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INTERNATIONAL

Boards of Directors have a critical governance role in enhancing confidence in integrated corporate reporting

The International Federation of Accountants (IFAC) has released a second instalment of its integrated reporting assurance series.

Integrated reporting has been adopted as a market-led initiative by thousands of private and public sector organisations around the world to help them understand and communicate their value creation and performance to investors and other stakeholders.

To enhance trust in integrated corporate reporting, boards need to oversee the integrity of the integrated report and underlying reporting process. To help them, IFAC has worked in partnership with the Institute of Internal Auditors (IIA) to develop ‘Executing the Board’s Governance Responsibility for Integrated Reporting’, the second instalment in IFAC’s integrated reporting assurance series. It highlights how boards execute their accountability responsibility for integrated reporting and integrated reports with the coordination of all lines of governance and the support of internal auditors.

Board responsibility statements incorporate multiple internal assurance activities across all lines of governance and management, and support the integrity of the integrated report and the underlying processes, systems and information. This instalment highlights the concepts and tools needed to deliver such statements. These can also be applied to regulated forms of management commentary in many parts of the world, including management discussion and analysis, strategic report, operating and financial review or the Task Force on Climate-Related Financial Disclosures.

‘The IFRS Foundation’s announcement on the future of integrated reporting and the International Integrated Reporting Framework confirms that the International Accounting Standards Board (IASB) and International Sustainability Standards Board (ISSB) will assume responsibility for the IR Framework from July,’ said Kevin Dancey, IFAC CEO.

‘Within the IFRS Foundation, the Framework will be further developed to help companies prepare an integrated report and support connectivity between the reporting required by the IASB and the ISSB. This instalment of IFAC’s integrated reporting assurance series shows how directors can deliver confidence in integrated reporting through coordinated and connected internal and external assurance activities.’

INTERNATIONAL

IPSASB launches a consultation paper on accounting for natural resources

The International Public Sector Accounting Standards Board (IPSASB) has released a consultation paper, ‘Natural resources’, which considers the issues relating to the recognition, measurement and presentation of natural resources by public sector entities.

Natural resources are generally understood to be resources such as sunlight, air, water and land that exist without the actions of humankind. They account for a significant proportion of the economic resources in many jurisdictions. However, governments often lack sufficient information on the monetary value of natural resources, and as a result, grant rights to these resources without regard to financial and environmental sustainability, or intergenerational fairness.

Currently, there is no explicit International Public Sector Accounting Standard (IPSAS) guidance on accounting for natural resources in their original state. The IPSASB is now working to address this gap. The first phase of its work focuses on the financial reporting of tangible, naturally occurring resources, including subsoil resources, water and living resources, which are in their natural state. This consultation paper is the first project output, and considers whether natural resources can be recognised as assets in general purpose financial statements or should be disclosed in broader financial reports.

‘The issue of accounting for natural resources is important for the public sector in most jurisdictions. The recognition and measurement of natural resources impacts not only on financial reporting, but also potentially for many governments on policy decisions and public financial management,’ said IPSASB Chair Ian Carruthers.

The IPSASB welcomes comments on all the matters discussed in this consultation paper by 17 October 2022. Feedback will guide the IPSASB in determining the approach to developing an Exposure Draft on the topic.

IESBA commits to readying global ethics and independence standards in support of sustainability reporting and assurance

The International Ethics Standards Board for Accountants (IESBA) has unanimously resolved to take timely action to develop fit-for-purpose, globally applicable ethics and independence standards as a critical part of the infrastructure needed to support transparent, relevant and trustworthy sustainability reporting. This recognises the need to respond at pace to match the speed of transformation in the corporate reporting landscape.

Demand for sustainability information has risen substantially in recent years, and such information is increasingly used to support capital allocation or other decisions by investors, customers, employees and other stakeholders. It also recognises the essential role that ethics and independence play in the production, reporting and assurance of sustainability information.

The IESBA has tasked its recently established Sustainability Working Group to develop a strategic vision to guide the IESBA’s standard-setting actions in relation to sustainability reporting and assurance. The Working Group will prepare a project plan by December 2022 as a launchpad for commencement of standard-setting work soon after.

