governance and corporate reporting world watch* · 2015-06-03 · investment funds – comprising...

World Watch*Governance and Corporate Reporting

Governance 4

Financial Reporting 12

Assurance 29

Broader Reporting 33

Diary Dates 44 Issue 1 2009

Decisions and reporting CEOs find information gap

Crisis response Revamping financial supervision

Revenue recognition Significant changes ahead

IFRS Direction of travel

Contents

Governance – News

4 Proposals to revamp financial supervision

5 De Larosière report recommendations

6 Obama’s five key regulatory reform proposals

6 Consider reporting with governance

7 Walker reins in financial institutions

8 The Combined Code – is it working?

8 Going concern guidance for directors

9 Commission funding for financial market supervision

9 Recommendations on remuneration

10 Proxy voting process ripe for improvement

10 Push for more shareholder power

Governance – Opinion

11 G20 action on global crisis

Financial Reporting – News

12 Financial crisis advisory group

13 XBRL becomes mandatory

13 Breaking down barriers to change

14 Call for change of direction in standard setting

14 Survey of users’ information needs

15 IFRS under review – looking to the future

16 Trustees move to second stage of Constitutional Review

17 Simplified IFRS

17 Country updates

18 Islamic finance on the agenda

18 Japan roadmap provides direction for IFRS

19 Financial reporting in a changing world

19 Trying to please too many users?

20 Downturn impact on assumptions for pensions

20 Leases – a preview

20 Fair value in one place

21 IASB addresses classification and measurement

21 Dynamic provisioning – suitable response to the crisis?

22 Brazilian companies grapple with big changes

22 New faces at the IASB

23 More choice for Lithuanian listed companies

23 Asian-Oceanian standards setters join forces

24 Mexico rides the IFRS wave

World Watch team

Editor: Sarah GreyConsulting editors: Richard Keys, David Phillips, Peter Hogarth, Graham Gilmour, Jaap van Manen, Hans Dijkstra Alan McGill, Diana HillierContributors: Nicole Wilson, Bethany Tucker, Raymond Taylor, Elizabeth Georgiades, Alison Thomas, Kinga Lodge, Margaret Cassidy and PwC Staff

PricewaterhouseCoopers provides industry-focused assurance, tax, and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 155,000 people in 153 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice.

© 2009 PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCoopers” refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

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Contact usPwC has a strong and effective network of people worldwide who can advise on the developments in reporting and the implications of local regulations, as well as international standards and global trends. If you would like to discuss any of the issues raised in this publication, please contact your local office, the people named in specific articles or the editor.

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EDITORIAL

Danger of divergenceWorld leaders will shortly be gathering in Pittsburgh, US, for the third summit of the G20 in less than twelve months. The agenda and subsequent communiqués are likely to talk of the need for global regulatory solutions to the banking crisis, the need for global accounting standards, a concerted commitment from governments to reflate their economies and the avoidance of protectionist tendencies.

In times of economic distress, however, the need to protect one’s own comes to the fore. So if there is momentum around these issues at the moment, it is largely domestic in nature. Take for example the various initiatives to improve financial supervision. The regulatory responses are now starting to emerge and each comes with its own domestic colouring. As someone put it recently, the number-one priority of every politician and regulator is the introduction of stability to the national banking system and the shoring up of the public finances, the economy and employment.

These are natural instincts. But there is a danger that until these priorities are dealt with, there will be a drift away from the global agenda. That would be a shame, as the benefits of convergence towards global standards are no less than they were before the financial crisis. For multinational companies and the markets, this may mean a period of uncertainty, and potentially increased costs of doing business.

These divergent tendencies are also present in the other big challenge facing the world – namely climate change. While Copenhagen may deliver some form of global agreement, the devil may be in the domestic regulatory details that follow.

The global economy will not benefit if each country reaches for domestic solutions, each with their own ‘bells and whistles’. We are already seeing different sets of guidance on carbon measurement emerging, all intended to be helpful, but each likely to create uncertainty and confusion and an unnecessary administrative burden on business at a time of economic challenge.

David Phillips, senior corporate reporting partner PricewaterhouseCoopers

Richard Keys, global chief accountant PricewaterhouseCoopers

Financial Reporting – Opinion25 Financial statement presentation proposals –

impact on cash flow?

26 Opinion varies on IFRS in the US

28 Revenue recognition – changes ahead

Assurance – News

29 Downturn triggers reporting and audit challenges

30 UK adopts international audit standards

30 Framework for assuring the quality of carbon emissions

30 SMEs are top priority

31 Clarity has worldwide support

31 New directions for the IAASB

32 Global regulators give thumbs up on ISAs

32 EC moves to adopt ISAs

Broader Reporting – News

33 Open up on ESG, says Eurosif

34 Australian charities recognised for transparency

34 Reward for better reporting during volatile times

35 Business is ready for action on climate change

35 Global position needed on carbon reporting

36 CEO response to looming water crisis

36 Danish law raises the bar for CSR reporting

36 League tables for emissions

37 Investment community wants environmental disclosure

37 Online support for sustainable recovery

38 Model for carbon emissions reporting

38 Transparent sustainability reporting wins support

39 Boost to ESG reporting

39 Investors’ activities under scrutiny

39 Malaysian sustainability reporting awards

40 Commitment to sustainability pays off

40 Sustainability reports on the rise

41 Opinion varies on merit of management commentary

41 Accountants top up their green credentials

42 Report finds drive for connected reporting

42 Giant wakes up to climate change?

Broader Reporting – Opinion

43 What does your reporting say about you?

News & Opinion

On 27 May the European Commission adopted a Communication on Financial Supervision in Europe, which proposes the creation of a European Systemic Risk Council (ESRC) to ensure better macro-prudential supervision and a European System of Financial Supervisors (ESFS) for micro-prudential supervision. This is part of a whole package of measures being taken forward by the Commission as a result of the de Larosière report.

European Systemic Risk Council

The ESRC would warn the Ecofin Council or the European Supervisory Authorities of threats to financial stability, whether these are general in nature or specific to one particular member state. Its recommendations would not be binding, but recipients of the recommendations would be required to follow them or give reasons for not doing so.

European System of Financial Supervisors

ESFS would be set up for the supervision of individual financial institutions, consisting of a network of national financial supervisors. The existing financial services committees (the so-called ‘level three committees’) would be transformed into three European Authorities:

a European Banking Authority; a European Insurance and Occupational Pensions Authority; and a European Securities Authority. Day-to-day supervision of financial institutions would remain the responsibility of the competent national authorities.

