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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.

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.

Pre-meeting summaries for the December IASB meeting

04 Dec 2017

The IASB will meet at its offices in London on 13–14 December 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.

There are seven topics on the agenda.

Wednesday 13 December

The meeting starts with a continuation of the discussion on the Primary Financial Statements. There are three topics at this meeting: objective of, and suitable locations for, the management performance measure; classification of interest and dividends in the statement of cash flows; and initial thoughts on other targeted improvements to the statement of cash flows. The staff are recommending that the Board:

  • explore how to present unusual or infrequently occurring items;
  • require that the management performance measure be presented as a subtotal in the statement of financial performance, or in a separate reconciliation directly following the statement of financial performance;
  • prescribe that interest paid on financing activities, regardless of whether it is capitalised, be classified as financing cash flows, dividends paid be classified as financing cash flows and interest and dividends received be classified as investing cash flows; and
  • not seek to align the operating sections of the income and cash flow statements.

The Board will begin considering feedback on its Discussion Paper Disclosure Initiative—Principles of Disclosure. The Board received 108 comment letters, and the staff have provided a high-level overview of the views expressed on those letters. The overall impression is that respondents think the DP lacked focus and depth. There was also concern over a lack of cohesiveness between the different Disclosure Initiative projects. This is an education session, so the Board is not being asked to make any decisions.

Thursday 14 December

The Board will continue its discussions on accounting for Goodwill. The staff are recommending that the Board not reintroduce goodwill amortisation and instead focus on improving the impairment test. The Board is being asked to clarify whether, in relation to the impairment test, it wants to take no further action; modify the VIU calculation by removing the explicit requirement to use pre-tax inputs and the requirement to exclude estimated cash flows from uncommitted future restructuring and from improving or enhancing the asset’s performance; use a single method to determine the recoverable amount; and/or apply the updated headroom approach. Additionally, the Board will be asked whether it wishes to develop disclosure requirements in relation to the headroom in a CGU to which goodwill is allocated and a breakdown of goodwill by past business combination, explaining why the carrying amount of goodwill is recoverable.

The Board will discuss a project plan for the development of an accounting model for Dynamic Risk Management (DRM). The staff intend to focus on developing the areas that are core to the model (target profile, asset profile, DRM derivative instruments and performance assessment and recycling) which they will test with external stakeholders before addressing extensions of the concepts.

The Consultative Group for Rate Regulation met on 26 October 2017.  The staff will summarise for the Board the feedback from this meeting. The consultative group encouraged the Board to develop an exposure draft as the next consultative document.

The Board will consider four IFRS Implementation Issues. The Board will:

  • be updated on the IFRS Interpretation Committee’s decision to add to its agenda a project to clarify which costs should be considered in assessing whether a contract is onerous;
  • consider a recommendation that the ED proposing to lower the threshold for relief from retrospective application of a change in accounting policy arising from agenda decisions also propose that the change to IAS 8 would be applied prospectively.
  • consider a recommendation from the IFRS Interpretation Committee to amend IFRS 1 to subsidiaries that apply adopt IFRS later than their parent with additional relief for measuring cumulative translation differences; and
  • discuss a summary of feedback on the proposed amendments to IAS 16 in relation to accounting for the proceeds from sales from testing—many respondents disagreed with the proposed amendments, considering them to be ineffective, costly to apply and require significant judgement.

The meeting concludes with a continuation of the Board’s discussions on the Business Combinations under Common Control (BCUCC) project. The papers review related projects and recommend that the project include within its scope transactions that are preceded by an external acquisition and/or followed by an external sale of one or more of the combining entities and transactions that are conditional on a future sale such as in an IPO. The staff are also recommending that the project focus on the acquisition method and predecessor accounting as the potential methods of accounting.

More information

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

December 2017 IASB meeting agenda posted

02 Dec 2017

The IASB has posted the agenda for its next meeting, which will be held at its offices in London on 13 and 14 December 2017. There are seven topics on the agenda with the longest slots (two hours each) reserved for primary financial statements and goodwill and impairment.

The Board will discuss the following:

  • Primary financial statements
  • Principles of Disclosure
  • Goodwill and impairment
  • Rate-regulated activities
  • Dynamic risk management
  • IFRS implementation issues
  • Business combinations under common control

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.

We comment on the IASB's proposed amendments to IAS 1 and IAS 8

02 Dec 2017

We have responded to the IASB's exposure draft ED/2017/6 'Definition of Material (Proposed amendments to IAS 1 and IAS 8)' that was published in September 2017.

While we agree that there is merit to defining 'material' so it is consistent in the revised Conceptual Framework and the standards it shapes, we urge the IASB to consider five adjustments before the exposure draft is finalised. We feel that these items can be easily remedied, without undermining the objective of the proposal.

Please download the full comment letter here.

Follow-up survey on the PIE definitions applicable in European countries

01 Dec 2017

Accountancy Europe has conducted a second survey on the definitions of Public Interest Entities (PIEs) applicable in Europe. The definitions have significant impact on the accounting and audit requirements for companies active in the European market.

A first survey conducted in 2014 had revealed that there is a wide diversity of definitions of PIEs applicable across European countries and that, as a consequence, the number of PIEs per European country is very variable.

The follow-up survey was conducted to see what has changed with the new EU rules on statutory audit that became applicable in June 2016. The findings of the survey demonstrate that the audit reform has resulted in more harmonised and reduced definitions of PIEs. This has led to an overall decrease in the number of PIEs across Europe.  

Please click to access the survey on the Accountancy Europe website.

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