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INTERNATIONAL
Global coalition led by iFac addresses need for strong public financial management in emerging economies
A coalition of 11 global and regional accountancy organisations and international development agencies, led by IFAC, the International Federation of Accountants, convened a three-day conference to bring awareness to how effective public financial management is critical to the advancement of emerging economies. The conference, Developing Accountancy Capacity in Emerging Economies, featured a series of keynotes and workshops designed to equip accountants, government officials, stakeholders and other practitioners with a roadmap for facilitating conversations and driving progress in their respective jurisdictions. “Accountancy capacity development efforts, like this conference, are most effective when national, regional, and global organisations come together with a laser-focus on a common cause. IFAC, with the support of the UK Department for International Development (DFID), is grateful to be able to catalyse the convening of institutions that comprise the financial management ecosystem, in order to enhance awareness and collaboration,” said Kevin Dancey, IFAC CEO. The accountancy profession plays an essential and significant role in a country’s sustainable economic development in both the public and private sectors. Not only has a strong and vibrant accountancy profession been regularly associated with lower levels of fraud and corruption, but there is also a recognised correlation between a strong accountancy profession and higher levels of economic growth. Supporting the development of accountancy capacity can be a catalyst to the success of the state-building strategies implemented by international development actors. Dr In-Ki Joo, IFAC President, said: “The role of professional accountants is to manage the financial information required by all stakeholders, and to develop the insights needed for sound decision making that helps promote economic, social and political stability. This important connection between accountancy and economic development is something that organisations, including the DFID, the World Bank, the Asian Development Bank and the Global Fund, have understood for a number of years and we are grateful for their ongoing partnership.” Aman Trana, Director of the Procurement, Portfolio and Financial Management Department of the Asian Development Bank (ADB), said: “One of ADB’s operational priorities under its Strategy 2030 is to strengthen the governance and institutional capacity of its developing member countries. Professional accountants play a critical role in this area by supporting public financial management institutions improving their public service delivery, financial efficiency, and transparency and accountability, thereby accelerating poverty reduction and achieving sustainable development.”
INTERNATIONAL
Key messages to the UN’s COP 25 from the accountancy profession
As the UN Climate Change Conference (COP) met, IFAC urged decisive action to put the world on a path to a sustainable future. To clearly articulate the role of the global accounting profession in addressing the climate emergency, IFAC published its Point of View on climate action.
In the Point of View, IFAC sets forth recommendations for various stakeholders: ● Governments can take advantage of the UN Climate Change Conference of the Parties (COP) to provide clear direction on reducing long-term emissions, to deliver greater certainty for business, and to encourage investment in low-emissions technology and innovation. ● Businesses can accelerate plans for climate change mitigation and adaptation. They can deliver
transparency and confidence through reliable and decision-useful climate related information. ● Professional accountancy organisations (PAOs) have an influential role in influencing climate change mitigation and adaptation as advocates for the profession and providers of accounting training and support. PAOs can commit to keeping accountants informed about how they can support their organisations’ and clients’ efforts to respond to climate risk. ● Accountants can encourage and enable meaningful action on climate change as influential advisors in governments and organisations. They can achieve this by providing relevant insights, analysis, reporting and assurance to help organisations create and protect value over the long term.
At the global level, IFAC is committed to working with the global profession to build the knowledge and capacity of accountants to meet the Sustainable Development Goals (SDGs), and to speaking out on climate action on behalf of the accounting profession, working through the B20, G20 and OECD. “Ignoring the impact of climate change is not an option – nor is business as usual,” said IFAC CEO, Kevin Dancey. “As instrumental members or advisers of every government, business and not-for-profit organisation, professional accountants must influence and enable the transition to a low-carbon society.” The conversations at COP 25 will be particularly important to provide clarity in reducing long-term emissions to meet the Paris Agreement. All actors in the global economy must usefully contribute, and professional accountancy remains a committed part of the solution.
IASB proposes to require comparable profit subtotals and bring greater transparency to ‘non-GAAP’ measures
the way information is communicated in the financial statements, with a focus on financial performance. Responding to investor demand, the proposals would require more comparable information in the statement of profit or loss and a more disciplined and transparent approach to the reporting of management-defined performance measures (“non-GAAP”).
