Technical

INTERNATIONAL

IESBA releases comprehensive research on the impacts of technology on ethics

The International Ethics Standards Board for Accountants (IESBA) has released its Technology Working Group’s final report, ‘IESBA Technology Working Group Phase 2 Report’. As part of IESBA’s Technology Initiative, the board determined to take a systematic, risk-based and phased approach to explore the ethics implications of technological developments on the accounting, assurance, and finance functions, and identify actions to respond to stakeholder expectations.

Building on the February 2020 Phase 1 Report, it documents the impacts of disruptive and transformative technologies on the work of professional accountants, and provides extensive analysis and insights into the ethical dimension of those developments. The report also discusses the relevance and importance of the overarching principles and specific provisions in theInternational Code of Ethics for Professional Accountants in laying out the ethical guardrails for professional accountants as they face opportunities and challenges in their work as a result of rapid digitalisation.

The report surveys the technology landscape and summarises the outcomes of the Working Group’s fact-finding into the ethics implications of innovative technologies such as artificial intelligence, blockchain and cloud computing. It explores – through the ethical lens – various related issues, including data governance, cybersecurity and reliance on, or use of, experts, and provides insights into those issues and the questions they raise.

The report includes ten recommendations which the IESBA will further consider, some of which it is already addressing in developing technology-related revisions to the Code. These include the need for transparency and explainable AI; data governance, including custody of data; ethical leadership and decision making; the reliance on and use of experts; the threshold for ‘sufficient’ competence; and business relationships.

The report has been informed by the IESBA’sTechnology Expert Groupand the input of a diverse group of stakeholders, including investors, regulators, those charged with governance, firms, national standard setters, professional accountancy organisations, public sector organisations and academics.

Stakeholders, including the International Federation of Accountants (IFAC) (and its member organisations), national standards setters, academics, firms and others are encouraged to study and leverage the report’s comprehensive findings as they consider how best to reinforce public trust in the work of professional accountants in business and in public practice in the age of digitalisation.

INTERNATIONAL

IASB amends IAS 1 Presentation of Financial Statements

The IASB has issued amendments to IAS 1 Presentation of Financial Statements that aim to improve the information companies provide about long-term debt with covenants.IAS 1 requires a company to classify debt as non-current only if the company can avoid settling the debt in the 12 months after the reporting date. However, a company’s ability to do so is often subject to complying with covenants. For example, a company might have long-term debt that could become repayable within 12 months if the company fails to comply with covenants in that 12 month period.

The amendments specify that covenants to be complied with after the reporting date do not affect the classification of debt as current or noncurrent. Instead, the amendments require a company to disclose information about these covenants in the notes to the financial statements. The IASB expects the amendments to improve the information a company provides about long-term debt with covenants by enabling investors to understand the risk that debt could become repayable early.

The amendments also respond to stakeholders’ feedback on the classification of debt as current or noncurrent when applying requirements introduced in 2020 that are not yet in effect. They are effective for reporting periods beginning on or after 1 January 2024, with early adoption permitted.

UK AND IRELAND

FRC launches consultation on audit committees standard

The Financial Reporting Council (FRC) has launched a consultation on its draft proposal for a minimum standard for audit committees.This follows the government’s response to its consultation on restoring trust in audit and corporate governance, which set out its intention to give the Audit, Reporting and Governing Authority (ARGA) statutory powers to mandate minimum standards for audit committees in their role on the external audit.

The purpose of the standard will be to increase performance across audit committees in the FTSE 350, ensuring a consistent approach and supporting a well-functioning audit market. The FRC is now seeking the views of its stakeholders on the draft standard, particularly those from FTSE 350 companies. Following the consultation, the plan is for the standard to be available to committees on a voluntary basis by the end of 2023, ahead of the planned legislation that will make the standard mandatory. The consultation will run until Wednesday 8 February and respondents should submit their comments to acstandard@frc.org.uk.

Improvements in corporate governance reporting but many still falling short

The Financial Reporting Council has published its Annual Review of Corporate Governance Reporting, which found an improvement in the quality of reporting against the UK Corporate Governance Code. The FRC has seen year-onyear improvements in reporting, and importantly more companies are disclosing the areas within the Code that they have chosen to explain rather than comply. However, the report also found that too few companies are providing meaningful explanations.

