The proposals in Conceptual Framework Exposure Draft 4 (CF–ED4) Conceptual Framework for General Purpose Financial Reporting by Public Sector Entities: Presentation in General Purpose Financial Reports, represent the fourth and final phase of the IPSASB Conceptual Framework project and follow on from an earlier Consultation Paper published in early 2012.

The first phase of the IPSASB's project was completed with the release of the first four chapters of the IPSASB Conceptual Framework project in January 2013, covering the role and authority of the framework, the objectives and users of general purpose financial reporting, qualitative characteristics of information included in general purpose financial reports, and the reporting entity. Exposure drafts dealing with the second and third phases of the project where issued in November 2012, covering the elements and recognition in financial statements, and the measurement of assets and liabilities in financial statements.

CF–ED4 explains the relationship between these other parts of the IPSASB Conceptual Framework and presentation concepts, doing so by proposing definitions of "presentation", "display" and "disclosure", and identifying three presentation decisions: selection, location and organisation.

The exposure draft explains that the concept of 'presentation' relates not only to how information is included within reports, but also which reports are necessary in addition to financial statements. Accordingly, it considers whether new reports are required, whether information should be moved between reports, and whether existing reports should be amalgamated in order to meet the objectives of financial information and qualitative characteristics.

The exposure draft considers 'displayed' information as conveying key messages, and so accordingly is kept concise and displayed prominently using techniques such as clear labelling, borders, tables and graphs. 'Disclosed information' then makes displayed information more useful through the provision of detail to assist in the understanding of it, but disclosed information is not considered a substitute for displayed information.

The document also explores decisions about what information needs to be reported, how information is selected for inclusion in a GFPR, the importance of location of information (both between reports and within each report), and how information should be organised.

CF–ED4 is open for comment until 15 August 2013. Click for IPSASB press release (link to IPSASB website).

The latest development follows initial proposals published in October 2011 and two resolutions of the European Parliament in February 2013.

An Executive Summary of the Impact Assessment prepared by Commission staff notes that "the majority of large EU companies fail to adequately meet growing demand from stakeholders (including investors, shareholders, employees and civil society organisations) for non-financial transparency", both in terms of quantity (only around 2,500 out of a possible 42,000 EU companies formally disclose non-financial information each year) and quality (lacking in materiality, balance, accuracy and timeliness).  The Impact Assessment outlines the various options considered to address these concerns, including no policy change, requiring disclosure in an annual report, detailed reporting or setting up of a mandatory EU standard.

On the basis of the constituent feedback and analysis performed, it was determined the best policy option was to propose a combined approach, setting minimum disclosure requirements in annual reports, but permitting companies to provide more comprehensive reports if they wish.  The requirements would only apply to larger EU companies (around 18,000 in total) to avoid an administrative burden on small and medium-sized companies (SMEs).

To implement the requirements, the legislative proposals would amend the Accounting Directives (Fourth and Seventh Accounting Directives on Annual and Consolidated Accounts, 78/660/EEC and 83/349/EEC) to require the annual report to include a non-financial statement with the prescribed minimum information.

The draft wording of the key requirements is reproduced below:

However, the statement is not required where the company includes in its annual report a comprehensive report relying on prescribed frameworks (such as the UN Global Compact, ISO 26000, the German Sustainability Code, or GRI guidelines) covering the information required.

Frequently asked questions accompanying the proposals clarify they do not require European companies to adopt integrated reporting:

The proposed directive focuses on environmental and social disclosures. Integrated reporting is a step ahead, and is about the integration by companies of financial, environmental, social and other information in a comprehensive and coherent manner. To be clear, this Directive does not require companies to comply with integrated reporting. The Commission is monitoring with great interest the evolution of the integrated reporting concept, and, in particular, the work of the International Integrated Reporting Council.

Click for EC press release (link to EC website).

EFRAG supported the 2009 exposure draft proposal for the integrated effective interest rate approach and the time proportionate approach indicated in the Supplementary Document. However, the EFRAG recognises that there were operational concerns by constituents when implementing those approaches.

Regarding the current exposure draft (ED/2013/3), the EFRAG preliminary position is that it:

• "accepts the proposed approach that requires recognition of a 12-month expected credit loss at initial recognition and lifetime expected credit losses when there is a significant increase in credit risk,"
• "the proposed approach strikes an acceptable balance between the cost of implementation and the underlying economics, while meeting the need to provide earlier for expected credit losses as expressed by financial regulators and other constituents, and"
• "supports the proposed credit deterioration approach as it distinguishes between financial assets that have deteriorated in credit quality and those that have not because it provides relevant and useful information about the likelihood of the collection of future contractual cash flows and the effect of changes in the credit quality of an entity’s financial assets."

However, the EFRAG does not believe the recognition of a portion of expected credit losses at initial recognition is conceptual sound but due to the lack of a better approach, the IASB should use the approach developed in the exposure draft as a basis when finalising its impairment requirements.