This will proceed in tandem with the development of IFRS Sustainability Disclosure Standards by the International Sustainability Standards Board (ISSB), and sustainability-related International Standards on Assurance Engagements (ISAEs) by the International Auditing and Assurance Standards Board (IAASB). The IESBA recognises the importance of coordinating closely with the ISSB and IAASB so that coherent, mutually reinforcing building blocks of standards can be put in place around the same time to support the necessary regulatory infrastructure for sustainability reporting.

UK AND IRELAND

FRC sets out next steps in transition to new regulator

The Financial Reporting Council (FRC) has published a position paper setting out the next steps to reform the UK’s audit and corporate governance framework.

The paper follows the government response to the consultation on strengthening the UK’s corporate governance, corporate reporting and audit systems, including the creation of the Audit, Reporting and Governance Authority (ARGA) to replace the FRC.

The document published builds on the areas of the government response that fall within the FRC’s remit, providing advanced clarity for stakeholders on how the work of reform will be delivered ahead of government legislation.

That work includes revising existing codes, strengthening auditing and accounting standards, setting expectations to drive behavioural change ahead of statutory powers, and the development of guidance to address issues set out in the government response.

In particular, the position paper sets out proposed changes to the UK Corporate Governance Code. This will provide a stronger framework for:

● reporting on the effectiveness of internal controls;

● board responsibilities for expanded sustainability and environmental, social and governance reporting; and

● new guidance on enhanced resilience statements and fraud reporting by directors.

The FRC’s CEO, Sir Jon Thompson said: ‘These long-awaited reforms are a once-in-a-generation opportunity to ensure corporate Britain upholds the highest standards of governance and protects those stakeholders who rely on high-quality reporting. While we await government legislation, the FRC is pressing ahead with those changes to standards and codes which will improve the UK’s audit and corporate governance framework and to lay the groundwork for the creation of ARGA.’

New research shows positive impact of revised Stewardship Code

New research commissioned by the Financial Reporting Council (FRC) has identified the positive impact the revised UK Stewardship Code has had on the practice and reporting of asset managers and owners. The research, which took evidence from 55 asset managers and owners, found that both groups are very positive about the impact of the Code and that there was strong evidence of material changes to practice in the areas of governance, resourcing, stewardship activities, outcomes and reporting.

All organisations in the sample had undertaken some organisational restructuring to better integrate stewardship within their investment decision making, a new requirement of the Code. 96% of the respondents reported increases in the size of their stewardship teams since the introduction of the revised Code and noted opportunities for more formal career progression in stewardship. 77% said the quality of engagement was better because of the Code’s influence.

Asset owners reported that the most significant way the Code has influenced their approach is that they now feel more empowered to monitor their investment managers. Respondents were also supportive of the Code’s contribution to industry-wide change, with some celebrating the Code’s focus on long-term goals for the investment community.

The FRC has been responsible for the UK Stewardship Code since December 2009. It was substantially revised in 2019 to include a wider definition of stewardship, applying to a range of asset classes and with a greater focus on stewardship activities and the outcomes of those activities. The FRC commissioned the independent research, carried out by a team of researchers from Minerva Analytics, the Durham University Business School and the Dickson Poon School of Law, King’s College London, to better understand the current stewardship practices of asset managers and asset owners and to assess the impact of the revised Code.

FRC issues revised guidance for recognising key audit partners for local audit

The Financial Reporting Council (FRC) has revised its guidance for the recognised supervisory bodies on the recognition of key audit partners for local audit. The revised guidance follows a public consultation to address a recommendation made by Sir Tony Redmond in his review of local audit. The review, which was published in November 2020, addressed the issue of capacity in this market. The accompanying feedback statement explains the FRC’s response to the comments received during the consultation period.

The revised guidance applies to all applications received by the RSBs from 30 June 2022. A link to the full report is available at bit.ly/3PaRMCA.

IAASA publishes a report on good repute for statutory auditors and audit firms

The Irish Auditing and Accounting Supervisory Authority (IAASA) has published a report on good repute for statutory auditors and audit firms.

This report provides a summary of how the recognised accountancy bodies, which approve and supervise statutory auditors and audit firms in Ireland, consider the good repute of these parties. This report provides useful insights into the application of the legal requirement for good repute by considering: the definitions used for good repute; the evidence assessed to demonstrate good repute; and the escalation of matters where good repute may be compromised.