The Board developed these proposals as part of its Primary Financial Statements project and wider work on “Better Communication in Financial Reporting”. The proposals cover three main topics.
New subtotals in the statement of profit or loss Companies would be required to provide three new profit subtotals, including “operating profit”. Operating profit is commonly reported by companies but is currently not defined by IFRS Standards, making meaningful comparisons between companies difficult. The new subtotals would give better structure to the information and enable investors to compare companies.
‘Non-GAAP’ transparency Companies would be required to disclose management performance measures – subtotals of income and expenses that are not specified in IFRS Standards – in a single note to the financial statements. In this note, companies would be required to explain why the measures provide useful information, how they are calculated and to provide a reconciliation to the most comparable profit subtotal specified by IFRS Standards. These requirements would add much needed transparency and discipline to the use of non-GAAP measures and make it easier for investors to find the information they need to make their own analyses.
Improved disaggregation of information Investors sometimes find it difficult to unpick a company’s reported information because items may be lumped together with insufficient labelling or explanations. Therefore, the Board has proposed new guidance to help companies disaggregate information in the most useful way for investors. Companies would also be required to provide better analysis of their operating expenses and to identify and explain in the notes any
unusual income or expenses, using the Board’s definition of “unusual”. These requirements would help investors analyse companies’ earnings and forecast future cash flows.
Hans Hoogervorst, Chair of the International Accounting Standards Board, said: “These proposals represent a game changer in the comparability and usefulness of financial statements.” The proposals would result in a new IFRS Standard that sets out general presentation and disclosure requirements relevant for all companies, replacing IAS 1 Presentation of Financial Statements. The Board is also proposing to amend some other IFRS Standards.
To read the General Presentation and Disclosures Exposure Draft, the Basis for Conclusions and the Illustrative Examples, and to comment on the Exposure Draft, please go to the comment letter page on ifrs.org. The Board is asking for stakeholder comments by 30 June 2020.
Help shape IFRS standards in 2020
To develop high quality accounting standards, the International Accounting Standards Board seeks views from people interested in and affected by financial reporting. This engagement helps the Board to generate ideas and evaluate suggested solutions to accounting problems so that IFRS Standards reflect the needs of the companies that use them when preparing their financial statements and of investors that use those financial statements when making investment decisions.
Thus, the Board gives stakeholders the opportunity to have their say multiple times during a standardsetting project’s life.
2020 is shaping up to be a busy year for consultations and calls for stakeholder views.
2020 consultations The first major consultation document, already out for comment, proposes improving the way information is communicated in the financial statements, with a focus on financial performance. Exposure Draft General Presentation and Disclosures, which the Board published in December 2019 as part of its Primary Financial Statements project, is open for comment until 30 June 2020.
The Board plans to publish a number of important consultation documents this year, including a discussion paper in its Goodwill and Impairment project and an exposure draft in its Management Commentary project. Later this year, you will have an opportunity to help the Board decide on its global standardsetting priorities by contributing to the 2020 Agenda Consultation.
Stakeholders will also be invited to provide comments on more narrowscoped proposed amendments, proposed updates to the IFRS Taxonomy and the IFRS Interpretations Committee’s tentative agenda decisions.
Here is a list of the planned consultations.
Discussion papers Q1: Goodwill and Impairment Q2: Business Combinations under Common Control
Exposure drafts Q2: IBOR Reform and its Effects on Financial Reporting – Phase 2 Q2: Rate-regulated Activities H2: Disclosure Initiative – Targeted Standards-level Review of Disclosures H2: Management Commentary
Requests for information Q1: Comprehensive Review of the IFRS for SMEs Standard Q2: Post-implementation Review of IFRS 10, IFRS 11 and IFRS 12 H2: 2020 Agenda Consultation
How to stay up to date The work plan lists the Board’s projects and indicates the next project milestone for each, as well as explaining when the Board expects to reach that milestone. You can register for project alerts as work progresses.
Consultations are an important part of the IFRS Foundation’s due process, which ensures that anybody can follow and contribute to standard setting.