A common theme throughout the report is the lack of disclosure in relation to the outcomes and impacts of governance policies and practices. Companies need to demonstrate, within their reporting how their governance has been improved. The FRC was also disappointed to see minimal disclosure about board engagement with major shareholders – with some companies simply stating that there had been meetings without providing further information on their engagement and its outcome. These are important to give investors and the public information which is critical for market confidence and lowering the cost of capital.

The assessment, which comprised 100 randomly chosen FTSE 350 and Small Cap companies, supports the FRC’s growing body of evidence on those areas where companies report well and where improvements could be made. That evidence will help inform the work of the FRC as it consults on revisions to the Corporate Governance Code next year.

The FRC’s CEO, Sir Jon Thompson, said: ‘In uncertain economic times, how companies govern themselves is more important than ever. The UK Corporate Governance Code continues to provide a clear and flexible basis to support better governance and well-run companies. This year, we have continued to see a good standard of reporting but companies still need to go further in reporting how they apply the Code’s principles and comply with the provisions, describing the actions and outcomes that come from them to improve market confidence and facilitate better stewardship.’

The FRC now holds a body of evidence on those areas where companies report well and where improvements could be made. It was pleased to see that workforce engagement issues continue to be high on companies’ agendas, although disclosures on outcomes of the engagement are almost exclusively in relation to flexible working matters. Where companies engaged their workers in reviewing corporate culture, purpose, values or desired behaviours, most reported on the positive impact of such an approach. Reporting on wider stakeholder engagement is generally of a good standard. However, there is often insufficient narrative on the outcomes from the engagement, including feedback received, or commentary on whether the board acted on any of the issues raised and how decisions align with company strategy, or culture, purpose and values.

EUROPE

The EBA publishes guidelines on remote customer onboarding

The European Banking Authority (EBA) has published its final guidelines on the use of remote customer onboarding solutions. These guidelines set out the steps that credit and financial institutions should take to ensure safe and effective remote customer onboarding practices in line with applicable anti-money laundering and countering the financing of terrorism (AML/CFT) legislation and the EU’s data protection framework. The guidelines apply to all credit and financial institutions that are within the scope of the Antimoney Laundering Directive.

These guidelines establish common EU standards on the development and implementation of sound, risk-sensitive initial customer due diligence policies and processes in the remote customer onboarding context. They set out the steps financial institutions should take when choosing remote customer onboarding tools and when assessing the adequacy and reliability of such tools, in order to comply effectively with their AML/CFT obligations. The guidelines are technologically neutral and do not prioritise the use of one tool over another.

The guidelines have been developed in response to the European Commission’s request in the context of its Digital Finance ESMA to work on ESG disclosures as a new union strategic supervisory priority Strategy, published in 2020. They are also in line with the EBA’s legal mandate to lead, coordinate and monitor the EU financial sector’s fight against money laundering and terrorism financing.

The Anti-money Laundering Directive sets out what financial institutions should do to comply with their AML/ CFT obligations but it does not set out in detail what is, and what is not, allowed in a remote and digital context, when onboarding new customers. This has created risks where regulatory expectations of credit and financial institutions’ remote onboarding practices were unclear. It has also made the uptake of new or innovative forms of customer identification by credit and financial institutions more difficult. These risks and challenges were amplified by increasing demand for non-face-to-face customer take-on options during the Covid-19 pandemic.

ESMA to work on ESG disclosures as a new union strategic supervisory priority

The European Securities and Markets Authority (ESMA), the EU’s financial markets regulator and supervisor, is changing its Union Strategic Supervisory Priorities (USSPs) to include environmental, social and governance (ESG) disclosures alongside market data quality.

The new priority of ESG disclosures replaces costs and performance for retail investment products and represents an important step in the implementation of the ESMA Strategy, which gives a prominent role to sustainable finance.

ESMA and the National Competent Authorities (NCAs) intend to accompany the growing demand for ESG-related financial products. They will foster transparency and comprehensibility of ESG disclosures across key segments of the sustainable finance value chain such as issuers, investment managers or investment firms and hence tackle greenwashing.

In addition, ESMA aims to gradually promote an increased scrutiny on ESG disclosures through effective and consistent supervision. This also implies building supervisory capabilities to fully embed sustainable finance into daily supervisory work and supervisory culture. ESMA and the NCAs will take active steps to protect investors and facilitate investments in a credible ESG market.

