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G8 stress the need for transparency in the use of natural resources

19 Jun, 2013

Meeting in Lough Erne in Northern Ireland on 17-18 June 2013, the Group of Eight (G8) finance ministers discussed the themes of 'Tax, Trade and Transparency' and agreed to make sure the world’s poorest people benefit from the natural resources of their various countries by improving the transparency of their extractive industries and land rights.

The final communiqué promotes transparency as a means of empowering people to hold governments and companies to account and states:

We have agreed a transformative Open Data Charter to make budget data and other government information public in an easily accessible way. We will make progress towards common global reporting standards to make extractive industry payments more transparent.

The Open Data Charter published as an appendix to the communiqué explains:

Open data can increase transparency about what government and business are doing. Open data also increase awareness about how countries’ natural resources are used, how extractives revenues are spent, and how land is transacted and managed. All of which promotes accountability and good governance, enhances public debate, and helps to combat corruption. Transparent data on G8 development assistance are also essential for accountability.

Improved transparency in the extractive industries and country-by-country reporting have also been the focus recent of legislative acts and announcements.

The European Parliament has voted last week to approve the new Accounting and Transparency Directives responding to international developments in this field, in particular the inclusion of a requirement to report payments to governments in the Dodd Frank Act in the United States. (However, the EU disclosure requirements are more comprehensive including also the logging industry and large unlisted companies.)

Last week, Canadian Prime Minister Stephen Harper announced on his website that the Canadian government will be establishing new mandatory reporting standards for Canadian mining companies to enhance the transparency of the payments they make to local, state and national governments. His website also contains an announcement of the formation of partnerships with Peru and Tanzania to further strengthen transparency in their extractive industries. (Similar partnerships were formed at the G8 summit between Burkina Faso and France, Colombia and the EU, Ghana and the United Kingdom, Guinea and the United States, Mongolia and Germany as well as Myanmar and the United States.

Please click for further information on the UK G8 Presidency website:

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Parliamentary Commission on Banking Standards Final report issued

19 Jun, 2013

The Parliamentary Commission on Banking Standards (PCBS), appointed by both Houses of Parliament last year to investigate and provide recommendations for legislative and other action to improve professional standards and culture in the UK banking sector, published its long-awaited Final Report today.

The Final Report 'Changing banking for good' is the fifth report of the PCBS to consider professional standards and conduct in the UK banking sector.  The recommendations contained within the report are made with the objective “to enable trust to be restored in banking” in light of past banking scandals.

The report makes recommendations in five areas: i) making individual responsibility in banking a reality for senior management; ii) reforming governance within banks to reinforce each bank’s responsibility for its own soundness and standards; iii) creating better functioning and more diverse banking markets; iv) reinforcing the responsibilities of regulators in the exercise of judgment; and v) specifying the responsibilities of this and future Governments.

Among other things, the report recommends “a new framework for individuals” to replace the Approved Persons Regime, changing remuneration standards and heightening expectations on, and sanctions for, the failures of individuals and increasing the competitiveness within banks.  Aside from these, the report also makes a number of recommendations in the areas of corporate governance, auditing and accounting. 

Corporate Governance recommendations

The Final Report comments “the financial crisis, and multiple conduct failures, have exposed serious flaws in governance”.  The report then goes on to say:

Poor governance and controls are illustrated by the rarity of whistle-blowing, either within or beyond the firm, even where, such as in the case of Libor manipulation, prolonged and blatant misconduct has been evident.

 The major recommendations in the area of corporate governance are: 

  • Each individual director should have a personal responsibility for the “safety and soundness" of the firm and the Companies Act 2006 (section 172) should be amended to prioritise financial safety over shareholder interest in the case of banks.  The report highlights that the Financial Reporting Council (FRC) should amend the UK Corporate Governance Code in this respect.
  • The Chairman of the Board should be personally responsible for the effective operation of the board, with the Senior Independent Director being responsible for making sure that this happens. A named non-executive director should be responsible for overseeing fair and effective whistle-blowing procedures. 

Auditing and Accounting recommendations

The Final report comments:

While we recognise the risk of ever more complex and burdensome accounting requirements, flaws in IFRS mean that the current system is not fit for regulators’ purposes. 