UK AND IRELAND
IAASA changes in Board membership
29 The Minister for Business, Enterprise and Innovation, Heather Humphries TD, has appointed Mr David Hegarty as a member of the Authority. Mr Hegarty has been appointed on the nomination of the Director of Corporate Enforcement. He takes over from Mr Conor O’Mahony,
who has served on the Board since March 2012.
IAASA publishes its settlement procedures for s 933 enquiries
IAASA has published its settlement procedures for enquiries under s 933 of the Companies Act 2014. As with the s 934 investigation settlement procedures published earlier, the process offers both the authority and the prescribed accountancy body a means of achieving early resolution of the matter. Early settlement is an efficient use of the authority’s resources and provides timely resolution and transparency through the publication of the details of the case.
The s 933 settlement procedures are available on www.iaasa.ie.
IAASA has published a guide to its reports on the quality assurance review of public-interest entity audit firms (PIE audit firms). The guide can be found on www.iaasa.ie.
IAASA’s Audit Quality Unit has an overall objective to promote improvements in the quality of auditing of public-interest entities (PIEs). This is achieved through the inspection of PIE auditors. The process involves an assessment of the design of the internal quality control system, performance of compliance testing around the implementation of the PIE audit firm’s processes and procedures, together with the review of a sample of audits of PIEs. From early 2020, IAASA will make quality assurance review reports on PIE audit firms available to the public.
The purpose of the guide is to assist readers in understanding IAASA’s public reports on the quality assurance review of PIE audit firms. The guide sets out what users can expect from the quality assurance review reports and explains how the quality assurance review process drives the form and content of the reports on each quality assurance review.
The guide sets out the following: ● key content in published reports on quality assurance reviews; ● the purpose and design of a quality assurance review; ● IAASA’s grading policy for findings arising in relation to the effectiveness of the design or implementation
of a PIE audit firm’s quality control system and for each of the PIE audits inspected as part of a quality assurance review; and ● the content of a report on quality assurance reviews and limitations of these reports.
The appendices to the guide include an outline of a quality assurance review report. In summary, a report on the quality assurance review includes: ● a brief overview of the PIE audit firm; ● an explanation of the quality assurance review process; ● the scope of IAASA’s quality assurance review; ● an overall review of the PIE audit firm’s quality; ● the results of the quality assurance review; and ● the results of follow-up procedures.
Improved governance and reporting required to promote sustainability and trust in business
Companies need to improve their governance practices and reporting if they are to demonstrate their positive impact on the economy and wider society, according to a new report from the Financial Reporting Council (FRC). While changes to the 2018 UK Corporate Governance Code raised the bar considerably and have led to some high quality reporting, greater focus is needed on longer term sustainability, including stakeholder engagement, diversity and the importance of corporate culture. These changes are expected to take time to bed in.
The UK Corporate Governance Code was updated to help build trust in business by forging strong relationships with key stakeholders. It called for companies to focus on long term sustainability by aligning purpose, strategy and culture, promoting integrity and valuing diversity.
The FRC reviewed reporting against the 2016 UK Corporate Governance Code and assessed FTSE 100 “early adopters” of the revised 2018 Code. The 2018 Code came into force in 2019 and all premium listed companies will report against it this year. The FRC’s analysis found some good examples of reporting by companies that are increasingly using incentives relating to non-financial matters and are grounded in long term strategy.
Many companies are grappling with defining purpose and what an
effective culture means, with too many substituting slogans or marketing lines for a clear purpose.
There is insufficient consideration of the importance of culture and strategy, or the views of stakeholders. Following the FRC’s 2016 report on culture, companies should be commenting on culture and now explain how they are monitoring and assessing it.
There is also limited reporting on diversity. Those companies that did report well had clear plans to meet targets – beyond just gender – and understood the long term value of diversity.
The use of engagement surveys was portrayed by many as an effective tool to achieve insight on employee engagement and culture. While these can help, they should not be used in isolation. Companies must be able to demonstrate that the engagement methods used are effective in identifying issues that can be elevated to the board and how this affects company decisions.
The FRC’s Chief Executive, Sir Jon Thompson said: “While there are examples of high quality governance reporting from ‘early adopters’, looking ahead we expect to see much greater insight into governance practices and outcomes reporting on a range of key issues from diversity to climate change. “Concentrating on achieving box ticking compliance, at the expense of effective governance and reporting, is paying lip service to the spirit of the Code and does a disservice to the interests of shareholders and wider stakeholders, including the public.
