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Recent sustainability and integrated reporting developments

16 Feb 2017

A summary of recent developments at the CDSB, LSEG, SASB, GRI/SEBI and Deloitte.

The Climate Disclosure Standards Board (CDSB) has responded to the consultation document of the Task Force on Climate-related Financial Disclosures (TCFD) with recommendations on climate-related disclosures. The CDSB calls on the TCFD to explore how the concept of materiality should be applied to climate-related financial disclosure, to work with relevant standard-setters (including IASB & FASB) to explore how the existing mainstream model could allow for the integration of climate-related financial disclosures, to review the suggested illustrative metrics so that they incorporate more financial metrics, and to rationalise and coordinate the recommendations. More information is available through the press release on the CDSB's website as well as the response itself.

The London Stock Exchange Group (LSEG) has issued guidance setting out recommendations for good practice in environmental, social and governance reporting (ESG). The guidance, has been developed in response to investor demand for a more consistent approach to ESG reporting and builds upon the TCFD recommendations. Please click for a press release and the guidance on LSEG website.

The Sustainability Accounting Standards Board (SASB) has published a Conceptual Framework and Rules of Procedure that move the organisation to a two-tier governance structure that separates fiduciary duty from standards-setting activities. The documents as well as further information on additional consultation are available through the press release on the SASB website.

The Global Reporting Initiative (GRI) and the Bombay Stock Exchange (BSE), one of India’s leading exchange groups, have released a linkage document between the GRI Standards and the SEBI Business Responsibility Report (BRR) Framework. The document is aimed at companies that wish to use the GRI Standards to comply with SEBI’s reporting requirements mandatory for the top 500 Indian companies listed in the country’s stock exchanges. The linkage document is available through the GRI website.

Deloitte has released a new publication in it Thinking allowed series that looks at climate-related disclosures and some of the issues involved and how companies and audit committees might respond to the challenges. The publication builds on the TCFD recommendations.

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Pre-meeting summaries for the February IASB meeting

15 Feb 2017

The International Accounting Standards Board (IASB) will meet at its offices in London on 22–23 February 2017. We have posted our pre-meeting summaries for the meeting that allow you to follow the IASB’s decision making more closely. For each topic to be discussed we summarise the agenda papers made available by the IASB staff and point out the main issues to be discussed by the IASB and the staff recommendations.

On Wednesday 22 February, the staff is bringing the Insurance Contracts project back to the Board to discuss the findings from the external editorial review of a draft of IFRS 17 Insurance Contracts. The staff is proposing some drafting changes to address matters identified in the review. The most significant changes proposed relate to changes to the carrying amount of the contractual service margin and introducing a narrow exemption to the requirements to group insurance contracts when a regulation or law constrains an entity from fully pricing the insurance risks transferred based on the characteristics of each policy holder.

For the project on financial instruments with the characteristics of equity, the papers explore whether rights and obligations arising from non-contractual terms (e.g. those arising from law) should be taken into account when classifying a financial instrument as equity. The Board will be looking at mandatory tender offers and bonds that are contingently convertible to ordinary shares as a result of regulatory requirements.

In January 2017 the Board decided to develop an exposure draft to amend IFRS 9 Financial Instruments in relation to symmetric prepayment options, to allow instruments with a prepayment options to qualify for amortised cost measurement. Having discussed the urgency of the amendment with the Due Process Oversight Committee the staff is proposing a 30 day comment period with the goal of finalising the amendment so that it can have an effective date of 1 January 2018.  

The staff will update the Board on the project to amend the definition of a business in IFRS 3 Business Combinations. The staff will also formalise the steps for publishing a request for views as part of the post-implementation review of IFRS 13 Fair Value. And there will be a brief update on the Research Programme.

On Thursday 23 February, the staff will present an analysis of the proposed new accounting model for rate-regulated activities that was discussed in the December 2016 Board meeting. The papers look at the general approach of the model, the scope and the recognition of regulatory assets and regulatory liabilities.