The major recommendations in the areas of auditing and accounting are:

  • Banks should prepare a separate set of accounts for regulators on the basis of specified prudent principles set by the Prudential Regulation Authority (PRA).  These accounts will be externally audited and a statutory duty to regulators will be placed upon auditors.  Where there is a public interest for these accounts to be published the PRA will have the power to require that these prudential accounts, or an abbreviated form, may be included in the annual report with a reconciliation to the IFRS numbers.
  • Audit reports on banks should include specific commentary on valuation, risk and remuneration, amongst other key judgement areas.
  • Auditors of banks should meet regularly with the PRA and the Financial Conduct Authority (FCA) – and more often than the once a year required by current Codes of Practice. Representatives of the audit profession should also have the opportunity to discuss emergent issues that have arisen from their work with banks, the PRA, the Financial Reporting Council (FRC) and HMRC.
  • The PCBS recommends that the FRC should push for an early decision on the introduction of the expected loss model for loan loss provisioning.  The PCBS noted that they were concerned about the length of time that the profession was taking to move the basis for valuing debt assets to an expected loss model.

The FRC supports the recommendations of the PCBS.  However they raised concerns over the recommendation to amend the Companies Act 2006 to prioritise financial safety over shareholder interest in the case of banks and comment that this may not be the correct solution.  The FRC comment:

The UK and Europe will be at a competitive disadvantage if its regulatory arrangements are too heavily swayed toward safety at the expense of capital attraction.

The FRC also note:

An amendment to the Companies Act to remove shareholder primacy could have a profound bearing on investors’ willingness to commit capital and might set precedents for other sectors.  It should only be undertaken after detailed and rigorous consultation so that we can assess and understand the impact this might have on the operation of the UK equity markets. It should be remembered that the concept of enlightened shareholder value which is enshrined in the Act was introduced on the basis of a consensus reached after wide public debate. Any changes to the Act should be equally well thought through.   

In relation to the recommended separate set of externally audited regulatory accounts, the FRC commented that it expects to be involved together with the PRA and FCA in the setting and implementing of standards and guidance.  The FRC also note that it has recently revised UK and Ireland auditing standards for auditors of companies who are required to comply with the UK Corporate Governance Code (including banks) which partially addresses the recommendation regarding disclosure of risk in the auditors’ report. 

The UK government has endorsed the principal findings and has stated that it intends to implement the Parliamentary Commission's main recommendations to address the failings that the Parliamentary Commission identified on individual accountability, corporate governance, competition and long-term financial stability.

Click for:

Full report (link to UK Parliament website)

FRC press release (link to FRC website)

Government response (link to government response)

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Public Conference of the EFRAG technical group (EFRAG TEG)

19 Jun, 2013

On June 26, 2013, the Technical Expert Group (TEG) of the European Financial Reporting Advisory Group, (EFRAG) will hold a public conference call.

An agenda for the meeting was not announced.  Interested listeners have the ability to dial into the Conference call.  For details, see the EFRAG website.

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EFRAG consideration of comments received

19 Jun, 2013

The European Financial Reporting Advisory Group (EFRAG) has published feedback statements summarising the main comments received from constituents invited to respond to their draft comment letters in relation to the International Accounting Standards Board (IASB) draft ED/2012/3, ED/2012/6 and ED/2012/07.

The feedback statements provide an analysis of the EFRAG tentative position expressed in the draft comment letters, describe the comments received from constituents and then highlight how these comments were considered by the EFRAG Technical Group (EFRAG TEG) in reaching their final position on the IASB EDs. 

ED/2012/3 Equity Method: Share of Other Net Asset Changes (Proposed Amendments to IAS 28)

This Exposure Draft proposed limited scope amendments to IAS 28 to include guidance on how an investor accounts for its share of the changes in net assets of an associate or joint venture that are not recognised in profit or loss or other comprehensive income of the investee ('other net asset changes'). 

ED/2012/6 Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Proposed Amendments to IFRS 10 and IAS 28)

This Exposure Draft proposed to clarify when unrealised profits and losses on transactions between an investor and an associate should be fully recognised: requiring full recognition in relation to transactions involving businesses, but requiring partial elimination in the case of asset sales. 

ED/2012/07 Acquisition of an Interest in a Joint Operation (Proposed amendment to IFRS 11)

This Exposure Draft proposed to amend IFRS 11 'Joint Arrangements' to clarify that a joint operator accounts for the acquisition of an interest in a joint operation which is a business by applying IFRS 3 'Business Combinations' and other relevant standards.

Click for:

EFRAG press release (link to EFRAG website)

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Telcommunications sector survey on revenue recognition

18 Jun, 2013

A survey of telecommunications operators has shown a wide variation of readiness for the forthcoming standard on revenue, and revealed a number of concerns in relation to its adoption.

The survey, undertaken by Deloitte's Technology, Media and Telecommunications group, gathered the thoughts of over 40 operators in relation to key questions on the understanding of the proposals in the IASB-FASB joint project on revenue recognition, and their concerns from an operational, commercial and accounting methodology perspective.