In addition, EFRAG states:

[A]ny impairment model – such as the model proposed by the FASB – that uses a single measurement approach that recognises lifetime expected credit losses from initial recognition will inevitably remove the need to track any changes in credit quality to determine when lifetime expected credit losses should be recognised as a result of significant credit deterioration. Nevertheless, in our view, such a model would not be less subjective and not necessarily operationally simpler compared to the proposed approach in the ED. EFRAG believes that such an approach would provide less relevant information about the effects of changes in the credit quality subsequent to initial recognition, and does not result in an appropriate balance between the representation of the underlying economics and the cost of implementation as the double counting effect of expected loss recognition at inception is aggravated by the consideration at once of life time expected losses.

In an effort to gather more information, the EFRAG, along with other European National Standard Setters, are currently conducting a field-test designed to show whether it improves on the old model, whether its operational and determine the costs and impacts that will come with the new model.

Click for (links to EFRAG website):

• EFRAG press release
• EFRAG draft comment letter
• Short presentation of EFRAG's position

Our previous story on the Exposure Draft ED/2012/3 Financial Instruments: Expected Credit Losses offers a summary of the key proposals of the ED.

Comments on the letter are invited by 17 June 2013.

The updates made in this Invitation to Comment were a result of feedback received from stakeholders on its initial discussion paper issued on July 2012 and other outreach activities. The feedback was discussed during the December 2012 and February 2013 FASB and PCC joint meetings, which lead to certain proposed changes, including:

Removing the industry-specific presumption by having the Board and the PCC consider whether the same industry-specific guidance is relevant to users of the financial statements of both public companies and private companies, and

Allowing a private company to select the alternatives within U.S. GAAP for recognition or measurement guidance that it deems appropriate, without having to apply all the alternatives within U.S. GAAP for recognition and measurement.

Feedback on the FASB's Invitation to Comment is due by 21 June 2013.

Click to view (links to FASB website):

• Press release
• FASB in Focus
• Invitation to Comment—Private Company Decision-Making Framework—A Guide for Evaluating Financial Accounting and Reporting for Private Companies

The report includes discussion of:

• The current accounting for business combinations under common control (BCUCC) under International Financial Reporting Standards (IFRS), United States Generally Accepted Accounting Principles (US-GAAP) and Korean GAAP
• The KASB's involvement in the progressing research and other developments in the accounting for BCUCC
• Empirical evidence of accounting for BCUCC in Korea
• The appropriate accounting for BCUCC, including detailed analysis of the European Financial Reporting Advisory Group (EFRAG) and Organismo Italiano di Contabilità (OIC) Discussion Paper Accounting for Business Combinations under Common Control published in October 2011.

The report notes that the predecessor basis of accounting is commonly used in the Korean context to account for BCUCC.  It suggests that utilising the 'hierarchy' in IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors to develop an accounting policy for BCUCC (which may lead to the application of IFRS 3 Business Combinations by analogy) is not appropriate for such transactions under IFRS. It also encourages the IASB to advance its project on common control.  In December 2012, the IASB formally reactivated this project as an IASB-only research project as part of its response to the Agenda consultation 2011.

The research report is available on the KASB website.

The draft Framework reflects input received by the IIRC in response to earlier consultation through a Discussion Paper (and feedback on a Prototype Framework), the findings to date from the IIRC’s Pilot Programme, and the results of other outreach activities.

The information below covers the following topics:

• The 'integrated reporting' concept
• Building blocks for an integrated report
• Interaction with financial reporting
• Background papers
• Comment period and the way forward

The ‘integrated reporting’ concept

Integrated Reporting (stylised by the IIRC as ‘<IR>’) is considered a process that results in communications by an organisation about value creation over time.

The most visible expression of <IR> is an integrated report, which the draft Framework proposes to define as:

… a concise communication about how an organization’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value over the short, medium and long term.

The draft Framework outlines three fundamental concepts as underpinning <IR>:

• Capitals – stores of value that an organisation depends on for its success as inputs to its business model, and which are increased, decreased or transformed through its activities and outputs.  These broaden the current focus on financial and manufactured capital to include intellectual, human, social and relationship capital (all linked to human activity), and natural capital, which provides the environment for the other capitals.  Not all of these capitals would be relevant to all organisations and organisations may define additional capitals, or consider some items to be across capitals (see our earlier story for more information)
• Business model – how an entity creates value, through a chosen system of inputs (resources), business activities, outputs (products and services) and outcomes (internal and external consequences both positive and negative).  See our earlier story for more information
• Value creation – the concept of ‘value’  for <IR> purposes is broader than traditional meaning of value focused on financial performance, and includes other forms of value that are created through the increase, decrease or transformation of capitals, each of which may ultimately affect financial returns.  Accordingly, value is broad in its conceptual basis, encompasses different time horizons for different stakeholders, and requires a focus on all relevant capitals.

<IR> is focused primarily on financial capital providers “in order to support their financial capital allocation assessments”, but also seeks to benefit other stakeholders including employees, customers, suppliers, business partners, local communities, legislators, regulators and policymakers.