The three authorities will ensure harmonised rules through the adoption of binding technical standards and the drafting of interpretation guidelines. In the event of disagreement between national regulators, they will mediate during a conciliation phase after which they will be empowered, as a last resort, to take a final decision binding on all interested parties. They would play a coordinating role in the event of a financial crisis and would provide the ESRC with confidential

information on the markets and the cross-border groups under their supervision on a regular basis.

Next steps

The changes are expected to become formal legislative proposals in the last quarter of 2009, with a view to having them adopted in the first reading by the newly elected European Parliament. As the final legislation will have the form of regulations rather than directives, it will, if adopted, enter into force in early 2010.

Five types of regulation

In its communication, the commission mentioned five types of regulatory and legislative initiatives that it will bring forward this year. Some of those steps have already been achieved, (see panel opposite).

EUROPE

Proposals to revamp financial supervision

Governance News

5World Watch Issue 1 – 2009

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EU FINANCIAL REGULATION

De Larosière report recommendations In March the European Commission adopted a communication following the wide-ranging recommendations made by a group of financial experts chaired by Jacques de Larosière (a former managing director of the IMF and former governor of the Banque de France) on how to improve supervision of financial institutions and markets in the EU. The report by the de Larosière High-Level Group was commissioned by the EU Presidency in late 2008, in the light of the financial crisis.

Key recommendations in the de Larosière report included:

Developing common rules for •investment funds across all 27 EU countries

Reviewing remuneration structures•

The creation of a new pan-EU body •under the auspices of the European Central Bank to identify systemic risks at European level and issue warnings to EU supervisors

Further reflection on the financial and •regulatory accounting issues arising from the economic crisis.

‘We support a better global working environment for the financial services sector with improved co-operation and exchange of information,’ said David Devlin, PwC regulatory partner. ‘The proposals set out in the de Larosière report for Europe are an important step towards improving the global environment.’

The proposals in the de Larosière report and the Commission’s own communication (see opposite) were largely consistent with the themes that European leaders wanted to see highlighted at the G20 summit in April (see page 11). The de Larosière report in particular is very broad in its scope, and its recommendations cover both the European infrastructure for financial supervision and the global landscape for market regulation.

Practical issues remain

Even though many market participants share the desire for a sound evolution of the regulatory framework in Europe, there are a number of practical issues that will need to be addressed to implement the proposals.

Mr Devlin concluded: ‘We believe the commission should adopt a careful approach to developing the proposals – analysing the reasons for current differences in regulatory approaches and consulting widely on any proposed EU measures, so as to avoid any unintended consequences.’For more information visit http://ec.europa.eu/internal_market/finances

EU regulatory and legislative initiatives – supervision of financial institutions and markets

1. A European financial supervision package by the end of May 2009

(See article opposite)

2. ‘Safety first’ proposals to fill gaps in EU or national regulation

A comprehensive legislative instrument establishing •regulatory and supervisory standards for alternative investment funds – comprising hedge funds, private equity and other fund managers (issued April 2009)

A white paper on tools for early intervention to prevent •a crisis in future (June 2009)

A report on derivatives and other complex structured •products (June 2009) and, based on that, appropriate initiatives to increase transparency and ensure financial stability

Legislative proposals to increase the quality and •quantity of prudential capital for trading book activities and tackle complex securitisation (June 2009), and to address liquidity risk and excessive leverage (Autumn 2009)

3. Ensure confidence in savings, access to credit and consumers’ rights relating to financial products

A communication on retail investment products to •strengthen the effectiveness of marketing safeguards (issued April 2009)

Further measures to reinforce bank depositor, investor •and insurance policyholder protection (Autumn 2009)

Measures on responsible lending and borrowing •(Autumn 2009)

4. Improve risk management in financial firms and align pay incentives with sustainable performance

Strengthen the Commission’s 2004 recommendation •on remuneration of directors (issued April 2009)

Bring forward a new recommendation on remuneration in •the financial services sector (issued April 2009), followed by legislative proposals to include remuneration schemes within the scope of prudential oversight (Autumn 2009)

5. More effective sanctions against market wrongdoing

A review of the Market Abuse Directive is planned for •Autumn 2009

Proposals on how sanctions could be strengthened •and better enforced

6 World Watch Issue 1 – 2009

The Obama administration has proposed sweeping financial regulatory reforms designed to ensure stability in the financial markets. The proposals, presented in a white paper – Financial regulatory reform, a new foundation: Rebuilding financial supervision and regulation – seek to meet five key objectives: robust supervision of firms and markets; protection of consumers and investors; tools to manage financial crisis; and better international standards and cooperation.

The white paper describes the reasons for each objective and sets out a number of legislative and regulatory actions intended to achieve them. Democratic leaders in Congress have said they intend to pass legislation before the end of 2009. Robust debate is likely, as the proposals are considered highly controversial. Many companies are expected to feel the regulatory and financial impacts.

The proposals are also considered noteworthy for what they don’t include. Proposals for a single federal bank regulator, a single capital markets regulator and a federal insurance regulator are all absent.

What is the Obama administration proposing?

1. Promote robust supervision and regulation of financial firms Proposed actions to include:

Create a new Financial Services •Oversight Council. Financial regulators would identify emerging systemic risks and improve interagency cooperation.

Give the Federal Reserve new •authority to supervise any firm that poses a threat to financial stability, regardless of whether the institution is or owns a bank.

Mandate stronger capital and other •prudential standards for all financial firms and even higher standards for large, interconnected firms.

Register hedge funds advisers and other •private pools of capital with the SEC.

2. Establish comprehensive supervision of financial markets Strengthen financial markets to withstand both system-wide stress

and the failure of one or more large institutions. Proposed actions:

Better regulation of securitised •markets, including new requirements for market transparency, and stronger regulation of credit rating agencies

Require issuers and originators to retain •a financial interest in securitised loans

Federal Reserve to oversee payment, •clearing and settlement systems

Create comprehensive regulation of all •over-the-counter derivatives (see also PwC publication Should All Customized Derivatives Be Standardized?).

3. Protect consumers and investors from financial abuse To rebuild trust in the markets, new protections would be provided for consumer financial services. More transparent, less complex financial products are also envisaged with fairer access to financial products. Proposed actions include: creating a new Consumer Financial Protection Agency and strengthened regulations to improve transparency and fairness.