In the context of the second USSP, market data quality, ESMA has already developed and applied common methodologies and thematic reviews. Both ESMA and NCAs will continue to engage into further targeted and concerted supervisory work. The USSPs are an important tool through which ESMA coordinates supervisory action with NCAs on specific topics. The aim is to provide a structured and comprehensive response to address key market risks across the EU. NCAs are required to take these priorities into account when drawing up their work programmes.

ESMA and NCAs will continue working together in the areas of ESG disclosures and market data quality. At the same time, ESMA and NCAs will follow-up on the previous work, namely monitoring closely the evolution of costs as a key element for investors protection.

UNITED STATES

FASB seeks input on the proposed new chapter of its conceptual framework: the reporting entity

The Financial Accounting Standards Board (FASB) has issued a proposed new chapter of its Conceptual Framework that describes a reporting entity. The Conceptual Framework is a body of interrelated objectives and fundamentals that provides the FASB with a useful tool as it sets standards. A Statement of Financial Accounting Concepts is nonauthoritative and does not establish or change generally accepted accounting principles. Stakeholders are encouraged to review and provide comment on the proposed chapter by 16 January 2023.

The proposed chapter would become Chapter 2 of FASB Concepts Statement No. 8, ‘Conceptual Framework for Financial Reporting’. It would establish concepts that the Board would use in developing standards of financial accounting and reporting. It would provide the Board with a framework for developing standards that meet the objective of financial reporting and enhance the understandability of information for existing and potential investors, lenders, donors, and other resource providers of a reporting entity.

Stakeholders are asked to provide input on the characteristics of a reporting entity described in the proposed chapter. This includes a description of a reporting entity as ‘a circumscribed area of economic activities that can be represented by general purpose financial reports that are useful to existing and potential investors, lenders, and other resource providers in making decisions about providing resources to the entity’. It also describes the three features of a reporting entity:

1. Economic activities of the entity have been conducted.

2. Those economic activities can be distinguished from those of other entities.

3. The financial information in general purpose financial reporting faithfully represents the economic activities of the entity in the circumscribed area and is useful in making decisions about providing resources to the entity.

The proposed chapter is available at: www.fasb.org.

ASIA PACIFIC

Strengthening Singapore’s corporate governance regime

The Accounting and Corporate Regulatory Authority (ACRA) implemented new requirements to strengthen Singapore’s corporate governance regime, and reaffirm Singapore’s commitment to combatting money laundering, terrorism financing and other threats to the integrity of the international financial system. The requirements are now in effect following the passing of the Corporate Registers (Miscellaneous Amendments) Act.

Companies (including foreign companies) are required to maintain a Register of Nominee Shareholders (RONS) at their registered office or at the registered office of their appointed Registered Filing Agent. The RONS will need to contain prescribed particulars of the nominator(s) of the company’s nominee shareholder(s). Companies must set up their RONS by 5 December 2022. To assist companies, ACRA has developed and published a new guidance document for the RONS.

Companies and Limited Liability Partnerships (LLPs) which are unable to identify a registrable controller who has a significant interest in or significant control, are required to identify individuals with executive control as their registrable controller(s). For companies, directors with executive control and the Chief Executive Officer must be identified as its registrable controller(s). For LLPs, partner(s) with executive control must be identified as its registrable controller(s).

Companies and LLPs which were previously unable to identify a registrable controller are now required to record the prescribed particulars of individuals with executive control in their existing Register of Registrable Controllers (RORC) by 5 December 2022. The same information must also be lodged with the ACRA central register.

MASB issues a narrow-scope amendments to MFRS 16 Leases

The Malaysian Accounting Standards Board has issued Lease Liability in a Sale and Leaseback (Amendments to MFRS 16 Leases). The Amendments is word-for-word Lease Liability in a Sale and Leaseback (Amendments to IFRS 16 Leases) issued by the International Accounting Standards Board (IASB).

The Amendments clarify how companies should measure the leaseback liability that arise in a sale and leaseback transaction. Although MFRS 16 includes requirements on how to account for a sale and leaseback at the date the transaction takes place, it has not specified how to measure the sale and leaseback transaction when reporting after that date.

The Amendments add subsequent measurement requirements for the lease liability arising from a sale and leaseback transaction by clarifying that a sellerlessee in a sale and leaseback transaction shall subsequently measure the leaseback liability by applying paragraphs 36 to 46 of MFRS 16. They will not change the accounting for leases other than those arising in a sale and leaseback transaction.

The Amendments shall apply for annual reporting periods on or after 1 January 2024. Earlier application is permitted.