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Technical
INTERNATIONAL
Global coalition issues guidance on how businesses can adopt a long-term value creation agenda
In the wake of unprecedented economic disruption due to the Covid-19 pandemic, many companies are rethinking their fundamentals and assessing how their corporate purpose, strategy and business model will drive long-term success. To support businesses in this uncertain environment, the International Federation of Accountants (IFAC), the International Integrated Reporting Council (IIRC) and Association of International Certified Professional Accountants (the unified voice of the American Institute of CPAs (AICPA), and the Chartered Institute of Management Accountants (CIMA) have released new guidance for chief financial officers (CFOs) and finance teams to navigate their organisations toward long-term value creation.
“Covid-19 is the greatest threat to value creation we’ve seen in generations. As a result, many companies are juggling a handful of pressing priorities, including protecting cash flows, ensuring long-term value creation and delivering positive societal impacts,” said IFAC CEO Kevin Dancey. “The CFO and finance function can partner with management to overcome the challenges associated with understanding and driving long-term value creation.”
The report contains actionable insights for CFOs, finance teams and business leaders to sharpen their perspective on value creation beyond the financials, including how to: ● understand the value creation process; ● identify principal opportunities andrisks related to the organisation’s strategy and business model; ● develop an integrated view of performance and value, with balance sheet, business and societalperspectives; and ● drive priorities for value creation into decision making and reporting.
The approach outlined in this report helps CFOs and finance teams to think about how to ensure that all relevant information around performance, opportunities, risks and trade-offs are available to internal decision makers, investors and other capital providers. It also enables the corporate mindset to evolve from shareholder value creation to a longer-term stakeholder value creation perspective.
“With an estimated 80% of enterprise value now made up of non-financial assets such as brand recognition, human capital and customer satisfaction, organisations that understand how to create and deliver value will be better positioned to achieve sustainable success,” said Barry Melancon, CPA, CGMA and CEO of the Association of International Certified Professional Accountants. “Accounting and finance professionals are uniquely positioned to bring together the insights and data needed by management teams to inform a value creation agenda, which is particularly important during this time of uncertainty.”
“Business leaders are under growing pressure to marry profit with purpose. A value creation agenda delivers exactly this,” said Charles Tilley, CEO of the IIRC.
“Building on the International Integrated Reporting Framework, this new report will guide CFOs to better understand, measure and report on value creation and impact. The result is comprehensive measurement based on a company’s value drivers that can be used to steer long-term sustainable development.”
INTERNATIONAL
IASB issues amendments to IFRS17 Insurance Contracts to help companies with implementation
The International Accounting Standards Board has issued amendments to IFRS 17 Insurance Contracts aimed at helping companies to implement the Standard and making it easier for them to explain their financial performance.
The fundamental principles introduced when the board first issued IFRS 17 in May 2017 remain unaffected. The amendments, which respond to feedback from stakeholders, are designed to: ● reduce costs by simplifying some requirements in the Standard; ● make financial performance easier to explain; and ● ease transition by deferring the effective date of the Standard to 2023 and by providing additional relief to reduce the effort required when applying IFRS 17 for the first time.
Hans Hoogervorst, chair of the International Accounting Standards Board, said: “We have listened to feedback and made changes to IFRS 17 that will help companies with the implementation of this much-needed Standard.”
The deferral of the effective date by two years, to annual reporting periods beginning on or after 1 January 2023, is intended to allow time for an orderly adoption of the amended IFRS 17 by jurisdictions around the world. This should enable more insurers to implement the new Standard at the same time.
The board has also issued an amendment to the previous insurance contracts Standard, IFRS 4, so that eligible insurers can still apply IFRS 9 Financial Instruments alongside IFRS 17. IFRS for SMEs Update published
The June 2020 IFRS for SMEs Update is now available, and includes following: ● an update on the second comprehensive review of the IFRS for SMEs Standard; ● an update on the SME Implementation Group (SMEIG); and ● information about online resources.
View this on the IFRS Foundation website.
EUROPE
Joint statement on the revision of the Non-Financial Reporting Directive in the context of Covid-19
challenges of our time in designing the means and tools to foster a green economic recovery.
It is more important than ever for both the private and the public sector to work together on policy priorities that governments should take in reaction to this crisis. The current Covid-19 crisis puts the world at a crossroads with important choices to be made on the best ways to come out of the crisis and improve resilience from an economic, social and environmental perspective.
The response should not weigh one element against the other; on the contrary, Covid-19 has shown how economic, social and environmental aspects are interlinked. That is why we support a sustainable recovery, including the necessary focus on social issues and the implementation of the European Green Deal with its goal of climate neutrality by 2050.
