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News

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Recent sustainability and integrated reporting developments

12 Apr 2017

A summary of recent developments at the BMZ/NCFA/GIZ, Nasdaq’s Nordic and Baltic Exchanges, and COSO/WBCSD.

Financed by the Federal Ministry for Economic Cooperation and Development (BMZ), the Natural Capital Financial Alliance (NCFA) and the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) have jointly developed an open source tool that allows banks to test their loan portfolios for vulnerability to major droughts. A report Drought Stress Testing – Making Financial Institutions more resilient to Environmental Risks showcases the tool in action by piloting the stress test on sample corporate lending portfolios of nine international financial institutions. For more information as well as access to the tool and the report see a press release on the UNEP FI website.

The Nasdaq’s Nordic and Baltic Exchanges have issued a framework to support their listed companies to meet ESG disclosure requirements. The guidance has a strong reference to GRI’s sustainability reporting framework, and it reflects the recommendations of the UN Sustainable Stock Exchanges Initiative (SSE). The ESG Reporting Guide is available through the Nasdaq's website.

The Committee of Sponsoring Organizations of the Treadway Commission (COSO) and the World Business Council for Sustainable Development (WBCSD) recently completed a Memorandum of Understanding (MoU) aimed at working together to help businesses identify and prioritise issues related to sustainability and enterprise risk management. COSO will work with WBCSD to develop interpretive guidance on how to embed sustainable development issues into COSO’s Enterprise Risk Management Framework as a foundation to bridge the gap between the way companies consider sustainability issues in their risk management processes and how they disclose these risks to investors. Please see the press release on the COSO website.

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ASBJ publishes amendments to 'Japan’s Modified International Standards'

11 Apr 2017

The Accounting Standards Board of Japan (ASBJ) has completed the endorsement process of IASB pronouncements as at 30 September 2016 and has updated 'Japan’s Modified International Standards (JMIS)' accordingly.

This endorsement round covered new or amended standards issued by the IASB from 1 January 2014 to 30 September 2016 which become effective by 31 December 2017:

  • IFRS 14 Regulatory Deferral Accounts
  • Accounting for Acquisitions of Interests in Joint Operations
  • Clarification of Acceptable Methods of Depreciation and Amortisation
  • Agriculture: Bearer Plants
  • Equity Method in Separate Financial Statements
  • Annual Improvements to IFRSs 2012-2014 Cycle
  • Disclosure Initiative (Amendments to IAS 1)
  • Investment Entities: Applying the Consolidation Exception
  • Recognition of Deferred Tax Assets for Unrealised Losses
  • Disclosure Initiative (Amendments to IAS 7)

Applying IFRS 9 'Financial Instruments' with IFRS 4 'Insurance Contracts' issued in September 2016 was not included in this round because the ASBJ concluded that it would be rare that pronouncement would become effective before 31 December 2017 through the use of the overlay approach.

The new or amended standards listed above were endorsed without any ‘deletions or modifications’.

Please click for access to all relevant documents on the ASBJ website (all documents available in the English language).

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ESMA publishes report on the activities of accounting enforcers and their findings within the EU in 2016

10 Apr 2017

The report provides an overview of the activities of the European Securities and Markets Authority (ESMA) and the accounting enforcers in the European Economic Area (EEA) when examining compliance of financial information provided by issuers listed on regulated markets with the applicable financial reporting framework in 2016.

European enforcers examined the interim and/or annual financial statements of more than 1,200 issuers representing an average examination rate of 21% of all IFRS issuers with securities listed on regulated markets (2015: 20%). These examinations resulted in 311 actions taken to address material departures from IFRS (2015: 273). As in 2015, the main deficiencies were identified in the areas of financial statements presentation, impairment of non-financial assets, and accounting for financial instruments.

Please click to access the full report on the ESMA website.

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Summary of the February 2017 ITCG conference call

10 Apr 2017

The IASB has published notes to the IFRS Taxonomy Consultative Group (ITCG) conference call held on 15 February 2017.

The ITCG discussed:

  • an update on the recently issued ESMA Feedback Statement relating to the European Single Electronic Format (ESEF);
  • the forthcoming IFRS Taxonomy releases; and
  • amendments to the ITCG charter.

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

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BCBS frequently asked questions on changes to lease accounting

07 Apr 2017

The Basel Committee on Banking Supervision (BCBS) has released responses to frequently asked questions related to the changes to lease accounting promulgated by the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB).

More of a regulatory than accounting nature the three questions are all related to the right of use asset and the question whether this is a tangible or an intangibel asset.

Please click to access the BCBS statement on the website of the Bank for International Settlements (BIS).

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Summary of the March 2017 GPF meeting

07 Apr 2017

Representatives of the IASB met with the Global Preparers Forum (GPF) in London on Wednesday, 8 March 2017. Notes from the meeting have now been released.