The discussions on the Conceptual Framework project are entering the final stages. The papers for this meeting relate mostly to housekeeping matters: whether the appendix on ‘cash-flow-based measurement techniques’ should be retained; a review of existing Standards for potential inconsistencies with the revised CF, the effects of the revised CF; and minor comments on concepts supporting asset and liability definitions and due process.

The Board will discuss two issues relating to IFRS 9 Financial Instruments that have come from the Interpretations Committee and the Transitional Resource Group for Impairment of Financial Instruments.

Our pre-meet­ing summaries are available on our February meeting note page and will be sup­ple­mented with our popular meeting notes after the meeting.

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Accounting Committee reviews accounting developments in Japan

15 Feb 2017

On 14 February 2017, the Accounting Committee of Japan's Business Accounting Council (BAC) held a meeting to review recent accounting developments in Japan.

Topics reviewed were:

  • Recent developments around IFRSs (such as the state of use of IFRSs in Japan and Japan's experience with first-time adoption)
  • Initiatives to promote further voluntary use of IFRSs in Japan
  • How Japan's voice in international standard-setting can be strengthened
  • Quality enhancements of Japanese GAAP
  • Development of human resources in the area of international accounting

No decisions were made, but the informative presentations were made publicly available and can be downloaded from the FSA website (in the Japanese language only).

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EFRAG assesses that IFRS 16 is conducive to the European public good

15 Feb 2017

Following the preliminary consultation document relating to the endorsement of IFRS 16 'Leases' for use in the EU published in October, the European Financial Reporting Advisory Group (EFRAG) has now published draft endorsement advice on the standard.

In the preliminary consultation document, EFRAG had expressed the view that that IFRS 16 meets the relevant qualitative characteristics, raises no issues regarding prudent accounting, is not contrary to the true and fair view principle, would improve financial reporting, compared to the standard and the interpretations it replaces, and would not put European entities at a competitive disadvantage taking into account the lack of convergence with the equivalent US GAAP standard. However, EFRAG had not formed an opinion on whether the standard would reach an acceptable cost-benefit trade-off. Also, as EFRAG intended to conduct additional work that was expected to result in significant additional input into its assessment, EFRAG had not expressed a view on whether IFRS 16 is conducive to the European public good.

EFRAG has now done additional research and evaluated the feedback on the preliminary consultation documents and concludes that IFRS 16:

  • Meets the qualitative characteristics of relevance, reliability, comparability and understandability, leads to prudent accounting, and it is not contrary to the true and fair view principle.
  • Would improve financial reporting and would reach a cost-benefit trade-off that is acceptable. EFRAG has not identified that IFRS 16 would have major deleterious effects on the European economy, including financial stability and economic growth.

Accordingly, EFRAG has assessed that adopting IFRS 16 is conducive to the European public good and has issued its draft endorsement advice. Comments on the draft endorsement advice are requested by 13 March 2017. It is available through the press release on the EFRAG website.

EFRAG has also updated its endorsement status report accordingly.

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Agenda for the upcoming IFASS meeting

14 Feb 2017

The International Forum of Accounting Standard Setters (IFASS) will meet in Taipei on 2 and 3 March 2017. Major topics on the agenda are implementing "big" standards, IFASS support for consistent application, and research the standard-setters should address.

The meeting offers core sessions and, in addition, evening/late morning optional sessions dedicated to the presentation of activities that have already been presented at other forums.

The agenda is summarised below:

Thursday, 2 March 2017 (09:00-18:15)

  • Opening remarks and objective of the meeting
  • Implementing "big" standards
    • Introduction
    • Presentation: Implementing IFRS 15 and IFRS 16 in the US
    • Group discussions
    • Discussion of group conclusions
  • Treatment of income tax on distribution of dividends
  • IFASS strategy: support for consistent application
    • Introduction
    • Group discussions
    • Discussion of group conclusions
  • High Inflation
  • Optional session: FRC’s triennial review of UK GAAP
  • Optional session: EFRAG reserach on macro hedging

Friday, 3 March 2017 (08:15-16:30)