4. Provide the government with the tools to manage financial crises Proposals here include: a new regime to resolve non-bank financial institutions whose failure could have serious systemic effects; and revising the Federal Reserve’s emergency lending authority to improve accountability.

5. Raise international regulatory standards and improve international cooperation The US proposes to continue work with the G20 to establish more consistent regulatory standards across jurisdictions, including to: strengthen the capital framework; improve oversight of global financial markets; coordinate supervision of international active firms; and enhance crisis management tools.

For extensive analysis see PwC's white paper – The Obama Administration’s ‘New Foundation for Rebuilding Financial Supervision and Regulation’ on www.pwc.com

The Report Leadership Group's comments on the Walker Committee review of corporate governance in the UK banking industry highlights the importance of looking at the issues of governance and reporting in parallel.

It points out that the quality and scope of information is a critical determinant of how well a company is managed by its executive team and whether non-executive directors are in a position to exercise effective governance. Reporting also affects a company’s ability to communicate effectively to its shareholders and shareholders’ ability to exercise effective oversight.

Is good governance working?

The group argues that one sign of whether governance is working is a company's overall commitment to transparency and its ability to present a joined-up picture of the activities that are critical to its corporate success. It concludes that very few companies today achieve this joined-up picture.

The letter called on the Walker Committee to focus on a company’s ability to:

Explain its strategy and provide •evidence that it is grounded in a real understanding of the markets in which it operates and the factors that will have an impact on it across the economic cycle

Explain the dynamic of the business •model and the key risks and relationships to which it is exposed

Articulate its risk appetite and •how this is reinforced by the tone from the top, the cultures and behaviours of the organisation and the structure of remuneration and incentive schemes.

‘With so much scrutiny of governance at the moment, it may be a good time for companies to reassess whether they have good enough governance in place,’ said PwC corporate reporting partner David Phillips.

www.reportleadership.com

US

Obama’s five key regulatory reform proposals

REPORT LEADERSHIP GROUP

Consider reporting with governance


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An independent review of the corporate governance of banks and other financial institutions in the UK has led to 39 recommendations to improve the way they operate, particularly in the areas of risk management, remuneration, board behaviour and regulation.

Sir David Walker, a former executive director of the Bank of England, was engaged by the UK government to make recommendations on:

The effectiveness of risk management •at board level

The balance of skills, experience and •independence required on the boards

The effectiveness of board practices •

The role of institutional shareholders •

International best practice.•

The Walker Review was made public in July 2009 as a consultative document.

The report recognises that financial institutions’ excessive, risk-taking culture played its part in the global financial crisis, and a lack of governance contributed to this. To counter this and avoid a future repetition, it says that weaknesses in risk management, board quality and practice, control of remuneration, and the exercise of ownership rights all need to be addressed both in the UK and internationally.

Sir David said: ‘The recommendations on remuneration are as tough or tougher than anything to be found elsewhere in the world, an important and urgent

challenge is to promote adoption of similar approaches internationally.’

The findings of the Review can be summarised under five main themes.

1. Corporate governanceThe Financial Reporting Council’s Combined Code on Corporate Governance remains fit for purpose. However, the code’s ‘comply or explain’ principles could be strengthened if combined with robust capital and liquidity requirements and a tougher stance on the part of the Financial Services Agency.

2. Board behaviourThe most critical need is for an environment in which effective challenge of the executive is expected and achieved in the boardroom before decisions are taken on major risks and strategic issues. This will require close attention to board composition to ensure the right mix of capability and experience. It will also require a materially increased time commitment from non-executive directors and the chairman.

3. Risk managementBoard-level engagement in the high-level risk process should be materially increased. A dedicated non-executive director focused on risk issues is needed as well as an executive risk committee process and full independence in the group risk management function.

4. Investor engagementFund managers and other major shareholders should engage more productively with their investee

companies to support long-term performance improvement – and boards should be more receptive to this. Fund managers should be expected to conform to principles of stewardship on a ‘comply or explain’ basis to provide comfort to prospective clients.

5. Remuneration policiesSubstantial enhancement is needed in board level oversight of remuneration policies. Board remuneration committees’ responsibility should be extended beyond board members to cover the remuneration framework for the whole entity. In addition, not less than half of expected variable remuneration for executive board members and other senior executives should be on a long-term incentive basis, with vesting, subject to performance conditions, deferred for up to five years.

‘These proposals are designed to improve the professionalism and diligence of bank boards, increasing the importance of challenge in the board environment,’ concluded Sir David. ‘If this means that boards operate in a somewhat less collegial way than in the past, that will be a small price to pay for better governance.’

Next stepsThe consultation document is open for public comment until 1 October, with conclusions expected in November 2009. The independent review will make recommendations to the UK government, which will then make a decision on which of the recommendations to adopt.

www.hm-treasury.gov.uk/walker_review_information

UK

Walker reins in financial institutions

The Walker Review proposals in brief

Board level risk committees chaired by a non-executive•

Risk committees to have power to scrutinise and •if necessary block big transactions

More power for remuneration committees to scrutinise •firm-wide pay

Remuneration committees to oversee pay of high-paid •executives not on the board

Significant deferred element in bonus schemes for •all high-paid executives

Increased public disclosure of remuneration for •high-paid executives

Chairman of remuneration committees to face re-election •if report gets less than 75% approval

Non-executives to spend up to 50% more time on the job•

Non-executives to face tougher scrutiny under FSA •authorisation process

Chairman of board to face annual re-election•

Financial Reporting Council to sponsor institutional •shareholder code

FSA to monitor conformity and disclosure by •fund managers

Institutional shareholders to agree Memorandum •of Understanding on collective action


FINANCIAL REPORTING COUNCIL

Going concern guidance for directors

UK

The Combined Code – is it working?

The Financial Reporting Council in the UK has issued an exposure draft to update its 1994 version of guidance for directors on going concern.

The guidance brings together in one place all the different requirements that exist, and provides practical advice on the procedures to be undertaken by directors in making an assessment about the going concern status of companies. It includes some useful additions to previous guidance on half-yearly and interim financial statements. It can be a useful reference for directors of listed and unlisted companies internationally as well as in the UK.

Four high-level principles are set out in the guidance, with supporting analysis and commentary. The principles cover: making an assessment; the review process; the review period; and disclosures. In terms of making an assessment, the directors will generally reach one of three conclusions:

No material uncertainties leading to •significant doubt about going concern have been identified

Material uncertainties leading •to significant doubt exist, or

The going concern basis for preparing •the financial statements is not appropriate.