Key findings from the survey include:

  • The most significant concerns expressed by respondents were meeting the data and information requirements that the proposed accounting will require, closely followed by the impact that this will have on IT systems
  • Concerns also exist over the level of awareness of the proposals amongst the analyst and investor community
  • The implementation of a portfolio approach to revenue recognition is desired but is likely to be very challenging
  • There is a wide variation of readiness and work undertaken to date amongst operators.

Click to access the full survey.

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EFRAG field-test results on proposals to IFRS 9

17 Jun, 2013

The European Financial Reporting Group (EFRAG) has issued a report containing the results of the field test conducted by the EFRAG and National Standard Setters (NSS) ANC, ASCG, FRC and the OIC, on how the new requirements in IFRS 9, as amended by Exposure Draft (ED) ‘Classification and Measurement: Limited Amendments to IFRS 9’, would affect the current classification and measurement of financial assets.

The focus of the field test was to (1) identify when the application of the new classification and measurement requirements in IFRS 9 would lead to changes in the current measurement of financial assets under IAS 39 and (2) gather facts and objective data from participants rather than views and opinions.

In general, the results of the field test indicated that:

More financial assets would be measured at FV-PL under IFRS 9 because they fail the contractual cash flow characteristics assessment.

Bifurcation of financial assets is currently used only to a limited extent.

Investment strategies and/or the level at which the business model test is performed could change when implementing IFRS 9 to achieve a particular accounting measurement.

The field-test results will be used as input to the European Commission’s endorsement process. Additionally, the EFRAG and NSS will use the feedback received to develop their views on the impacts of the proposals.

More information on the results of the field test are available on the EFRAG website.

 

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European Parliament approves new Accounting and Transparency Directives

13 Jun, 2013

The European Parliament has voted to approve the new Accounting and Transparency Directives. The reform of these Directives was predominently aimed at reducing the administrative burden on small companies, enhancing the transparency of payments to governments by the extractive industry and loggers of primary forest, and creating a mandatory country-by-country reporting requirement.

 

Accounting Directive

The new Accounting Directive reduces unnecessary and disproportionate administrative costs on small companies by simplifying the preparation of financial statements and reducing the amount of information required by small companies in the notes to financial statements. Under the Directive, small companies are only required to prepare a balance sheet, a profit and loss account and notes to meet regulatory requirements.

When examining the various policy options available to replace the old Accounting Directives, the Commission examined and rejected the option to adopt the IFRS for SMEs at EU level as the Commission deemed that IFRS for SMEs did not meet the objective of reducing the administrative burden. Nevertheless, EU Member States are able to permit or require the IFRS for SMEs as their accounting standard for all or some of their unlisted companies provided that the Directive is fully implemented and the standard, which is partially in conflict with the Accounting Directive, is modified to comply with any accounting requirement of the Directive that departs from the IFRS for SMEs.

 

Transparency Directive

The revised Transparency Directive closes an existing gap in the notification requirements by requiring disclosure of major holdings of all financial instruments that could be used to acquire economic interest in listed companies. A second major change is the fact that the requirement to publish quarterly financial information was abolished. This aims at reducing the administrative burden and encouraging long term investment.

 

Country-by-Country reporting

Country-by-country reporting was introduced with the new Accounting Directive. In order to ensure a level playing field between companies, the same disclosure requirement has been incorporated in the proposal to revise the Transparency Directive.

The disclosure requirement will require listed and large non-listed companies with activities in the extractive industry and the logging of primary forests to report any payments made to governments on a country-by-country basis in an effort to improve the transparency. The Commission responded to international developments in this field, in particular the inclusion of a requirement to report payments to governments in the Dodd Frank Act in the United States, but the EU disclosure requirements are more comprehensive including also the logging industry and large unlisted companies.

 

Further Information

The EU Commissioner for Internal Market and Services, Michel Barnier, published a press release welcoming the European Parliament vote:

Financial reporting obligations have been modernised and costs reduced, in particular for SMEs. With the new rules on country by country reporting, we have created a framework where businesses and governments must disclose revenues from natural resources. This framework will also contribute to the fight against tax fraud and corruption.

Click for (links to European Commission website):

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Long-awaited narrative reporting regulations laid before UK parliament

13 Jun, 2013

The long-awaited narrative reporting regulations issued by the United Kingdom Department for Business, Innovation and Skills (BIS) have now been finalised and laid before the UK parliament for approval. The regulations are the UK government’s response to a project that began in 2010 and are intended to make narrative reporting simpler, clearer and more focussed.

