The Financial Stability Board (FSB) has issued a statement welcoming the IASB's new insurance accounting standard.

The statement is little more than an announcement that IFRS 17 Insurance Contracts is now available but also notes:

Nevertheless, the FSB encourages firms to start the implementation efforts as soon as possible, and to engage in open dialogue with the IASB on the ways in which the standard’s application can generate the most relevant information.

Please click for the statement on the FSB website.

Summary report for the joint EFRAG/FRC outreach event on principles of disclosure in London

17 Jul, 2017

On Tuesday 4 July 2017, the Financial Reporting Council (FRC) together with EFRAG, hosted a joint outreach event in London on the IASB discussion paper DP/2017/1 'Disclosure Initiative — Principles of Disclosure'. A summary report related to this outreach event has now been provided.

The event introduced the main elements of the discussion paper and sought input on a number of the key questions in the paper that will be used by EFRAG and FRC in providing their input to the IASB.

Please click for the summary report on the FRC website.

FRC publishes a feedback statement on its Discussion Paper on improving the Statement of Cash Flows

14 Jul, 2017

The Financial Reporting Council (FRC) has published a feedback statement summarising respondents’ comments on its Discussion Paper on improving the Statement of Cash Flows.

The Discussion Paper, which was divided into five sections, was issued in October 2016 with the aim of identifying possible ideas to improve the usefulness of the statement of cash flows which is currently required by International Accounting Standard (IAS) 7 Statement of Cash Flows.  The feedback would then provide input to the International Accounting Standards Board (IASB) on its project on Primary Financial Statements.

The feedback statement indicates that “a large majority of respondents welcome[d] the publication of the Discussion Paper or agree[d] with most or some of its suggestions”.  Key messages include:

  1. The usefulness of information about cash flows – the majority of respondents agreed that notional cash flows should not be reported in the statement of cash flows although there should be disclosure of non-cash transactions.
  2. The classification of cash flows – a majority of respondents agreed that ‘operating activities’ should be positively defined or described.  Also a majority of respondents considered that all cash flows relating to financing liabilities should be reported in the financing category of the statement of cash flows and that there should be a separate section for tax.  Views were split as to whether or not capital expenditure should be reported within operating activities rather than as an investing activity.
  3. Cash equivalents and the management of liquid resources – views were split as to whether or not the statement of cash flows should report flows of cash or of cash and cash equivalents.
  4. Reconciliation of operating activities – the majority of respondents agreed that, in all cases, a reconciliation of operating activities should be presented.
  5. Direct or indirect method - the majority of respondents agreed that the direct method of cash flows should continue to be permitted.

The press release, full feedback statement and a letter from the FRC to the IASB are available on the FRC website.

FRC announces new Deputy Chair of the FRRP

14 Jul, 2017

The Financial Reporting Council (FRC) has announced the appointment of Andrew Vials as the Deputy Chair of the Financial Reporting Review Panel (FRRP).

As Deputy Chair of the FRRP, Andrew will also be a member of the Corporate Reporting Review Committee, which is a committee of the Conduct Committee.

Please click here for the corresponding press release on the FRC website.

FRC issues revisions to ISA (UK) 250 Section A, ISA (UK) 330 and ISA (UK) 505

14 Jul, 2017

The Financial Reporting Council (FRC) has today issued a revision of ISA (UK) 250 Section A – ‘Consideration of Laws and Regulations in an audit of Financial Statements’, ISA (UK) 330 ‘The Auditor’s Response to Assessed Risks’ and ISA (UK) 505 ‘External Confirmations’.

The revisions to ISA (UK) 250 Section A, which were consulted on in March 2017, reflect changes made to the International Code of Ethics for Professional Accountants issued by the International Ethics Standards Board for Accountants (IESBA).  The International Auditing and Standards Board (IAASB) made revisions to ISA 250 to align with the requirements of the revised Code.

The revisions to ISA (UK) 330 and ISA (UK) 505 were consulted on in April 2017. As a result of these revisions the FRC has withdrawn Practice Note 16 – Bank Reports for Audit Purposes in the United Kingdom

The revised standards are effective for audits of financial statements for periods commencing on or after 15 December 2017.