The review period is not entirely straightforward, with differences between UK and IFRS standards. However, the draft guidance proposes that for both annual and interim financial statements, the directors should disclose if the period considered is less than 12 months from the date of approval of the accounts. In relation to disclosures,

directors are encouraged to bear in mind the need for clarity and transparency on the material uncertainties that have led to significant doubt, with a reminder that auditors are under an obligation to report if an appropriate level of clarity has not been achieved.

www.frc.org.uk

The Financial Reporting Council (FRC) in the UK has announced a review of the Combined Code for corporate governance. An exposure draft proposing changes is expected in November.

Sir Christopher Hogg, chairman of the FRC, has been meeting chairmen of FTSE 350 companies to gather evidence and to seek first-hand views of how well the code and the ‘comply or explain’ mechanism is perceived to be working. Anecdotal evidence suggests that the code is

working, but could potentially benefit from some adjustments in areas such as: executive remuneration; time commitment; expertise and independence of non-executive directors; shareholder engagement; and the board’s responsibility for risk assessment and risk management.

‘There will be considerable pressure to make revisions to the code, but the justification for any change should be based on substantive evidence generated by independent research,’ said PricewaterhouseCoopers governance

director Margaret Cassidy. ‘Clearly, the whole system isn’t broken, so the FRC might want to look at sectors or businesses that have survived, or even thrived in the current climate, and consider what has worked well.’

The next steps for the FRC will be to establish whether there are weaknesses in the framework provided by the Combined Code, or whether the issues that led to the economic crisis were a result of poor implementation of the framework.

www.frc.org.uk


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Recommendations on remunerationThe European Commission (EC) has issued two recommendations covering remuneration policies in the financial services sector and the regime for the remuneration of directors of listed companies. As a result, companies operating within the EU are likely to be required to strengthen their governance processes and reporting of remuneration.

The move follows a statement of principles for sound compensation practices issued by the Financial Stability Forum in early April (and endorsed by the G20 leaders at their summit in London). This was wholly consistent with the UK Financial Services Authority’s (FSA’s) draft Code of Practice on remuneration, issued in March 2009.

Member states must take measures to promote the application of the EC recommendations by 31 December 2009. In many territories some of the provisions are already included in local regulation and/or may already be reflected in companies’ remuneration structures. But some change is expected for most companies.

Examples of recommended practices that may not be in common use already include:

Directors’ contracts should provide •for claw-back of bonuses where performance is subsequently proved to be misstated

Directors should retain a fixed •number of shares until their retirement from the board (eg, twice total annual remuneration)

Information should be shared •on: the policy for retention of shares following the vesting of awards and the composition of peer groups used to determine remuneration policy

The remuneration committee •should ensure that remuneration of individual executive directors is proportionate to that of other executive directors and members of staff

The implementation of the •remuneration policy (for financial sector companies) should be subject to central and independent internal review by control functions for compliance on at least an annual basis.

The European Commission has announced proposals to fund changes to the European regulatory framework from the EU budget. This is clear evidence of the EC’s commitment to reinforcing financial stability.

‘The financial crisis has demonstrated the need to further strengthen EU supervisory arrangements and has reminded us of the importance of transparency and independence, especially when setting financial reporting and auditing standards,’ said internal market and services commissioner Charlie McCreevy when he announced the proposals. ‘An essential move in this direction is to reinforce the role of key bodies in these fields, at both European and international level, and to provide them with financial support.’

Funding for the supervisory committees as well as key international bodies – the International Accounting Standards Committee Foundation, the European Financial Reporting Advisory Group and the Public Interest Oversight Board – will come from a new community

programme budget. There is widespread consensus that all these bodies have an important role to play in strengthening EU supervisory arrangements. This was confirmed by European Parliament approval of the proposals in May. Funding of €38.7m will run from 1 January 2010 to 31 December 2013, which is slightly higher than the commission’s original request.

The European Parliament has also asked the Commission to put forward a proposal to provide interim financing to the three EU Committees of Supervisors in 2009 to the tune of not more than €500,000. MEPs made clear that a decision on interim funding is justified due to the

exceptional circumstances of the ongoing financial crisis and the need to strengthen supervisory convergence and cooperation at the EU level. They did, however, make it clear that their decision is not intended to constitute a precedent.

The Commission has previously voiced concern that the independence of the IASCF, EFRAG and PIOB may be jeopardised when funding is accepted from interested parties (for example audit firms). The provision of grants from the Community programme should alleviate these concerns and enable the standard-setting process to move ahead free from conflict-of-interest claims.

EUROPEAN UNION

Commission funding for financial market supervision


The Securities and Exchange Commission (SEC) has voted on three measures that are intended to better inform and empower shareholders to improve corporate governance and help restore investor confidence. In the US shareholders tend to have fewer rights than in some other countries – for example they are not able to use voting rights to remove directors, as they are in the UK. The move responds to significant pressure for more balance in shareholders’ rights to give them more authority in governance.

The SEC voted unanimously on two proposals that will amend the current proxy rules relating to compensation and corporate governance matters. First,

public companies in receipt of funds from the Troubled Asset Relief Program (TARP) should provide a shareholder vote on executive pay in their proxy solicitations. Second, public companies should provide better disclosure of executive compensation in their proxy statements.

The commission also voted to approve a New York Stock Exchange (NYSE) rule change that prohibits brokers from voting proxies in corporate elections without specific instruction from their customers. This will apply to shareholder meetings held on or after 1 January 2010.

‘With over 800 billion shares being voted annually at over 7,000 company meetings, it is imperative that our proxy

voting process works – starting with the quality of disclosure and continuing through to the integrity of the vote results,’ said SEC chairman Mary Schapiro at an SEC open meeting to consider the proposals.

‘The three items that we consider today are all related to that fundamental goal – that is, enhancing the quality of the system through which shareholders exercise their franchise.’

Companies will disclose how compensation policies relate to risk; the qualifications of directors, executive officers and nominees; company leadership structure; and potential conflicts of interests of compensation consultants.

The Securities and Exchange Commission (SEC) has voted to propose rule changes that will allow shareholders to nominate directors to the boards of US companies. Three previous attempts to put proposals on the table met with dissent. However, the economic crisis has led the SEC to rethink whether boards are exercising sufficient oversight over companies they control.