The topics discussed at the meeting included:

  • IASB Update. Members were updated on the importance of post implementation reviews and the upcoming review of IFRS 13, a possible update of the the Practice Statement Management Commentary, and the research project on goodwill and impairment.
  • Implementation activities and maintenance projects. Topics covered included implementation support on IFRS 9, IFRS 15, and IFRS 16; educative guidance in recent agenda decisions published by the IFRS Interpretations Committee; and symmetric prepayment options (proposed amendments to IFRS 9) where an exposure draft is expected in April 2017. This section of the meeting also included the discussion of three issues in breakout groups:
    • Income tax consequences of payments on financial instruments classified as equity,
    • Long-term interest in associates and joint ventures, and
    • Interest and penalties related to income taxes.
  • Impairment of goodwill. The staff sought feedback from the GPF members on ideas for possible simplifications to the goodwill impairment testing requirements in IAS 36:
    • one-model approach,
    • relief from annual testing,
    • improving the value in use methodology, and
    • providing additional guidance on allocating goodwill.
  • IFRS Taxonomy. The staff introduced the new IFRS Taxonomy and explained that moving towards more electronic reporting would reduce the overall data information costs (not undisputed by GPF members as it might simply shifts costs from users to preparers), would give preparers back some control of the data, and lead to more standardised IFRS financial reporting (again questioned as preparers would still come under market pressure).
  • Business Combinations under Common Control. The staff provided an overview of the research results, discussed the its preliminary views on the issue, and explained the next steps of the project. Only a few GPF members provided questions or comments on the topic.

The next GPF meeting will be held on 15 and 16 June 2017 (joint meeting with the CMAC).

The full meeting summary is available on the IASB's website.

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We comment on the amendments proposed under the IASB's annual improvements project (cycle 2015-2017)

07 Apr 2017

We have responded to the IASB's Exposure Draft 'Annual Improvements to IFRSs 2015–2017 Cycle' that was IASB published in January 2017 and makes proposes amendments to three IFRSs (IAS 12, IAS 23, IAS 28).

In our comment letter, we agree with the amendments proposed in the ED but are concerned that the proposed amendments do not provide sufficient guidance.

Please click to access the full comment letter.

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EFRAG establishes academic advisory panel

05 Apr 2017

In a move that reflects a current direction in standard-setting, the European Financial Reporting Advisory Group (EFRAG) has established an academic panel in order to strengthen its relationship with the academic community’s thought leaders on financial reporting and to ensure that solutions to financial reporting issues are developed on a firm foundation of evidence.

Given EFRAG's European role, the composition of the advisory panel is pan-European and brings together eminent researchers from Austria, Cyprus, Denmark, France, Germany, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the UK.

In Australia, the AASB also set up an academic advisory panel and held a very successful first research forum in November 2016. The IASB does not have an academic advisory panel but has already held three research forums, the last one in October 2016. And the French ANC has established a series of symposiums on accounting research where the 6th one took place in December 2016.

For more information on the new EFRAG Academic Panel please see the press release on the EFRAG website.

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The Bruce Column — Explaining the issues around climate-related financial disclosures

05 Apr 2017

As Special Advisor to the Financial Stability Board’s Climate-related Financial Disclosures Task Force, the body which produced the Recommendations of the Task Force on Climate-related Financial Disclosures, Russell Picot, is at the forefront of efforts to encourage the disclosure of climate risks in annual reports. Robert Bruce, our regular, resident columnist has interviewed him and reports on the latest progress.

We are now in the midst of the period when the comments on the Recommendations of the Task Force on Climate-related Financial Disclosures are being assessed. A final report is promised by the middle of the year. And one of the key people assessing the comments is the task force’s special advisor, Russell Picot. Picot has a long pedigree in this field. He was in at the beginning of the Prince of Wales’ Accounting for Sustainability project. For years he was in command of financial reporting at HSBC. He is an ambassador for the International Integrated Reporting Council and chairs the judges for the Finance for the Future Awards. And he wears an asset-owner’s hat as well as a director of the HSBC UK Bank Pension Trust and chairman of its asset and liability committee.

We sat down together for an interview the other day, to talk through the issues behind the Recommendations of the Task Force on Climate-related Financial Disclosures. ‘Its objectives’, he said, ‘were to come up with recommendations within a voluntary framework for information to be published around climate risks and which would provide for information which would enable stakeholders to understand the distribution through the financial system of holdings of climate-related and carbon-related assets’.

For Picot much of this stems from two pressures. First, the understanding of physical risks to assets from extreme events and secondly, the Paris Agreement adopted at the UN Climate Change Conference in 2015, that, as he puts it, ‘we should move to a low carbon global economy’. For Picot ‘that was a real game-changer’. ‘That will affect all businesses in all different sectors to some extent’, he said. And part of the Bloomberg agenda was, he said, simply ‘how do we give the market the information that quite frankly they are missing at the moment’. In his view it is a simple equation. ‘We do need to see a significant improvement in the quality of both quantitative and qualitative financial information’, he said. That would ‘make sure that climate risk is properly priced into decisions and capital allocation for equity and debt and credit’. That, Picot argues, ‘will reduce risk and be of interest to the beneficiaries of the pension schemes and other asset holders’.