As the objectives are clear, we now have to put in place the right tools and incentives for each stakeholder from both public and private sector to play its role. The European Commission indicated in its recently published consultation on a renewed Sustainable Finance strategy that companies should prioritise key stakeholders’ long-term interest.
We see that the revision of the Non-Financial Reporting Directive (NFRD) is an important element of achieving this.
As a group of stakeholders with different backgrounds but a common interest in sustainable finance, we believe the following matters are instrumental in the upcoming revision of the NFRD to make a leap forward in improving the quality, comparability and consistency of information on environmental, social and governance matters. ● Expand the scope: Whether companies have a significant impact on the environment and society does not depend on their size or legal status, neither are investments limited to assets listed on stock exchanges.
We therefore recommend reviewing the scope beyond large publicly listed entities to cover those companies that have a significant impact on the environment and society as a result of economic activities and business models to ensure well targeted reporting. It is important though to have a balanced approach towards creating a reporting system that as an end result would ensure smart reporting, feasible for all kinds of companies.
Disclosure of non-financial information in the annual
management report: Assessing a company’s performance and future resilience does not stop at financial numbers and risks. Including nonfinancial information in the publicly available annual management report could help to improve the connectivity between financial and non-financial information (NFI) and inform the stakeholders to the fullest extent about a company’s performance, risks, future development and impact on the environment and society. Such disclosures, however, should be based on a materiality assessment to ensure that they pertain to matters that are truly relevant to the company and its long-term value creation. If supporting information is disclosed separate from the management report, clear links and synergies to the management report should be provided. Disclosing non-financial information in the annual management report would also ensure proper supervision of compliance by national authorities.
Strengthen the social and
governance aspects: We understand that climate-related issues have been at the centre of attention due to the urgency of the matter. Sustainability, however, encompasses wider ESG factors. Environmental, social and governance considerations within a company are interlinked and often “E” and “S” follow the “G”. Therefore, reporting should look equally at all matters of sustainability (E, S and G). In this respect, there is a particular need to improve disclosures on social matters, including human rights, employee issues, and health and safety, as well as governance matters such as the board’s and management’s overview of non-financial risks and opportunities, and description of governance processes.
Minimum mandatory reporting
requirements: A common and harmonised level of reporting is necessary to ensure comparability, consistency and reliability. Therefore, the legislation should provide a mechanism for clear guidance and develop a minimum set of reporting requirements, including sector specific requirements. The legislation should specify key principles for its application and disclosure, while detailed content and requirements should be developed in a reporting standard to allow their dynamic development in response to a fast-changing context. Materiality determination should be the basis to prepare relevant and meaningful disclosures.
Build on existing reporting
initiatives: We recognise the need to consolidate the different existing reporting initiatives to ensure some level of simplification and comparability on a global level. Each of them encompasses strong elements in their respective areas, but none of them is probably covering the full set of ESG issues relevant for comprehensive non-financial reporting. Going forward, it is necessary to build on these initiatives and take into account international developments.
International role of reporting
standards: We welcome the EU’s ambition to be the spearhead in sustainability related policy. However, we need to bear in mind that challenges such as the worldwide climate crisis requires global efforts and solutions. Companies operate and sell cross-border, as investors invest beyond their domestic market only. Therefore, any EU proposal for future NFI standards should ensure comparability and compatibility at a global level as companies need to comply by a broadly recognised reporting standard to be able to meet the information needs of stakeholders in a global market. Ensure legislative consistency: NFRD requirements should be coherent with relevant existing (or imminent) requirements and avoid duplication of reporting legislation, considering the purpose and scope of different legislation, for example: ● disclosures regulation for institutional investors; ● taxonomy regulation; and ● the Shareholders Rights Directive.
Other initiatives such as E-GAAP (environmental accounting) should also be taken into account to help companies produce the necessary information internally.
Accountancy Europe leads the non-financial reporting debate
Accountancy Europe has released three publications to shape the debate on non-financial information (NFI) reporting. Accountants have the skills and knowledge to lead this discussion. Based on its expertise, Accountancy Europe urges more reliable EU NFI
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reporting, offers a view on NFI assurance, and progresses the debate on a global NFI standard setter.