No say in nominations

At present, public companies elect their board of directors based on support for nominations put forward by management. The company sends out proxy materials to inform shareholders of eligible candidates, and this information is then used by shareholders to make a decision on how to cast their vote. Shareholders may find themselves voting for someone they feel is less than perfect for the role simply because they have had no say in who should be considered.

The only viable route for shareholders who want to nominate a different candidate is to arrange their own proxy voting arrangements, at their own expense. Alternatively, many companies allow shareholders to put forward their nominations at the annual shareholder

meeting where the election takes place. However, by this time proxy votes will already have been cast, so there is little chance of a successful outcome.

The proposals

Amendments to exchange rules would give eligible shareholders the ability to nominate directors at companies they own. Their director nominations would be included in the company’s proxy materials provided this is not prohibited under state law or a company’s bylaws.

Shareholders who wish to have their nominees included in the proxy

materials would need to own between 1% and 5% of a company’s voting securities. However, they would be able to aggregate holdings to meet the applicable thresholds.

In addition, shareholders would be required to have held their shares for at least a year, and sign a statement declaring their intent to continue to own their shares through the annual meeting at which directors are elected. They would also have to certify that they were not holding their stock for the purpose of changing control of the company.

US

Proxy voting process ripe for improvement

US

Push for more shareholder power


OPINION

G20 action on global crisisGraham Gilmour analyses the outcomes of the G20 summit in April and the implications for regulatory scrutiny and standard setting

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The UK hosted the summit of the Group of Twenty (G20) leading developed and developing nations in London earlier this year. The event was a follow-up to the G20’s Washington summit last November, which was called to analyse and respond to the global financial crisis.

At the April summit, the leaders issued a number of new communications – each of which has an impact on accounting and financial reporting.

The main communiqué called on the accounting standard setters ‘to work urgently with supervisors and regulators to improve standards on valuation and provisioning and achieve a single set of high-quality global accounting standards.’

The leaders also agreed a Declaration on strengthening the financial system that covered a number of areas including:

Setting up an expanded and enhanced Financial Stability •Board (formerly the Financial Stability Forum) with a broadened mandate to promote financial stability

Strengthening international frameworks for prudential •regulation and cross-border regulatory cooperation

Including all systemically important financial institutions, •markets and instruments within the scope of appropriate regulation and oversight

Endorsing international principles on pay and compensation •in significant financial institutions

Taking action on tax havens and non-cooperative jurisdictions•

Introducing more effective oversight of credit rating agencies•

Agreeing that accounting standard setters should improve •standards in a number of respects (see box below).

Taken as a package, the recommendations demonstrate the reality in the current economic environment of continued regulatory and political scrutiny of accounting standards and standard setting. The IASB reacted to the outcome of the April summit by issuing a paper showing how it proposed to respond to each of the recommendations, recognising that many actions were already in progress. Having to devote time and resources to addressing the accounting matters arising from the financial crisis will continue to have a significant impact on the board’s work programme and priorities.

Scrutiny and pressure will remain intensePolitical pressure on accounting standard setting is likely to continue to be at its most intense in Europe. The EU finance ministers issued a statement very shortly after the G20 summit, welcoming and reinforcing its conclusions, but also flagging up concerns about the need to maintain a ‘level playing field’ between IFRS and US GAAP.

A further important outcome from the G20 process is the growing importance of the strengthened Financial Stability Board. The FSB will be undertaking joint strategic reviews of the policy development work of the various international standard setting bodies, including the IASB. There is a keenness in political circles to ensure that organisations such as the Basel Committee on Banking Supervision, IOSCO and the IASB work together more closely, under the umbrella of the FSB, in the interests of maintaining the stability of the financial system.

The next G20 summit will take place in Pittsburgh, US in September. It is likely that attendees will pick up on many of these themes again.

Graham Gilmour is a director in PwC’s Regulatory and Public Policy team.

G20 declaration – impact on accountingWe have agreed that the accounting standard setters should improve standards for the valuation of financial instruments based on their liquidity and investors’ holding horizons, while reaffirming the framework of fair value accounting.

We also welcome the FSF recommendations on pro-cyclicality that address accounting issues. We have agreed that accounting standard setters should take action by the end of 2009 to:

Reduce the complexity of accounting standards for •financial instruments

Strengthen accounting recognition of loan-loss provisions •by incorporating a broader range of credit information

Improve accounting standards for provisioning, •off-balance sheet exposures and valuation uncertainty

Achieve clarity and consistency in the application of •valuation standards internationally, working with supervisors

Make significant progress towards a single set of •high-quality global accounting standards

Improve involvement of stakeholders within the framework •of the independent accounting standard-setting process, including prudential regulators and emerging markets, through the IASB’s constitutional review.

www.g20.org

Graham Gilmour

Financial ReportingFINANCIAL CRISIS ADVISORY GROUP

Standard setters seek help to address financial crisis The International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) set up a high-level group to advise them on financial reporting issues arising from the global financial crisis. The group has just delivered its advice, following six months of discussion and consultation.

The Financial Crisis Advisory Group (FCAG) is co-chaired by former SEC commissioner Harvey Goldschmid and Hans Hoogervorst, chairman of the Netherlands Authority for the Financial Markets. The chairmen are joined by recognised leaders from business and government, with a broad range of experience in international financial markets and an interest in the transparency of financial reporting information.

The primary mandate of the FCAG was to advise the IASB and the FASB about the standard-setting implications of the global financial crisis and potential changes to the global regulatory environment. The group also considered how improvements in financial reporting could help investor confidence in financial markets, and identified significant accounting issues that require the immediate attention of the boards, as well as issues for longer-term consideration.

The group met six times and concentrated on areas such as fair value, loan provisioning, structured entities and other off-balance sheet

vehicles. It also looked at oversight, the standard-setting process in difficult times, and convergence of IFRS and US GAAP.

To help inform its deliberations, the group sought views from constituents on a number of accounting and reporting matters that have been cited as related to the financial crisis. These include questions on dynamic loan provisioning, off-balance sheet items, and fair value.

The FCAG’s report to the boards was issued on 28 July and contains a number of recommendations in four broad areas: effective financial reporting and the intersection with prudential reporting; the limitations of financial reporting; convergence; and standard-setter independence and accountability.

The report is generally supportive of the actions of the two boards. The FCAG supports a single set of high-quality

global accounting standards and urges the boards to reach, as their highest priority, converged solutions on financial instruments.