The Institute of Chartered Accountants in England and Wales (ICAEW) have welcomed the new regulations (link to draft regulations) but have also raised concerns that some companies may struggle to meet the adoption deadline.  Dr Nigel Sleigh-Johnson, Head of ICAEW’s Financial Reporting Faculty, said: 

Companies need time to implement changes of this magnitude; the timetable is likely to prove challenging for many businesses. This is not ideal; boards certainly need to turn their attention to this change sooner rather than later. 

The regulations: 

  • require all companies (except small companies) to prepare a strategic report which will be presented separately to the directors' report and will replace the current business review.  The aim of the strategic report is to pull together the company’s strategy, business model and risks facing the company and link this through to the financial statements and remuneration of company directors.  The regulations regarding directors’ remuneration, which include the requirement for quoted companies to disclose a single remuneration figure for each director, are expected to be laid before parliament shortly. Quoted companies will need to ensure they include specific information on the company’s strategy, business model, human rights and gender diversity; 
  • require quoted companies to include information on greenhouse gas emissions in their directors’ report.  This report will be required to contain an annual quantity of emissions, in tonnes of carbon dioxide equivalent, in respect of emissions produced by “activities for which that company is responsible”, including fuel usage and resulting from the purchase of “electricity, heat, steam or cooling” by the company.  Companies will be required to disclose the methodology used to calculate these figures including prior year comparative information for the second and subsequent year of reporting;
  • remove a handful of other currently required disclosures in the director’s report such as the principal activities of the company during the course of the year; and 
  • replace the option to prepare summary financial statements with an option to provide a ‘strategic report with supplementary material’.  The supplementary material consists of some administrative details, details of any qualifications made by the company’s auditor in its report on the full annual accounts and, for quoted companies, the “single total figure table” for directors’ remuneration.

The UK Department for Environment, Food & Rural Affairs (DEFRA) has published regulations governing how companies should report their greenhouse gas (GHG) emissions in their publication 'Environmental Reporting Guidelines: Including mandatory greenhouse gas emissions reporting guidance' (link to DEFRA guidance).  This publication provides guidance for companies on how to measure and report greenhouse gas emissions and discusses the requirements for carbon reporting in more detail.  Further DEFRA guidance is on greenhouse gas emission factors is provided in their publication '2013 Government GHG Conversion Factors for Company Reporting: Methodology Paper for Emission Factors' (link to DEFRA guidance) and 'UK Greenhouse Gas conversion factors' (link to DEFRA website).  Should they be approved, the regulations will come into force for periods ending on or after 30 September 2013.  

Click for: 

BIS press release (link to BIS website)

Regulations laid before parliament (link to draft regulations)

DEFRA guidance on how to measure and report greenhouse gas emissions and '2013 Government GHG Conversion Factors for Company Reporting: Methodology Paper for Emission Factors' (link to DEFRA guidance)

Our previous story on the future of narrative reporting

Deloitte ‘Need to know’ on the New UK narrative reporting regulations

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Notes from the IFRS Advisory Council meeting

12 Jun, 2013

The IFRS Advisory Council met in London on 10-11 June 2013. We have posted the Deloitte observer notes from the meeting. Topics discussed included the costs and benefits of IFRS adoption, project updates and discussion on various IASB projects, an evaluation of the post-implementation review process, the Accounting Standards Advisory Forum (ASAF), and the role and composition of the IFRS Advisory Council.

Click through for direct access to the notes:


Monday, 10 June 2013

Public sessions (09:15-17:30)


Tuesday, 11 June 2013

Public sessions (09:00-15:00)

 

Please click to access the preliminary and unofficial notes taken by Deloitte observers during the meeting.

The next council meeting is on 14-15 October 2013 in London.

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IASB XBRL team seeks participants for its 2013 XBRL Industry Practice Project

10 Jun, 2013

In the last three years, the IASB XBRL team has been interacting with companies from various countries and industries to identify and develop extra concepts to the IFRS taxonomy reflecting common practices. The IASB XBRL team is re-establishing the project to examine and develop common industry practice concepts for the IFRS Taxonomy, and is looking to work directly with stakeholders across different industries and regions in order to increase comparability, reduce the number of XBRL extensions, and lower the burden on preparers. The process will be conducted by a joint programme of empirical analysis and interaction with industry representatives.

For 2013, the project will be focusing to the following industries:

  • pharmaceuticals,
  • real estate,
  • telecommunications; and
  • transport.

The IASB is looking for participation from the following groups:

  • Preparers,
  • Users (Investors and Analysts),
  • Industry groups,
  • Regulators and Supervisors.

Application from all geographical regions is encouraged.

Companies interested in participating in this project should express their interest by 28 June. The first meeting will take place on 8 July.

For further information please go to the press release on the IASB's website.

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