  • Optional session: IFRS Taxonomy
  • Optional session: IFRS adoption in Korea - 5 years experience and lessons
  • Research: what should standard-setters address?
    • Introduction
    • An economic-based theory of financial reporting: Designing the balance sheet and the income statement to serve investors' need
    • Evidence-based accounting research and standard setting
    • Digital currencies
    • The role and the future of OCI
    • Conclusion
  • Implementation: Case studies on IFRS 15 and IAS 37
    • Introduction
    • Group discussions
    • Discussion of group conclusions
  • Closing remarks
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Monitoring Board approves three IFRS Foundation Trustees

13 Feb 2017

The IFRS Foundation Monitoring Board has announced that Else Bos, Su-Keun Kwak, and Guangyao Zhu have been appointed as IFRS Foundation trustees.

Ms Bos fills the European vacancy, and Mr Kwak and Mr Zhu fill the Asia-Oceania vacancies. The terms of all three members became effective on 1 February 2017 and will last for three years.

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

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Updated AOSSG survey on the financial reporting practices of Islamic financial institutions

13 Feb 2017

In March 2015, the Asian-Oceanian Standard-Setters Group (AOSSG) released the results of a 2014 survey into the financial reporting standards that Islamic financial institutions (IFIs) are legally required to comply with in their jurisdiction and the extent of compliance. This research has now been updated with 2016 data.

In comparison with the 2014 results, the 2016 data shows a 2% increase in the number of IFIs asserted compliance with IFRS, however, 52% of IFIs still don't use IFRS but apply local GAAP (33%), the accounting standards issued by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) (17%), or do not specify the accounting standards or law complied with in their financial statements (2%). The study concludes:

The IFIs in the study continued to apply a variety of financial reporting frameworks. As a result, the differing recognition and measurement bases impede users’ ability to meaningfully compare the financial statements. Further efforts must be made to engage with relevant standard-setters and regulators to persuade them of the merits of IFRS compliance. This is all the more important when there may be indications that affected entities in those jurisdictions would prefer IFRS over other frameworks.

Please click for access to the study on the AOSSG website. It offers a general survey of the standards applied and the treatment of the three areas of focus (lessor accounting for ijarah with an arrangement to transfer ownership, classification of customer investment accounts, and recognition and measurement of finance income) for the whole sample as well as findings listed by jurisdiction.

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February 2017 IASB meeting agenda posted

10 Feb 2017

The IASB has posted the agenda for its next meeting, which will be held at its offices in London on 22–23 February 2017.

The Board will discuss the following:

  • Insurance contracts.
  • Financial instruments with characteristics of equity.
  • Symmetric prepayment options related to IFRS 9.
  • Due process step followed in the post-implementation review of IFRS 13.
  • Definition of a business.
  • Update on the research programme.
  • Rate-regulated activities.
  • Cash-flow-based measurement techniques, concepts supporting asset and liability definition, and due process related to the Conceptual Framework.
  • IFRS implementation issues related to IFRS 9.

The full agenda for the meeting can be found here. We will post any updates to the agenda, our comprehensive pre-meeting summaries as well as observer notes from the meeting on this page as they become available.

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Sue Lloyd appointed new IFRS Interpretations Committee Chair

10 Feb 2017

The Trustees of the IFRS Foundation have announced that Sue Lloyd, IASB Vice-Chair, has been appointed Chair of the IFRS Interpretations Committee with immediate effect.

The position had become vacant with the death of Wayne Upton in September 2016.

Please click for the press release announcing Ms Lloyd's appointment on the IASB website.

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The Bruce Column — Pushing stakeholders towards value creation and the long term

09 Feb 2017

Robert Bruce, our regular, resident, columnist reports on moves towards widespread adoption of integrated reporting and the direction taken at the recent joint conference of the International Corporate Governance Network and the International Integrated Reporting Council.