It does this through encouraging the use of ‘integrated thinking’ whereby an organisation actively considers relationships between its operations and the ‘capitals’ it uses and affects, with the objective of achieving integrated decision making that considers wider impacts and benefits over the short, medium and long term time frames.  For example, in addition to traditional measures of performance such as revenue, profit or loss or cash flows from operations, integrated thinking might consider the impacts of an entity's operations on employees, supplier and customer relationships, the local community and the environment, considering the trade-offs between each, and the impacts on the long term performance of the entity.  To this end, the draft Framework also promotes the alignment of external and internal reporting, particularly at the top level of an organisation, as being “nearly always appropriate, even for the most complex of organizations” (consistent with the requirements of IFRS 8 Operating Segments, but on a broader scale).

The draft Framework is intended primarily for the for-profit companies in the private sector, but the Consultation Draft indicates that it “can also be applied, adapted as necessary, by public sector and not-for-profit organizations”.

Building blocks for an integrated report

The draft Framework develops the requirements for an integrated report through:

• Guiding principles – these underpin the preparation of an integrated report.  These are: strategic focus and future orientation, the connectivity of information, stakeholder responsiveness, materiality and conciseness, reliability and completeness, and consistency and comparability
• Content elements – the categories of information required to be included in an integrated report under the draft Framework, presented as a series of questions rather than a prescriptive list of disclosures.

Interaction with financial reporting

The draft Framework does not seek to replace financial reporting, but seeks to build on it by broadening the key concepts disclosed and embedding integrated thinking into the organisation.

The <IR> process is designed to be applied continuously in developing reports and communications, including a stand-alone integrated report prepared annually in line with the statutory financial reporting cycle.  Financial statements, and sustainability reports, are acknowledged in the draft Framework as additional reports that may be required “for compliance purposes or to satisfy the particular information needs of a range of stakeholders”.  The draft Framework additionally notes that technological advances “enable innovative approaches to reporting” and that web-based media and XBRL may be useful for <IR> in bringing connectivity of information between a concise integrated report and detailed and other information.

The draft Framework notes:

Although <IR> builds on developments in financial and other reporting, an integrated report differs from other reports and communications in a number of ways.  In particular, it has a combined emphasis on: conciseness, strategic focus and future orientation, the connectivity of information, the capitals, the business model, the ability to create value in the short, medium and long term, and providers of financial capital as the primary audience.

In addition, the draft Framework provides guidance on the reporting boundary used for integrated reporting, explicitly linking it to the boundary used for financial reporting purposes (i.e., financial information about subsidiaries, joint arrangements and associates).  The draft Framework requires information provided in an integrated report to be prepared on the same basis, or reconciled to, information in an entity’s financial statements.

However, an integrated report would also include information beyond the financial reporting entity to identify opportunities, risks and outcomes that may have a material effect on the ability of the financial reporting entity to create value over time.  This may include ‘related parties’ (such as defined in IAS 24 Related Party Disclosures), but may also extend to other parties which introduce opportunities, risks and outcomes (e.g., the labour practices of key suppliers may impact an entity’s ability to create value).  In some respects, this is conceptually similar to, but significantly broader than, the requirements in IFRS 12 Disclosure of Interests in Other Entities in relation to unconsolidated structured entities.

Background papers

In order to assist in understanding the key principles and background to the concepts in the Consultation Draft, the IIRC has also published ‘background’ papers on the capitals, materiality and the business model concept (links to our earlier stories on these papers), which were prepared by Technical Collaboration Groups formed by the IIRC.  These papers, which were used to develop the draft Framework, explore the key concepts in the draft Framework in more detail, summarise constituent feedback and the outcomes of the Pilot Programme, and include additional analysis and examples to assist in the understanding of <IR>.

The background papers are available on the IIRC website. Further background papers are expected later in the year on the concepts of connectivity, value and assurance.

Comment period and the way forward

The Consultation Draft is available on IIRC’s website at www.theiirc.org/consultationdraft2013. In addition to English, approved translations will progressively be made available in the following languages: Arabic, Chinese, French, Italian, Japanese, Portuguese, Russian and Spanish.

The Consultation Draft is open for comment for a three-month period, with comments due by 15 July 2013.  The IIRC hopes to receive comment in a prescribed format through their website, but will accept alternative responses.

The IIRC hopes to publish a first version of its finalised Framework by the end of 2013.  The adoption of <IR> will depend upon legal, regulatory and other developments, although individual organisations may choose to voluntary adopt the Framework.

Click for IIRC press release (link to IIRC website).

Consistent with recent meetings, the focus of the meeting is the IASB comprehensive Conceptual Framework project, with more than half of the time devoted to this project as the IASB seeks to publish a Discussion Paper by the end of June 2013.

In conjunction with the release of the agenda, the IASB has cancelled the education sessions originally scheduled for 17-19 April 2013.  Instead, a brief education session on the comprehensive review of the IFRS for SMEs has been included on the first day of the meeting.

There are currently no joint IASB-FASB sessions scheduled for this meeting, and accordingly, the meeting with be an IASB-only meeting.

The full agenda for the meeting, as of 12 April 2013, can be found here.  We will post any updates to the agenda, and our Deloitte observer notes from the meeting, on this page as they are available.