The press release and revised standards are available on the FRC website.

EFRAG Board meeting July 2017

14 Jul, 2017

The European Financial Reporting Advisory Group (EFRAG) will hold a Board meeting on 20 July 2017 in Brussels.

An agenda with supporting papers and details on how to register for the public meeting can be found on the EFRAG website.

European Commission text with "top up" regarding IFRS 4 amendments

14 Jul, 2017

The European Commission has made available the text sent to the European Parliament and the Council of the European Union regarding the endorsement of 'Applying IFRS 9 'Financial Instruments' with IFRS 4 'Insurance Contracts' (Amendments to IFRS 4)'. The text includes a "top up" that would allow a financial conglomerate to elect that none of its entities operating in the insurance sector apply IFRS 9 in the consolidated financial statements for financial years the commencement of which precedes 1 January 2021 where certain conditions are met.

The conditions are set out in Article 2 of the text, which can be accessed here in all official EU languages.

The EFRAG has updated its endorsement status report to include a link to the document.

EU High-Level Expert Group on Sustainable Finance delivers early recommendations

14 Jul, 2017

The High-Level Expert Group (HLEG) on Sustainable Finance, established by the European Commission, has published its first report setting out concrete steps to create a financial system that supports sustainable investments. Special significance is placed on the integration of information for investors and integrated reporting is cited as key to the ultimate ambition of convergence to low-carbon growth.

The report argues that sustainability needs to be put at the heart of the financial system and that to deliver systemic change, ESG factors and long-term sustainability risks and opportunities will be needed in corporate governance, core indices, accounting standards and credit ratings.

The authors note that the time horizon in finance is typically much shorter than the time horizon needed to address society’s pressing challenges; and the conception of risk in finance is typically much narrower than one that effectively captures economic, social and environmental sustainability. The resulting mismatch of time horizons would make certain social and environmental issues (such as resource depletion, which are likely to materialise only in the long term) become ‘externalities’ that are deemed ‘not material’ for financial markets and are thus not sufficiently accounted for by asset owners and managers.

However, the report states, social and environmental issues do have financial consequences in the real economy and for end-beneficiaries and should be accounted for. On accounting frameworks, the authors note:

While there are numerous initiatives on sustainability reporting, the ultimate ambition has to be the convergence of financial and sustainability information, supported by a more comprehensive set of accounting standards. Integrated reporting supports this convergence qualitatively through reporting that links sustainability factors with firms’ strategy. Accounting standards can help advance the quantitative element.

The report is aimed at readers in Europe and beyond, who are concerned about issues of sustainability, financial markets and the wider challenges for society. It is intended to provide the basis for fruitful and constructive consultations as the HLEG engages in the next phase of its work. The HLEG welcomes comments, questions and discussions during the process of preparing its final report for publication in December 2017.

Please click to access the full report on the European Commission website.

EBA reports on results of the second impact assessment of IFRS 9

14 Jul, 2017

The European Banking Authority (EBA) has published a report on the results of its second impact assessment of IFRS 9 'Financial Instruments'. For the report, EBA looked at a sample of approximately 50 institutions across the European Union.

The exercise, which follows up on the first impact assessment published in November 2016, has confirmed the EBA's initial observations on the stage of preparation for the implementation of IFRS 9 and the estimated impact of IFRS 9 on regulatory own funds.

On the qualitative side, the report highlights that banks have made further progress on the implementation of IFRS 9 since the previous exercise, but smaller banks are still lagging behind in their preparation compared with larger banks. On the quantitative side, the responses received show that the estimated impact of IFRS 9 is mainly driven by IFRS 9 impairment requirements. The estimated increase of provisions is on average 13% compared to the current levels of provisions under IAS 39.

The full report can be accessed on the EBA website.

In parallel, the EBA also launched a public consultation on its guidelines on uniform disclosure of IFRS 9 transitional arrangements to ensure institutions' Pillar 3 disclosures on capital and leverage ratios are consistent across the EU during the transitional period. More information is available here.

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