For integrated reporting this year is intended to be a time of strategic initiatives aimed at making the reporting system a principle of corporate governance for the future and a catalyst for a more cohesive reporting system. There is a series of themes developing. There is the question of global adoption of the integrated reporting framework across all sectors; greater technical support to increase the quality of integrated reporting practice; being a catalyst for corporate governance change in the capital markets; facilitating greater alignment of the corporate reporting system; and bringing the concepts of integrated reporting to bear on the policy and regulatory environment. All of this will play out over the year ahead. And these themes were echoed at a gathering late last year where views were shared and the scale of change assessed. 

It was Mervyn King’s words in the opening sessions of the recent joint conference of the International Corporate Governance Network and the International Integrated Reporting Council which brought the most influential sense of change.

King is the guru in such circles and later in the proceedings he was given the ICGN lifetime achievement award. In his opening remarks he emphasised the rapid rate of progress that had been made in recent years. ‘You will not see the word profit in the conference programme’, he said. ‘We have moved from profit to value creation’. And this theme ran through the whole conference.

His words were backed up by the annual global survey* from consultancy Black Sun released during the conference. ‘There is strong indication from executives that attitudes concerning business and stakeholder value creation need to change and that organisations must deliver a purpose beyond profit’, was how it summed it up. ‘Shareholder returns will, as expected, remain crucial for business, but other factors, such as meeting customer expectations and inspiring and engaging people, will significantly grow in importance. Working for the longer-term is cited as preferable over the short-term, and doing this is thought to bring significant internal and external benefits’.

It is a world moving away from narrow measures. Mervyn King made it clear that the traditional financial measures were not up to scratch. For him the importance was that the corporate world should move from ‘the plague of short-term profits to value-creation in a long-term manner’. And, for most people at the conference, this meant properly run companies using the wider models of integrated reporting.

In his opening keynote address the former managing director and CFO of the World Bank, Bertrand Badré, reinforced this: ‘As we continue to struggle in the aftermath of the global financial crisis it remains crucial to focus on tools and practices that can make a difference and contribute to restore trust in the market economy system. Proper corporate governance and integrated reporting can help to achieve this’.

The research from Black Sun amongst senior executives around the world backed this up. ‘Executives also believe that bringing financial and non-financial information together enhances business performance and corporate reporting, but many executives say that their organisations lack reliable tools and techniques for doing this’, it reported. ‘Improved reporting, particularly Integrated Reporting, is viewed by many as a potential driver for future value creation, improved reporting and enhanced business’.

But during the plenary session on aligning the capital market system for the current century’s needs the amount of disconnect between what was actually happening and what it was felt ought to happen became plain. Two votes during the session summed it up. 70% of those voting supported the idea that corporate governance was ‘essential’ for the reform process. David Pitt-Watson, guru in the field of responsible investment and business practice and co-chair of UNEPFI, the UN Environment Programme Finance Initiative, and who headed up the session, agreed but was sceptical that this was a widely held view in the world outside. ‘I have never heard any western leader say that corporate governance is central to the economic system’, was his comment.

The next vote was on which corporate governance issue was the most important one to concentrate upon. Again there was disconnect. Recent Government pronouncements have focused on pay and incentives and the composition of corporate boards, yet these issues attracted just 9% and 5% of the vote. The overwhelming favourite, coming in at 68%, was for getting boards to focus on long-term value and the significance of stakeholder interests. For Jane Diplock, director of Singapore Exchange, this vote essentially squared the circle. ‘It’s about integrated thinking’, she said. ‘It is all about getting businesses to think about their stakeholders as well as their shareholders’.

And the world of integrated reporting has been testing out the views of its stakeholders too. The recent IIRC survey found that 87% of respondents strongly agreed or agreed that integrated reporting promoted ‘a more joined-up and efficient approach to corporate reporting’. The question for the year ahead is how far such views can stretch within the wider market.  It is a great aspiration but it remains to be see whether it is a universally shared one.

* ‘The Value of Value: Board-Level Insights’ is an annual survey of C-Suite members from across the globe, carried out by consultancy Black Sun, which looks into the value of value creation stories inside boardrooms. This year’s edition - ‘Purpose beyond profit’ – was conducted in partnership with AICPA, CIMA and IIRC, with the aim of gauging executives’ views on how their organisations understand, manage and communicate value creation.

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