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Recent sustainability and integrated reporting developments

08 Dec 2017

A summary of recent developments at the European Parliament and CDSB.

On 21 November 2017, the European Parliament's Committee on Legal Affairs organised a public hearing on corporate social responsibility with the aim of following up on the most recent developments in the field. Among the experts invited was also Alain Deckers, Head of the Unit ‘Accounting and Financial Reporting’ at the European Commission. The full programme, webstreaming and presentations are available on the Parliament website.

Business leaders in the US have formed an integrated reporting working group under the auspices of the IIRC in a bid to make integrated reporting mainstream. The group has launched a US <IR> Website and will hold monthly webinars to inform stakeholders of latest developments and to build understanding.

The Climate Disclosure Standards Board (CDSB) has published an infographic showing the users of the CDSB framework (374 companies in 32 countries across 10 sectors). Please click to access the infographic on the CDSB website.

IFAC Call for Nominations

08 Dec 2017

The International Federation of Accountants (IFAC) has issued issued a 'Call for Nominations for the Independent Standard-Setting Boards in 2019' looking to fill 22 vacancies including 6 vacancies on the International Public Sector Accounting Standards Board (IPSASB).

Nominations are requested by 15 February 2018. For more information please see the following information on the IFAC website:

Revisions to ISA (UK) 250 Section A

07 Dec 2017

The Financial Reporting Council (FRC) has issued a revision of ISA (UK) 250 Section A - 'Consideration of laws and regulations in an audit of financial statements' which includes a new Appendix that provides revised guidance on the auditor's responsibilities in respect of money laundering, terrorist financing and proceeds of crime legislation in the UK.

The appendix was revised following consultation with HM Treasury, HM Revenue and Customs and the National Crime Agency and supersedes the guidance included in Practice Note 12 Money Laundering - Guidance for Auditors on UK Legislation which is withdrawn.

By incorporating the guidance as an Appendix to ISA (UK) 250 (Revised December 2017), the FRC aims to better link the requirements on auditors set by UK Legislation with the audit itself. Additionally, the FRC aims to take advantage of new material in ISA (UK) 250 (Revised July 2017) which specifically refers to money laundering, terrorist financing and proceeds of crime laws and regulations.  

The new ISA (UK) is effective for audits of financial statements for periods commencing on or after 15 December 2017.

The press release and revised ISA (UK) 250 are available n the FRC's website.

The Bruce Column — Finance for the future winners

07 Dec 2017

The winners of the 2017 Finance for the Future awards highlighted just how far financial leadership focused on creating resilient and sustainable businesses and delivering environmental and social benefits has taken the world by storm. Robert Bruce, our resident, regular columnist, describes how the awards have gone international.

One of the winners of the 2017 Finance for the Future awards was the National Trust, a typically English organisation whose role is to preserve the nation’s heritage and coastline. Its finance team had taken a major role in shaping a new finance model which would increase maintenance and conservation spend while also investing more in strategic priorities. But the winners also included, for example, a company that had used an ingenious financing structure to enable a great leap forward in providing solar power in the domestic German market, a bank in Ecuador that had improved credit risk while embedding sustainability in customers and suppliers, a Canadian company that had digitised the process of bringing the providers of capital together with small farmers in Africa and South America, a Spanish company bringing change and benefits to infrastructure worldwide, a bank creating a digital platform to revolutionise the payments systems in Zimbabwe, and a Canadian telecommunications giant that upended the relationship between its real estate and its workforce to create better work/life balance and reduce its carbon footprint and that has been so successful that it now has a business mentoring other organisations wanting to follow its lead.

The judges all recognised that, however different and varied their paths, all these companies had triumphantly achieved the goals of the awards, and the hopes of the awards’ sponsors and supporters.

For the National Trust the importance was grasping the chance of change and taking a very complex change management programme through to a point where it delivered, for example, long-term planning programmes and significant growth in renewable energy. The finance team were ‘the key enablers in this to deliver strategy and be at the heart of sustainability’, they said.

For Banco Pichincha in Ecuador the catalyst was the realisation that it could introduce a system that measures social and environmental risks to inform investment decisions. Encouraging the implementation of social and governance measures at customers and suppliers has in turn brought about more secure businesses and hence more secure loans. Credit risk fell as governance measures grew. Ferrovial, a Spanish infrastructure company, views its integrated thinking as a competitive advantage, so they communicate this to their investors. Integrated thinking has brought immense and beneficial change to the infrastructure projects which the business built. ‘We create value trying to solve complex problems for society’, said its head of corporate responsibility. From building complicated road systems in the heart of Dallas in Texas to transport improvements in Colombia, all with benefits to congestion issues, carbon emissions and speed of travel for users, the integrated thinking at Ferrovial brought change and value to many users.