In its response to the European Commission (EC) Non-Financial Reporting Directive consultation, it supports corporate reporting that connects financial and non-financial information and advocates for strengthening NFI assurance requirements, building a common comprehensive NFI standard and tackling the substantial issues in NFI reporting. In particular, the EU should consider the following: ● Standard setting requires a multi-stakeholder approach with robust, independent governance and sufficient resources. ● A voluntary, simplified reporting standard for SMEs could reduce the administrative burden and effectively support delivering information on demand. ● The materiality definition should be clarified to encompass wider impacts on society and the environment. ● Assurance should be mandated at an EU level. ● The scope should encompass all companies that significantly impact the environment and society. ● NFI should be disclosed as part of the management report, and needs to cover what is material to the company.
Accountancy Europe has also released “Setting up for high-quality non-financial information assurance in Europe” to supplement its consultation response. This position paper investigates three conditions to provide high-quality and consistent NFI assurance across Europe: ● The EU regulatory framework should mandate independent external assurance. ● All assurance service providers need to abide by professional standards (competence, quality and ethics). ● Public oversight should cover all assurance service providers.
In the broader debate to improve NFI reporting, the EC announced that it intends to develop a European NFI standard setter. Before this announcement, Accountancy Europe issued a Cogito project where an independent task force built the case for setting global interconnected NFI standards. The new “Follow up paper: interconnected standard setting for corporate reporting” analyses the feedback received from over
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40 respondents. The key takeaways include: ● developing a “system solution” should be the ultimate goal to deliver global
NFI reporting standards connected to financial information; ● achieving this goal could be in steps, such as bilateral moves towards closer aligning NFI reporting standards, policy developments and expanding the mandates for multilateral organisations; ● following a “building blocks” approach, where regional or sectoral requirements may be added to the core set of global NFI reporting metrics; ● building on the best of NFI frameworks and standards may be quickest; and ● embracing the leading role that the EU has to play.
A significant achievement of this project is the exclusive statement from CDP, the Climate Disclosure Standards Board, the Global Reporting Initiative and the Sustainability Accounting Standards Board, which confirms their commitment to working together towards a globally harmonised system. This answers stakeholders’ calls for NFI initiatives to move more decisively towards convergence.
This work to achieve reliable and comparable NFI reporting facilitates the shift to a sustainable economy. If corporate information is transparent, includes environmental and social impact, and can be verified, stakeholders can make the right decisions to help move to a sustainable economy.
UK AND IRELAND
The FRC has announced its principles for operational separation of the audit practices of the Big Four firms.
The objectives of operational separation, which is world leading, are to ensure that audit practices are focused above all on delivery of high quality audits in the public interest, and do not rely on persistent cross-subsidy from the rest of the firm. The desired outcomes include the following: ● Audit practice governance prioritises audit quality and protects auditors from influences from the rest of the firm that could divert their focus away from audit quality. The total amount of profits distributed to the partners in the audit practice does not persistently exceed the contribution to profits of the audit practice. The culture of the audit practice prioritises high quality audit by encouraging ethical behaviour, openness, teamwork, challenge and professional scepticism and judgment. Auditors act in the public interest and work for the benefit of shareholders of audited entities and wider society.
These final principles follow upon extensive discussions with the audit firms. The FRC is now asking the Big Four firms to agree to operational separation of their audit practices on this basis and to provide a transition timetable to complete implementation by 30 June 2024 at the latest.
An implementation plan should be submitted to FRC by 23 October 2020. The FRC will then agree a transition timetable with each firm. Thereafter, the FRC will publish annually an assessment of whether firms are delivering the objectives and outcomes of operational separation. FRC CEO Sir Jon Thompson said: “Operational separation of audit practices is one element of the FRC’s strategy to improve the quality and effectiveness of corporate reporting and audit in the United Kingdom following the Kingman, CMA and Brydon reviews. The FRC has delivered a major step in the reform of the audit sector by setting principles for operational separation of audit practices from the rest of the firm. The FRC remains fully committed to the broad suite of reform measures on corporate reporting and audit reform and will introduce further aspects of the reform package over time.”
IAASA, Ireland’s accounting enforcer, has published a further compendium of financial reporting decisions. These decisions relate to accounting treatments applied by Aminex plc, Astute Capital plc, Bank of Cyprus Holdings plc and Datalex plc in their financial reports.
These decisions cover a range of accounting matters as follows: ● FRS 102 The Financial Reporting Standard applicable in the UK and the
Republic of Ireland; ● IAS 1 Presentation of Financial
Statements; ● IAS 12 Income Taxes;
IAS 24 Related Party Disclosures; IAS 34 Interim Financial Reporting; IAS 37 Provisions, Contingent Liabilities and Contingent Assets; IAS 40 Investment Property; IFRS 6 Exploration for and Evaluation of Mineral Resources; IFRS 7 Financial Instruments: Disclosures; IFRS 9 Financial Instruments; and Transparency (Directive 2004/109/EC) Regulations 2007 (as amended).