Commenting on the relationship between financial and prudential reporting, Pauline Wallace, PwC UK public policy and regulatory partner, said: ‘We concur that there are different but overlapping interests between financial market participants and prudential regulators. As a result, the financial system and capital markets will benefit from regular dialogue between accounting standards setters and prudential regulators. We welcome the FCAG's support for the boards' continuing efforts to consult with the regulatory community.’

Although the group’s initial mandate has now been discharged, the FCAG plans to meet again in December and will review progress made by the two boards in the intervening period.

News & Opinion


A Global Accounting Alliance (GAA) report – Getting to the heart of the issue: Can financial reporting be made simpler and more useful? – sheds light on stakeholders’ views on the barriers to the practical application of a more principles-based accounting regime and how the current complexity and detail in listed company financial statements could be reduced, focusing on better communication with financial statement users.

To gather views on how financial reporting could be simplified, a series of interviews were conducted, including with regulators, the European Commission, accountants and auditors.

The interviews revealed a clear consensus that principles-based standards are the

way forward, supported by a framework for accounting standards that enables professional judgement to become the driving force in financial reporting statements. The report also highlighted a need for a change in culture and mindset from the accounting profession, business and regulators to achieve this. A clear consensus was also expressed for greater legal protection around the exercise of judgement, and a support mechanism to achieve this.

The research revealed strong support for changing the nature of financial statements to reduce complexity, with interviewees highlighting the need for ‘communication’ to be the driving force behind them. There was a desire for clearer language, less jargon and

coded language and a focus on clarity and transparency in financial statements.

The interviews took place before the worst of the financial market collapse. At the time, there was clear consensus that principles-based standards were the way forward. The credit crisis may have led some to question whether this is still the case. However, the GAA is organising roundtable events to discuss ideas emerging from the research, and is keen to continue the debate with stakeholders in the financial reporting community.

The Global Accounting Alliance (GAA) is an alliance of leading professional accountancy bodies in significant capital markets, representing over 750,000 professional accountants in over 140 countries.

The US Securities and Exchange Commission has mandated XBRL for all public companies’ and mutual funds’ reporting. The US joins the growing band of countries that have already mandated XBRL for some companies, including Spain, Belgium, Japan, China, South Korea and Singapore. The new SEC rules will apply to overseas companies with US listings.

The 500 largest public companies will be the first to provide interactive data reports, starting with their first quarterly reports from 15 June 2009. The remaining US GAAP filers will be required to come on board over a two-year, phased schedule. IFRS reporters will start their XBRL reporting from 15 June 2011, and by the end of that year all US public companies will have filed interactive data financial statements.

Mutual funds will be required to include XBRL tagging in 2011 to provide investors with information on objectives and strategies, risks, performance and costs. All registrants must concurrently also post the XBRL information as ‘exhibits’ on their public website, if they have one.

Investors will benefit

‘Interactive data will help provide investors with the information they need, rather than just a warehouse of forms on which they can try to find it,’ said former SEC chairman Christopher Cox. ‘Interactive data will enable new analysis tools to put key information at every investor’s fingertips within seconds, exactly as the investor wishes to see it.’

Companies will have to tag their data for websites as well as SEC reporting. Investors will need to familiarise themselves with the enhanced features of their tagging tools that make the most of interactive data for faster access, more accurate and complete searches, enhanced analysis, and better comparison of business performance across reporting periods and industries.

Standardisation improves reporting

Companies that take the ‘bolt-on’ approach to compliance with this reporting regulation will add some time and cost but may miss key benefits. ‘XBRL can be used to standardise and streamline currently pervasive manual internal processes and controls,’ said PwC partner Mike Willis.

‘US registrants should make the most of this compliance transition to lower costs and improve process efficiencies. Regulators should consider collaborating on the use of relevant taxonomies (say IFRS) to converge compliance requirements. This will smooth the path for future convergence efforts and provide cost savings for both producers and consumers.’

UK: XBRL by the back door Companies House has not yet mandated the use of XBRL for financial reporting in the UK (small and Medium-Sized Enterprises have the option to do so) – but the tax authorities have. HM Revenue and Customs proposes that corporate tax returns for periods ending after 31 March 2010, filed after 31 March 2011, will need to use XBRL.

This requirement covers the CT600 return, the tax computation and the statutory accounts. A separate tagging exercise is likely to have to be carried out for the statutory accounts and many companies have said they are concerned about the costs of making the change.

GLOBAL ACCOUNTING ALLIANCE

Breaking down barriers to change

US & UK

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A European survey on the information needs of investors, lenders and related advisers and the usefulness of financial information available to that group revealed financial statements and management commentary as the preferred sources for decision-making.

The survey was conducted by staff at the French standard setter, the Conseil National de la Comptabilité (CNC) as part of Europe’s Pro-active Accounting Issues in Europe (PAAinE) initiative on the IASB’s conceptual framework for accounting. It set out to establish how useful users find the different forms of financial information, what improvements they would like to see, and to question the validity of the IASB and the FASB assumptions relating to the cash flow and stewardship objectives of financial reporting.

Survey respondents came from ten European countries, with 43% identifying

themselves as analysts. 22% as investors, 13% lenders and 22% ‘others’. PAAinE had identified this group as the primary users of financial reporting, based on statements in the joint boards’ discussion paper on a conceptual framework for financial reporting, issued in July 2006.

Press releases, economic surveys and market information were found to be less useful than financial statements and management commentary, with some rating management commentary as the most useful of all. In general, users find both the balance sheet and income statement helpful, with certain users preferring the income statement.

Despite IFRS not requiring companies to disclose the results of operating activities, this was highlighted as being the most useful indicator in the financial statements (84% of respondents). Also

mentioned were revenue (72%), net income (71%), debt/equity ratio (68%), liquidity ratios (59%), earnings per share (56%) and cash flows (29%).

Users pointed out that decision-useful financial information could be improved by stabilising reporting standards and improving comparability and simplicity of reporting through better presentation that highlighted key data and disclosures. In particular, user comment focused on disclosure of risk management information, better quality prospective information, and highlighting the trends in growth and profitability.

The PAAinE is an initiative that was set up by EFRAG and the European national standard setters to stimulate debate on important items on the IASB agenda at an early stage in the standard-setting process.

The Federation of European Accountants (FEE) has voiced concern over the IASB’s strategy, believing that the continued focus on convergence is distracting the board from its vision for a single set of high-quality financial reporting standards for global use.