And this will have a knock-on effect. ‘Our recommendations would move climate change into the mainstream’, he says. ‘It would be a step forward for most companies to actually think about this through their mainstream processes’. The report recommends that the disclosures should sit in the annual report as a mean to reach a wider stakeholder base. ‘This is because we want to drive this into the mainstream’, he said, ‘and also because we believe there is strong stakeholder interest in this information being subject to the highest quality of internal assurance’.

We are back to the mantra of what gets measured, gets managed. ‘When you ask a company to make disclosures things happen’, he says. ‘The CFO gets interested, because it is a public disclosure. The audit committee chair gets engaged and then the normal reporting processes kick in. That tends to lead to a good structure, good discussion and a dialogue in the boardroom’. For Picot this is one of main objectives of the report’s recommendations. ‘One of the great benefits of our work is to actually bring a proper discussion about climate risk and its impact on strategy and the business model into boardrooms’, he said. But he doesn’t want to scare the horses. He stresses that there is a concept of materiality in the recommendations. If having considered the issues companies feel that climate risk is not material then they can simply disclose how they considered the governance and strategy aspects and that would be it. Though for more complex situations the report does recommend the publication of scenario analysis.

Picot sees the report as an opportunity for the finance function. ‘As we have seen through the judging of the Finance for the Future Awards’, he said. ‘There are some really exciting examples of talent within finance functions who are making a really important contribution. I think this is a very good opportunity for the finance function to really understand what is an emerging mainstream business risk and to really help the organisation shape the way it thinks about it and to craft external disclosures which will be helpful’.

Looking five years ahead Picot would ‘like to see the broad spectrum of asset owners really understand the climate risk in their portfolios and use the information to make better decisions and to call on their fund managers to use this information when they are running their funds and for the managers in turn to be demanding the information from the companies’, he said. ‘And it is only by having all these elements within the investment chain working properly that will we actually manage to deal with the issue’.

Picot, again thinking of his experience chairing the judging panel for the Finance for the Future Awards, sees all this as being part of the way the world is changing. ‘In the judging of the awards I got a sense of what the younger generation wants to happen’, he said. ‘I think they have a real and genuinely keen interest in what their savings are being used to do. The younger generation are going to typically be members of a defined contribution scheme and the pension they will get many years in the future is going to be a function of the amount of money they put in and the investment return’, he said. ‘I sense they want more than that. They want to know what their money is being used for and they worry about issues like climate risk and sustainable investing. I see that as being a significant and growing force for good and we have started to see the asset management industry responding. We are starting to see some really interesting innovations around some of the defined contribution investment products as a consequence’.

But Picot stressed that what the report calls for underlines that there is no substitute for the traditional rigour of financial disclosure. ‘Shareholders’, he said, ‘need to understand the financial condition of the companies they are investing in and understand the stewardship’. But the landscape is changing. ‘There is no doubt that broader society wants more than that’, he said. ‘And climate risk is part of that. I think there is a lot of interest in organisational thinking around the UN Sustainable Development Goals, for example’, he said. ‘I don’t think this is some sort of overnight fad’, he said. ‘I think this is a genuine change in terms of what the world is demanding from the business community who in turn is responding very practically to that change’.

Meanwhile the sifting and assessing of over 300 comment letters continues. ‘They show very strong support from asset owners and fund managers’, he said, ‘and perhaps unsurprisingly less wholehearted support from the corporate reporting world, probably because it is a voluntary framework and they can see the costs attached to that and see less of the benefits.’ The final version of the report will be with us by the middle of the year.

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Article on investor event on better communication

05 Apr 2017

On 29 March 2017, the IFRS Foundation and the CFA Institute hosted a joint event for investors entitled 'Better Communication in Financial Markets: Sharing Perspectives'. A general article on the event has now been posted on the IASB's website.

The better communication discussion was for a large part held under Chatham House rules but saw directly attributable contributions by IASB Chairman Hans Hoogervorst who explained the IASB's position around alternative performance measures and the IASB's primary financial statements project. He believed that the IASB "should definitely have a go at defining EBIT" – a position also evidenced by the Board discussions on primary financial statements in March 2017 and the recently published discussion paper on principles of disclosures, which features a section on the use of performance measures in the financial statements.

Gary Baker, managing director of CFA Institute in EMEA, stressed there is a need to improve the presentation of financial statements to investors and to better connect all the different strands of information released by companies and pointed at the institute's recent studies on non-GAAP financial measures.

The article summarising the event on 29 March is available here.

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