These decisions include instances where the company voluntarily agreed to enhance its accounting treatment or disclosures in future financial reports to address matters identified in the course of IAASA’s examinations. IAASA’s policy on publishing financial reporting decisions and the criteria to be met for such decisions to be published is set out in IAASA’s Policy Paper on Publication of IAASA’s Financial Reporting Findings. The financial reporting decisions for each company are included in a compendium of decisions which can be accessed on the IAASA website.
IAASA will continue to publish selected financial reporting decisions periodically.
UNITED STATES
FASB approves new standards and a proposed effective date delay
The Financial Accounting Standards Board (FASB) has approved the issuance of two upcoming Accounting Standards Updates (ASUs): one that improves financial reporting associated with accounting for convertible instruments and contracts in an entity’s own equity; and one that improves how not-forprofit organisations present and disclose contributed non-financial assets, also known as gifts-in-kind.
The FASB also voted to issue a proposed ASU that would delay the effective date for its standard that improves financial reporting for insurance companies that issue long-duration contracts, such as life insurance, disability income, long-term care and annuities.
FASB to Issue ASU to improve convertible instruments and contracts in an entity’s own equity
models required under current Generally Accepted Accounting Principles (GAAP). Accordingly, more convertible instruments will be reported as a single liability or equity with no separate accounting for embedded conversion features. Certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception will be removed and, as a result, more equity contracts will qualify for the scope exception. The upcoming ASU also will simplify the diluted earnings-per-share (EPS) calculation in certain areas. In its original July 2019 Exposure Draft, the FASB also proposed simplifying the accounting for equity contracts by reducing form-over-substance based accounting conclusions that are driven by remote contingent events in the assessment of the derivatives scope exception. However, based on mixed feedback from stakeholders, the FASB decided not to include those proposed changes in the upcoming ASU. Consequently, the FASB plans to continue to explore improvements on this aspect of the guidance in a separate Phase 2 project. “The upcoming ASU will address areas of liabilities and equity guidance that stakeholders identified as overly complex, internally inconsistent, and the source of frequent financial statement restatements,” stated FASB chairman Russell G. Golden. “We expect it to result in improved comparability of information for financial statement users and reduced cost and complexity for preparers and auditors.” The upcoming ASU will be effective for public business entities that meet the definition of a US Securities and Exchange Commission (SEC) filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after 15 December 2021, including interim periods within those fiscal years. For all other entities, the standard will be effective for fiscal years beginning after 15 December 2023, including interim periods within those fiscal years. Early adoption will be permitted. The FASB expects to issue the upcoming ASU during the third quarter of 2020.
FASB to issue ASU on accounting for contributed non-financial assets by not-for-profit organisations
The upcoming ASU will require a not-forprofit organisation to present contributed non-financial assets as a separate line item in the statement of activities, apart from contributions of cash or other financial assets. It also will require a not-for-profit to disclose the amount of contributed non-financial assets received, disaggregated by category, that depicts the type of contributed non‑financial assets, and for each category of contributed non‑financial assets received (as identified in (1.)): ● qualitative information about whether the contributed non-financial assets were either monetised or utilised during the reporting period.
If utilised, a description of the programmes or other activities in which those assets were or are intended to be used. ● The not-for-profit’s policy (if any) about monetising rather than utilising the contributed non-financial assets. ● A description of any donor restrictions associated with the contributed non-financial assets. ● A description of the valuation techniques and inputs used to arrive at a fair value measure in accordance with Topic 820, Fair Value Measurement, at initial recognition. ● The principal market (or most advantageous market) used to arrive at a fair value measure if it is a market in which the recipient not-for-profit is prohibited by donor restrictions from selling or using the contributed non‑financial assets.
The upcoming ASU will be effective for annual reporting periods beginning after 15 June 2021. It is expected to be issued during the third quarter of 2020. The FASB also directed the staff to determine if educational efforts are necessary for valuing contributed non-financial assets and to monitor how the ASU improves transparency by providing better information to users.
FASB to issue proposed ASU that would delay standard for insurancecompanies that issue long-duration contracts
Finally, FASB voted to issue a proposed ASU that would grant insurance companies that issue long-duration contracts, such as life insurance and annuities, an additional year to implement Accounting Standards Update No. 2018-12, Financial Services – Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts. Stakeholders will have 45 days to comment on the proposed ASU, which the FASB expects to issue in the coming weeks.
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