The report demonstrates common ground, as well as differences arising in the approaches taken by the three recognised accountancy bodies regarding good repute. The results will inform IAASA in its development of Guidelines on Education and Licensing. It may also be useful to the bodies and to other readers of the report in providing information on different steps that can be adopted to ensure good repute assessments are as effective as possible.

The report on Good Repute for Statutory Auditors and Audit Firms is available at bit.ly/3AWBEQG.

EUROPE

ESMA publishes results of its Call for Evidence on ESG ratings

The European Securities and Markets Authority (ESMA), the EU’s securities markets regulator, has published a letter to the European Commission providing its findings from the Call for Evidence to gather information on the market structure for ESG rating providers in the European Union. ESMA received a total of 154 responses and found 59 ESG rating providers currently active in the EU. The analysis of the responses further indicated several characteristics and trends as follows:

● ESG rating providers: The structure of the market shows that there is a small number of very large non-EU providers, and a large number of significantly smaller EU entities. While the legal entities of respondents are spread out across almost half of the EU member states, a large number of these are clustered in a small number of member states.

● Users of ESG ratings are typically contracting for these products on an investor-pays basis from several providers simultaneously. Their reasons for selecting several providers are to increase coverage, either by asset class or geographically, or in order to receive a different nature of ESG assessments. The most common shortcomings identified by the users were a lack of coverage of a specific industry or a type of entity, insufficient granularity of data, and a lack of transparency around methodologies used by ESG rating providers. However, the provision of ESG ratings on an issuer-pays basis was also evidenced and more prevalent than anticipated.

● Entities covered by ESG ratings dedicate at least some level of resourcing to their interactions with

ESG rating providers, although the amount largely depends on the size of the rated entity itself. Most respondents highlighted some degree of shortcoming in their interactions with the rating providers, most notably on the level of transparency as to the basis for the rating, the timing of feedback or the correction of errors.

The feedback received is indicative of an immature but growing market which, following several years of consolidation, has seen the emergence of a small number of large non-EU headquartered providers. ESMA will continue supporting the EC in their assessment of the need for introducing regulatory safeguards for ESG ratings.

EIOPA issues a staff paper on the proposal for an Insurance Recovery and Resolution Directive

The European Insurance and Occupational Pensions Authority (EIOPA) has published a staff paper that provides an overview of the proposal for an Insurance Recovery and Resolution Directive (IRRD) put forward by the European Commission in September 2021. In its staff paper, EIOPA welcomes the proposal as it addresses all relevant building blocks of a recovery and resolution framework and focuses on cooperation and coordination among authorities. The paper outlines that the IRRD is a comprehensive framework taking into account the insurancespecific features. The main benefits of the proposed IRRD are:

● one single framework across the EU, which seeks to minimise the potential impact on policyholders and the stability of the system as a whole in case of insurance failure;

● preventive planning as a fundamental element of the framework with the underlying idea that crisis prevention is less expensive and more effective than crisis management;

● appointment of resolution authorities with specialised knowledge of the insurance undertaking and the resolution process;

● clear conditions for resolution and adequate safeguards in line with international standards;

● a broad range of proposed resolution tools providing authorities with flexibility to reach an optimal solution in any situation; and

● resolution colleges addressing the need for cooperation and coordination among authorities, which will ensure a successful resolution process, particularly in cross-border cases.

UNITED STATES

FASB issues standard to improve fair value guidance for equity securities

The Financial Accounting Standards Board (FASB) has issued an Accounting Standards Update (ASU) that improves financial reporting for investors and other financial statement users by increasing the comparability of financial information across reporting entities that have investments in equity securities measured at fair value that are subject to contractual restrictions preventing the sale of those securities.

Topic 820, Fair Value Measurement, states that when measuring the fair value of an asset or a liability, a reporting entity should consider the characteristics of the asset or liability, including restrictions on the sale of the asset or liability, if a market participant also would take those characteristics into account. Key to that determination is the unit of account for the asset or liability being measured at fair value.