“Where companies depart from the provisions of the Code, they need to provide compelling explanations for why non-compliance is the right approach for their particular company.”
Good quality explanations should be specific to individual companies, improve transparency and provide important insight into a company and the way it is run, often explaining risks and any mitigating actions. Explanations from a small number of companies continually fail to meet the Code’s Provision for board composition in terms of director independence were particularly poor.
In the future, companies also need to ensure they apply the Code’s principles in a manner shareholders’ can more easily evaluate, with a much greater focus on activities and outcomes reporting. This should set out the effectiveness of the board in decision making, and how this has led to sustainable benefits for shareholders, employees and wider stakeholders.
The Financial Reporting Council (FRC) has issued an update of its Practice Aid to assist audit committees in evaluating audit quality in their assessment of the effectiveness of the external audit process.
The update takes account of developments since the first edition was issued in 2015, including revisions of the UK Corporate Governance Code, the requirement for all public interest entities (PIEs) to conduct a tender at least every 10 years and rotate auditors after at least 20 years, and increasing focus generally on audit quality and the role of the audit committee. It also takes account of commentary from audit committees suggesting how the Practice Aid could be more practical in focus and more clearly presented.
The framework set out in the Practice Aid focuses on understanding and challenging how the auditor demonstrates the effectiveness of key professional judgments made throughout the audit and how these might be supported by evidence of critical auditor competencies. New sections have been added addressing the audit tender process, stressing that high audit quality should be the primary selection criterion, and matters to cover in audit committee reporting.
As well as illustrating a framework for the audit committee’s evaluation, the Practice Aid sets out practical suggestions on how audit committees might tailor their evaluation in the context of the company’s business model and strategy; the business risks it faces; and the perception of the reasonable expectations of the company’s investors and other stakeholders. These include examples of matters for the audit committee to consider in relation to key areas of audit judgment, and illustrative audit committee considerations in evaluating the auditor’s competencies.
The FRC encourages audit committees to use the Practice Aid to help develop their own approach to their evaluation of audit quality, tailored to the circumstances of their company. Audit committees are encouraged to see their evaluation as integrated with other aspects of their role related to ensuring the quality of the financial statements – obtaining evidence of the quality of the auditor’s judgments made throughout the audit, in identifying audit risks, determining materiality and planning their work accordingly, as well as in assessing issues.
EUROPE
EU enforcers must monitor closely new reporting standards
The European Securities and Markets Authority (ESMA), the EU’s securities markets regulator, has published the priorities that European enforcers will consider when examining the 2019 annual financial reports of listed companies. The 2019 enforcement priorities reflect the changes introduced in recent financial reporting standards and consider issues identified by national competent authorities (NCAs) through their enforcement activities in 2019.
The common enforcement priorities related to 2019 IFRS financial statements include: ● specific issues related to IFRS 16 Leases, given the need to exercise significant judgment in its application, particularly in determining the lease term and the discount rate; ● improvement of the information provided under standards that became applicable in 2018 IFRS financial statements; ● IFRS 9 Financial Instruments for credit institutions – relating to expected credit losses and significant increase in credit risk, and IFRS 15 Revenue from Contracts with Customers for corporate issuers, which should be of focus where revenue recognition is subject to significant assumptions and judgments; and ● the application of IAS 12 Income regarding deferred tax assets arising from unused tax losses.
Steven Maijoor, ESMA Chair, said: “The provision of good quality financial information by listed issuers in their financial statements is a key element in building investors’ confidence in European capital markets and the priorities regarding financial information reflect key changes in the IFRS standards in 2019 which impact on issuers and financial markets.
“We continue to stress the importance of providing investors with material, complete, balanced and accessible information on non-financial matters, including environmental matters and climate change. Issuers should also improve the transparency and quality of reported information in various areas, most notably on the key non-financial performance indicators used and on the non-financial disclosure frameworks adopted. “The consistent application of reporting standards across the EU is essential to enhancing investor protection and promoting stable and orderly markets.”