The recent publication of a policy statement – Future approach to setting global financial reporting standards – puts forward collective views from the European accounting profession. It sets out to explain why FEE believes that convergence should no longer be a key driver in the financial reporting debate, and suggests a model that would better serve preparers and users of IFRS in the future. In short, this would be achieved through greater input from national standard setters and a reduction in the number of active projects on the board’s agenda.

‘FEE believes that the G20 should urge the IASB to use all existing high-quality accounting standard-setting expertise from around the world, including those within the FASB and EFRAG, to work

together on new global solutions in those areas that really matter to investors,’ emphasised Hans van Damme, FEE president. ‘A joint development and parallel implementation by all stakeholders of new principles-based global standards is the best way forward to develop high-quality standards and to deliver a level playing field.’

Convergence

FEE recognises that the IASB’s convergence strategy has delivered good results since its creation in 2005, but believes we have now entered a period of diminishing returns. The dominance of convergence projects on the IASB’s work programme has led to concentration on some longer-term IASB/FASB projects that, although important, are not necessarily urgent. Set against that, some of the short-term projects have led to piecemeal and often minor revisions that have not always delivered improvements and have made it harder for investors to eliminate increasingly smaller differences between IFRS and other standards.

Setting the IASB work plan

FEE believes the IASB should launch a public consultation on its work plan, to seek views on priorities and significantly reduce the number of active projects on its agenda. It wants to see a future work plan that sets clear priorities for new standards and justifies the need for change to stakeholders in terms of measurable cost/benefits. FEE also calls for a specific procedure to add issues to the IASB’s work programme and to remove them and to ensure that public consultation plays a role in driving priority items onto the agenda.

EUROPE

Survey of users’ information needs

FEE

Call for change of direction in standard setting


IASB

IFRS under review – looking to the future

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Standard under review Can I still comment? Overview of proposals

Financial crisis-related projects

Derecognition No. Comments on ED currently being considered by the IASB

Part of the IASB’s response to the global financial crisis and conclusions of G20. Will result in amendments to IAS 39 and IFRS 7. Proposals seek to improve ways of assessing whether an entity should derecognise assets or not, and explain risks related to on and off balance sheet financial instruments.

Consolidation No. Revised standard expected Q4 2009

Part of the IASB’s response to the global financial crisis and conclusions of G20.The revised standard will provide a single IFRS on consolidation combining IAS 27 and SIC 12. The proposals revise the definition of controls, and expand disclosure requirements to give an overall view of companies’ involvement with consolidated and unconsolidated entities.

Credit risk in liability measurement

Yes. Staff paper issued June 2009 for comment by 1 September 2009

The Invitation to Comment is accompanied by a staff paper that describes the most common arguments for and against including credit risk in measuring liabilities.

Fair value measurement guidance

Yes. ED issued and comment invited by 28 September 2009

Proposals to replace fair value measurement guidance contained in individual IFRSs with a single, unified definition of fair value, as well as further authoritative guidance on the application of fair value measurement in inactive markets. (See page 20)

Financial instruments: Replacement of IAS 39

Phase 1: Classification and measurement of financial instruments

Yes. ED issued 14 July 2009 for comment by 14 September 2009

Financial instruments would be classified into two measurement categories: fair value or amortised cost. (See page 21)

Phase 2: Impairment methodology

Yes. Request for comments on the feasibility of an expected loss model by October 2009

One impairment method would be applied to all financial assets measured at amortised cost – a major simplification compared with today’s requirements. The IASB is seeking information on the feasibility of an expected loss model.

Phase 3: Hedge accounting Yes. ED due December 2009 Direction of this project will be decided by the outcome of phases 1 and 2.

New standards

Revenue recognition Yes. ED expected first half of 2010

See page 28

Leases Yes. ED expected first half of 2010

IASB/FASB proposals for a possible new approach to lease accounting based on the principle that all leases give rise to liabilities for future rental payments and assets (the right to use the leased asset) that should be recognised in an entity’s statement of financial position (see page 20).

Income taxes No. Comments on ED being considered by the IASB

The objective is to clarify and improve IAS 12 and to reduce the differences with US GAAP for income tax, by removing most of the exceptions.

Emissions trading schemes Yes. ED due Q4 2009 IASB/FASB joint project to develop comprehensive guidance on accounting for emissions trading schemes. These are designed to achieve a reduction of greenhouse gases through the use of tradable emission permits.

Financial statement presentation

Yes. Project being undertaken in 3 phases (see page 25). Phase 1: completed; Phase 2: DP comment period closed April 2009; Phase 3 ED expected first half of 2010.

Financial instruments with characteristics of equity

Yes. ED expected Q4 2009 This is a joint project with the FASB. The boards are working together to develop and publish an exposure draft.

Insurance contracts Yes. ED expected Q4 2009 Phase 1 completed with the publication of IFRS 4, Insurance Contracts. In phase II, the current phase, the board intends to develop a standard that will replace IFRS 4 and provide a basis for consistent accounting for insurance contracts in the longer term.

Joint ventures No. IFRS expected Q3 2009 Comments to an earlier exposure draft revealed differences in how respondents assessed the likely effect of the proposals and how the board assessed the implications. Clarification is being sought from respondents before proceeding to a final standard.

Management commentary Yes. ED issued June 2009. Comment period closes 1 March 2010

See page 41, in Broader Reporting news.

Post-employment benefits (including pensions)

Yes. ED expected Q3 2009 The IASB is undertaking a comprehensive review of IAS 19 with a view to completing the revision by 2011. The project is in two parts. A discussion paper on the first part concerning matters that the board believes can be addressed quickly was issued in 2008 and an ED is being prepared. The timing for Part 2 remains uncertain.

Rate-regulated activities Yes. ED expected Q3 2009 The project objective is to develop a standard on rate-regulated activities that clarifies whether regulated entities could or should recognise an asset or a liability as a result of rate regulation.


The Trustees of the International Accounting Standards Committee Foundation (IASCF – the parent trustee body of the IASB) have commenced the second stage of their five-yearly review of the constitution.

As reported in previous issues of World Watch, the constitutional review is being conducted in two parts. Part 1, which the trustees announced in January had been completed, comprised the creation of a Monitoring Board (MB) of regulators – aimed at providing political-level accountability for the organisation – together with changes to the size and composition of the IASB.

The trustees held their first meeting with the Monitoring Board at the beginning of April. The five MB members comprise two representatives from IOSCO (from their Technical and Emerging Markets committees) and one each from the European Commission, the Japanese Financial Services Agency and the US SEC. The Basel Committee is an official observer at the MB, but has no voting rights. The Trustees and the MB

have drafted a Memorandum of Understanding that will set out the formal basis for their discussions, but this has not yet been officially signed by all the MB members.