MEP Werke and Strasser Capital in Germany realised that the provision of ordinary domestic level solar power was precluded by the high upfront capital costs. The solution to develop an innovative financing structure which allowed the parcelling of solar lease contracts to enable the provision of solar power through small monthly rates. MEP Werke and Strasser Capital became the first to develop a structured financing solution targeted at long-term solar power leasing in Germany.

For Telus, the Canadian telecommunications giant, the catalyst for change was the realisation that it had an ageing real estate infrastructure and was using its staff in a very inefficient way. It created what it called a Work Styles project based around the work styles of employees. Once implemented this brought cost savings, better employee engagement and reduced its carbon footprint. The company is now in demand to provide mentoring for other organisations wanting to achieve the same type of change.

A number of other organisations were highly commended. The team at FAST in Montreal had a very different task. They created a digital platform to provide virtual matching between financial providers in the sustainable agriculture and forestry sector and the small farmers involved across Africa and South America. The digital platform will open up access to large amounts of previously untapped private investment capital.

And for Econet in Zimbabwe an original need to provide urgent cash transfers to refugees from the war in Burundi proved the catalyst for creating a mobile money business that now has more than 80% of Zimbabwe’s adult population accessing financial services. In a struggling economy a simple banking and payments system which is transforming social inclusion really makes an enormous difference to ordinary people.

But in the end all these disparate, and winning, examples have the same quality in common. They all derive from bright people in finance functions around the world, powered by a desire to build resilient and sustainable businesses, using integrated thinking to arrive at smart and simple, and award-winning, solutions.

IASB member discusses implementation of IFRS 17

07 Dec 2017

The IASB has published an article by board member Martin Edelmann to provide an overview of tool available to those implementing IFRS 17, ‘Insurance Contracts.’

These tools include:

  • Letterbox — a dedicated email address for questions on IFRS 17.
  • Webcasts and webinars — Discussions on specific requirements.
  • Transition resource group — Forum to discuss implementation issues with companies, auditors and regulators.
  • Events — Scheduled regularly worldwide to provide information about the standard.
  • Investor education — Educational material tailored for investors.

For more information, see the article on the IASB’s website.

IASB remains in London

07 Dec 2017

In January 2017, the IFRS Foundation issued a tender for estate agency services for help in relocating its London office since the lease on the current premises is expiring in 2018. The Foundation had also stated that it was open to proposals of 'overseas' locations.

The IFRS Foundation has now released a press statement saying that it will remain in London and move its offices to Canary Wharf. The statement does not contain specifications as to the length of the new lease.

Please click for the press release on the IASB website.

Summary of the October 2017 CMAC meeting

06 Dec 2017

The IASB has released a summary of the Capital Markets Advisory Committee (CMAC) meeting, which was held in London on 20 October 2017.

The topics discussed at the meeting included:

  • Discussion Paper Disclosure Initiative — Principles of Disclosure:
    • Feedback from investors.
    • Areas to prioritise.
  • Primary financial statements:
    • Project update.
    • Useful subtotals for the presentation of financial performance for banks.
  • Post-implementation review of IFRS 13
    • Feedback from investors and recommendations.
  • Perceptions of the IFRS Foundation
    • Findings in the reputation research survey report and recommendations.

The next CMAC meeting will take place on 2 March 2018.

For more in­for­ma­tion, see the meeting page and the meeting summary on the IASB's website.

IASB Vice-Chair discusses impact of new IFRS Standards and enhancing the communication of financial information

05 Dec 2017

At the 2017 AICPA Conference on Current SEC and PCAOB Developments in Washington, D.C., IASB Vice-Chair Sue Lloyd gave a speech on IASB’s developments in the standard-setting process as well as its upcoming focus on improving communication effectiveness in financial statements and wider corporate reporting.

Ms Lloyd started by recapping some of the major standards finalised in the past few years, which include IFRS 9, Financial Instruments, IFRS 15, Revenue From Contracts With Customers, IFRS 16, Leases, and IFRS 17, Insurance Contracts. She noted that for some of these standards, the IASB worked closely with the FASB to develop comparable guidance where possible. In addition, she discussed how the Interpretations Committee and the implementation groups play a key role to gather information about issues in practice related to application of accounting guidance.

Next, Ms Lloyd commented that one of the objectives the IASB has for the next five years is to improve communication effectiveness. She explained that this area of work is broken into three parts: (1) improving performance reporting, (2) improving the effectiveness of financial statement disclosures, and (3) enhancing content with the use of electronic tagging (IFRS Taxonomy).

Lastly, she mentioned that the IASB has added a project to its work plan on wider corporate reporting, which will investigate what information is useful to investors that goes beyond the traditional financial statement.

The full transcript of the speech is available on the IASB’s website.

FRC consults on a new-style UK Corporate Governance Code

05 Dec 2017

The Financial Reporting Council (FRC) has today published a new-style UK Corporate Governance Code for consultation together with revised Guidance on Board Effectiveness and some questions on the future of the Stewardship Code.