Some stakeholders noted that Topic 820 contains conflicting guidance on what the unit of account is when measuring the fair value of an equity security. This has resulted in diversity in practice on whether the effects of a contractual restriction that prohibits the sale of an equity security should be considered in measuring that equity security’s fair value.

To address this, the amendments in the ASU clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The ASU introduces new disclosure requirements to provide investors with information about the restriction, including the nature and remaining duration of the restriction. The ASU, including effective date and transition information, is available at www.fasb.org.

FASB expands disclosures and improves accounting related to the credit losses standard

The Financial Accounting Standards Board (FASB) has issued an Accounting Standards Update (ASU) intended to improve the decision usefulness of information provided to investors about certain loan refinancings, restructurings, and write-offs. FASB Chair Richard R. Jones stated, ‘The new ASU responds to feedback we received from investors and other stakeholders during our extensive post-implementation review (PIR) of the credit losses standard. The amendments create a single model for loan modification accounting by creditors while providing improved loan modification and write-off disclosures.’

During the FASB’s PIR of the credit losses standard, including a May 2021 roundtable, investors and other stakeholders questioned the relevance of the troubled debt restructuring (TDR) designation and the decision usefulness of disclosures about those modifications. Some noted that measurement of expected losses under the current expected credit loss (CECL) model already incorporates losses realised from restructurings that are TDRs and that relevant information for investors would be better conveyed through enhanced disclosures about certain modifications.

The amendments in the new ASU eliminate the accounting guidance for TDRs by creditors that have adopted CECL, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors made to borrowers experiencing financial difficulty.

The disclosure of gross write-off information by year of origination was cited by numerous investors as an essential input to their analysis. To address this feedback, the amendments in the new ASU require that a public business entity disclose current-period gross write-offs by year of origination for financing receivables and net investment in leases. The ASU, including effective dates, is available at www.fasb.org.

ASIA PACIFIC

Hong Kong: Money laundering report published

The latest issue of Hong Kong’s Money Laundering and Terrorist Financing Risk Assessment Report has been published. It examines the money laundering and terrorist financing threats and vulnerabilities facing various sectors in Hong Kong and the city as a whole, according to the requirements of the Financial Action Task Force, an inter-governmental body that sets international standards on combating such crimes. The latest report also for the first time assesses the risk of proliferation financing faced by Hong Kong.

The government said that as an international financial centre, Hong Kong attaches great importance to safeguarding the integrity of its financial systems, adding that the city received positive recognition of its anti-money laundering and counter-terrorist financing regime from the task force in 2019.

It said the risk assessment can help it to formulate informed policies to keep strengthening its work in antimoney laundering and counter-terrorist financing.

To address the risks identified, the government will focus on enhancing the legal and regulatory framework, strengthening risk-based supervision and partnerships, stepping up outreach and awareness-raising, and monitoring new and emerging risks, as well as strengthening law enforcement efforts and intelligence gathering capability.

In particular, the government will introduce a proposal to the Legislative Council to amend the Anti-Money Laundering and Counter-Terrorist Financing Ordinance in order to introduce a licensing regime for virtual asset service providers and a registration regime for dealers in precious metals and stones.

The proposed amendment aims to mitigate the risks of the sectors and protect investors. The government said it will continue to monitor and respond to the risks with vigilance amidst the evolving international security landscape.

ACRA and SGX RegCo set up a Sustainability Reporting Advisory Committee to advance Sustainability Reporting for Singapore

The Accounting and Corporate Regulatory Authority (ACRA) and Singapore Exchange Regulation (SGX RegCo) have set up a Sustainability Reporting Advisory Committee (SRAC) to advise on a sustainability reporting roadmap for Singapore-incorporated companies. The Committee will provide inputs on the suitability of international sustainability reporting standards for implementation in Singapore.

ACRA and SGX RegCo are working on developing a roadmap for wider implementation of sustainability reporting for Singapore-incorporated companies, beyond SGX-listed companies. SGX RegCo has been progressively enhancing sustainability reporting for listed companies, including mandatory reporting since 2016 and the introduction of climate reporting from FY2022. The growing interest in environment, social and governance (ESG) issues globally has led to a call to provide greater transparency and assurance on companies’ ESG-related information which investors and other stakeholders can incorporate into their decision making.