ESMA also highlights the potential implications of the transition from one interest rate benchmark rate to another on financial reporting and the importance of timely disclosure of its consequences. It encourages issuers to prepare for the timely implementation of recent IFRS 9 amendments which address hedge accounting implications, and monitor developments in the EU endorsement process which is expected to be finalised in time for the 2019 accounts.
Key non-financial information issues and alternative performance measures (APMs) ESMA highlights the principles of materiality and completeness of disclosures which should guide the reporting of non-financial information, including the importance of reporting information in a balanced and accessible fashion. This should include disclosures of non-financial information focusing on: environmental and climate change-related matters; key performance indicators; the use of disclosure frameworks; and supply chains. In addition, ESMA reminds issuers of the importance of providing adequate disclosures to enable users to understand the rationale for, and usefulness of, any changes to their disclosed APMs, especially regarding changes due to the implementation of IFRS 16.
Other issues ESMA expects issuers to undertake all necessary steps to comply with the new European Single Reporting Format (ESEF) requirements which will begin to apply with the 2020 annual financial statements. Finally, it highlights the importance of disclosures analysing the possible impacts of the decision of the United Kingdom to leave the European Union.
Next steps ESMA and European national enforcers will monitor and supervise the application of the IFRS requirements, as well as any other relevant provisions outlined in the statement, with national authorities incorporating them into their reviews and taking corrective actions where appropriate. ESMA will collect data on how EU listed entities have applied the priorities and will report on findings regarding these priorities in its report on the 2020 enforcement activities.
UNITED STATES
The Financial Accounting Foundation (FASB) has announced the availability of the 2020 GAAP Financial Reporting Taxonomy and the 2020 SEC Reporting Taxonomy (SRT), along with the new 2020 XBRL US DQC Rules Taxonomy (DQCRT).
The 2020 taxonomy contains updates for the accounting standards and other recommended improvements. The 2020 SRT contains improvements to the dimensional elements whose underlying recognition and measurement are not specified by the GAAP but are elements commonly used by GAAP filers.
The DQCRT is a FASB taxonomy that includes in a derivative format XBRL US DQC Rules (DQCR) published by the XBRL US as validation checks for XBRL filings with the SEC. The purpose of the DQCRT is to improve exposure and access to and thereby compliance with the DQCRs. This initial DQCRT implementation is limited to three DQCRs. Over time, additional DQCRs may also be included. DQCRT files must not be referenced directly by any EDGAR submission, just as many GAAP Taxonomy linkbases must not be referenced in an EDGAR submission.
The 2020 GAAP Financial Reporting Taxonomy and 2020 SEC Reporting Taxonomy are expected to be accepted as final by the SEC in early 2020. The taxonomies are available on the FASB’s Taxonomy (XBRL) pages and through the following links: 2020 GAAP Financial Reporting Taxonomy, 2020 SRT, and 2020 XBRL US DQC Rules Taxonomy.
Questions about using the taxonomies and creating and submitting XBRL tagged interactive data files in compliance with SEC rules should be directed to the SEC. SEC details and guidance are available at the SEC’s portal on Structured Data.
Small Business Advisory Committee Meeting recap
The Small Business Advisory Committee (SBAC) met on 17 December 2019. At the meeting, the SBAC members provided input on the following topics: ● EITF Issue No. 19-C, “Warrant Modifications: Issuers’ Accounting for Modifications of Equity Classified Freestanding Call Options That Are Not within the Scope of Topic 718, or Topic 815”: SBAC members shared their experiences related to warrant modification transactions and acknowledged the diversity in practice. However, members expressed concerns about requiring the same accounting for different types of warrant modification transactions and suggested that the guidance should require consideration of the nature and fact patterns in determining appropriate accounting. ● Disclosure Framework: Disclosures – Interim Reporting: SBAC members discussed the complexity associated with the judgment involved in defining material changes and significant events in the context of interim reporting. Members also shared their views on information that should be disclosed on a quarterly basis.
SBAC members also received updates on the following projects: ● simplifying the balance sheet classification of debt; and ● distinguishing liabilities from equity (including convertible debt).
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Budget Webinar 2020
13 March 2020 | 11:30am-12:30pm Join guest presenter Tim Keeley as he discusses the March 2020 Budget and how it will affect the accountancy industry.
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