This is not a tweaking of the Code, as in recent years, but a substantial re-write and simplification/reduction with the idea at its foundation that the focus of the revised Code is the company’s approach to governance through the application of the Code principles - principles which emphasise the value of good corporate governance to long-term success.

The revised Code also incorporates elements of the Government’s corporate governance reform agenda and proposes the removal of exemptions currently available for smaller listed companies (those outside the FTSE 350).

The revised Code proposes a number of new principles and provisions.

New Code principles on:

  • alignment of company purpose, strategy, values and corporate culture;
  • responsibilities of the board to the workforce and other stakeholders;
  • demonstrating independent and objective judgement from the chair (coupled with a hardening of the Code provision on independence so, for example, a tenure of longer than nine years would mean that a director was no longer independent); and
  • alignment of remuneration and workforce policies to the long-term success of the company and its values.

New Code provisions on:

  • the board’s role in monitoring and assessing culture;
  • mechanisms for gathering the views of the workforce;
  • reporting on how stakeholder interests, and the other matters set out in section 172, have influenced the board’s decision-making;
  • board conflicts of interest;
  • the chief executive’s responsibility for strategy and board information;
  • succession planning and board member contribution;
  • diversity and inclusion;
  • holding periods for long-term incentive schemes; and
  • pension arrangements.

It is proposed that the updated Code will be applicable to all companies with a premium listing of equity shares for periods commencing on or after 1 January 2019.

The consultation period ends on 28 February 2018.

The FRC plans to consult on specific changes to the Stewardship Code during the course of 2018.

A press release and the full consultation paper are available on the FRC website.  Our related Governance in brief publication is available here.

Report from EFRAG's fair value conference

05 Dec 2017

On 5 December 2017, the European Financial Reporting Advisory Group (EFRAG) hosted a half-day event on the use of fair value in financial reporting in Brussels. We have put together a short report on the speeches and presentations at the conference.

EFRAG Board President Jean-Paul Gauzès welcomed speakers, presenters, panelists, and participants from the standard-setting, regulatory, investor, preparer, and academic worlds to the well-attended exchange of views regarding theoretical and practical aspects of fair value reporting, a topic “that encourages much debate”.

Keynote speaker was Sir David Tweedie, Chairman of the Board of Trustees of the International Valuation Standards Council (IVSC) and former Chairman of the IASB, who spoke on “Valuation experts and accountants: working together”. He noted that valuations undertaken in accordance with generally accepted principles are central to financial stability and for financial reporting under IFRS and US GAAP and that poor valuation practice was identified as a significant contributor to the 2008 financial crisis with a particular focus on financial instruments. Accordingly, the example chosen by Sir David to illustrate problems that need to be solved between valuation and reporting centered around financial instruments. He noted that IAS 39, IFRS 9, and IFRS 13 are not very specific on valuation principles and that regulators have observed huge variation in the valuation of financial instruments. Sir David also pointed at the conflicting approaches between accounting standards and current view of market practitioners.

The next agenda item was a presentation that looked at the theory behind fair value accounting and especially the merits and limitations of fair value in financial reporting. Prof. Mauro Bini noted that including more current estimates of the future in assets and liabilities enhances income’s predictive ability. However, he also noted that historical cost accounting is an anchor for developing forecasts and asked whether fair value can serve for this purpose equally well. He then noted aspects such as an entity’s business model and the question of relevance versus reliability. Prof. Bini concluded that reliability costs of fair value accounting are high and that the net economic benefits of adopting fair value are low, a conclusion afterwards discussed by a panel that included as panelist IASB member Prof. Ann Tarca and Alain Deckers, Head of the Unit ‘Accounting and Financial Reporting’ at the European Commission.

The practice of fair value was the topic of the next presentation “Challenges in using fair value”. After a short discourse into the history of fair value in IFRSs, presenter Henk Oosterhout also turned to the question of relevance versus reliability, noting that relevance is related to a stronger role of financial markets while reliability also means to consider that prices are objective, but values are not. His illustration examples were drawn from the S&P Europe 350 index companies and he noted an increase of the proportion of fair value assets to total assets of listed firms. This required, Mr Oosterhout noted, more voluntary disclosure and better consistency and comparability. He stated that markets generate often more information than assumed, which increased the importance of Management Discussion & Analysis when arguing the often stressed point of increased volatility. Mr Oosterhout’s conclusions were discussed by a panel moderated by Andrew Watchman, EFRAG TEG Chairman and CEO, with Stephen Cooper, analyst and former IASB member, as one of the panelists.

The event concluded with remarks by Filippo Poli, EFRAG Research Director. EFRAG will issue a report summarising the feedback received at the event. The speaker presentations have already been uploaded to the EFRAG website.

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