Questions of responsibility

Part 2 of the review covers all the other more detailed aspects of the constitution, including the responsibilities of the board and trustees, and the arrangements for due process on technical pronouncements. The first consultation document on Part 2 was issued in December, for response by the end of March. This preliminary consultation posed a dozen questions on specific aspects, including:

Should the organisation’s primary •objective remain the development of accounting standards to support financial reporting to help capital market participants in making economic decisions?

Should the constitution make specific •reference to a principles-based approach to drafting accounting standards?

Should the independence of the •IASB’s standard-setting process and its ability to have full discretion to pursue the technical agenda remain essential elements?

Should a separate ‘fast-track’ •procedure be created for changes in IFRSs in case of great urgency?

In addition to these and other specific questions, the consultation document also invited respondents to suggest any other matters for consideration by the trustees. The trustees considered the responses at their July meeting – with a view to further consultation and roundtables in the period August-December 2009, with any changes aimed to take effect next year.

The timing of the constitutional review is significant, given that the governance of the IASB has come under the scrutiny of the G20 group of leaders of the major developed and developing economies (see article on page 11).

Funds dependent on action

It remains to be seen whether the changes already announced by the trustees and the process and anticipated scope for Part 2 of the review will be sufficiently far-reaching to satisfy stakeholders, particularly in Europe, who have pressed for more to be done. EU Commissioner Charlie McCreevy noted in a speech in May that EU funding for the IASCF ‘would be conditional upon further concrete improvements in governance’.

He highlighted three areas that in his view warranted further attention: the number of board members from countries that actually apply IFRS; the number of board members with practical experience rather than theoreticians; and improved consultation and due process.

More information on the IASCF constitutional review can be found at: www.iasb.org

IASCF

Trustees move to second stage of Constitutional Review


Singapore, Ecuador, Taiwan and Argentina have made progress towards adoption of IFRS.

Singapore is to fully converge Singapore Financial Reporting Standards (SFRS) with IFRS by 2012. The decision was made in May 2009 by the Accounting Standards Council, and will apply to all locally incorporated companies listed on the Singapore stock exchange. SFAS are already closely aligned to IFRS with only two major areas of difference – the way revenue is recognised for the sale of condominiums, and how equity for cooperatives is recognised.

Ecuador will start to phase in IFRS from 1 January 2010. A recent resolution passed by the Superintendent of Companies requires entities subject to the regulations of the stock market and all external auditors to adopt from this date. Consolidated groups, holding companies, state-owned entities and foreign-invested companies, plus any company with assets in excess of US$4m dollars at 31 December 2007, are required to adopt from 1 January 2011. All other companies will transition to IFRS from 1 January 2012.

Taiwan has announced an IFRS adoption roadmap. The Financial Supervisory Commission is proposing a two-phased mandatory adoption timetable. Phase 1 companies (including listed entities, and some financial institutions) would adopt IFRS in 2013, with early adoption permitted from 2012 (with conditions). Phase II includes unlisted companies and requires IFRS financial statements from 2015, although early adoption would be permitted from 2013.

Argentina is expected to adopt a resolution that will require listed entities to adopt IFRS for financial statements from 1 January 2011. The resolution was issued by the national accounting standard setter in March and states that the IASB’s Spanish translation of IFRS must be followed. It also allows unlisted entities to use IFRS if they wish. The resolution will go before the National Securities Commission for approval later this year.

The IFRS for small and medium-sized entities standard is now available. The standard is intended to be easier to apply, accessible to the majority of private entities and, with the IFRS ‘branding’, will be internationally recognised and accepted.

The exposure draft issued in 2007 attracted a large number of comments from potential users. The board spent a year deliberating the many technical topics before coming up with a final standard that is less complex than the original exposure draft. The resulting standard demonstrates that the IASB has recognised the different needs of intended users. That is:

The different character of a •private entity compared to a listed entity with public securities market responsibilities

Cost-benefit considerations relating •to the accounting expertise available to private entities.

‘There is now a greater differential between the final SME standard and full IFRS,’ according to Hugo van den Ende, PwC partner and member of the IASB Working Group on IFRS for Small and Medium-sized Entities. ‘For example, the new standard permits amortisation of goodwill whereas full IFRS requires the impairment approach. Simplification in the standard was very much desired, as private entities can now often avoid sophisticated and expensive impairment calculations,’ he continued. ‘Other key simplifications can be found in the sections on financial instruments and defined benefit obligations. These and other decisions will further lower the barrier for private entities to apply IFRS for SMEs.’

The IASB has publicly stated that there will be no amendments to the new standard within the first two years of implementation. After that period, an assessment of implementation issues encountered by a broad range of entities will be undertaken.

Future changes to full IFRS will not necessarily mean changes to simplified IFRS. It has been decided, for example, that borrowing costs should be

recognised as an expense whereas full IFRS requires the capitalisation of borrowing costs. Similarly, under the SME standard entities are allowed to apply the relatively simple indirect method for the cash-flow statement, whereas it is expected that in the near future the direct method will be the only acceptable alternative in full IFRS.

‘We now know that the standard for SMEs is manageable,’ said Allan Watson, global PwC private company leader. ‘We think the new standard has clear benefits for investors, lenders and those seeking to raise finance through the transparency afforded by a consistently applied, global set of financial reporting standards,’ he added. ‘The advantages to mid-tier companies around the world applying IFRS include increased comparability, more convenient cross-border acquisitions, improved relationships with overseas customers and improved negotiations with finance providers.’

The IASB is advising jurisdictions not to rush to make the standard mandatory in 2009. It recommends allowing time for companies and auditors to familiarise themselves with the contents and to plan their transition process.

Mr Van den Ende predicts that the standard will be adopted in the near future by a number of territories and companies, but adds a word of caution for those keen to adopt: ‘It is very important to consider the consequences for your company. The starting point for a UK-based private company, where the current GAAP is quite close to IFRS, will probably be very different from the starting point for Eastern European companies with reporting standards that are further away from full IFRS.’

For further information see pwc.com, including IFRS for SMEs: Pocket guide 2009.

IFRS FOR SUBSIDIARIES AND PRIVATE COMPANIES

Simplified IFRS

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IFRS

Country updates


MALAYSIA

Islamic finance on the agendaWhen Asian regional standard setters met with members of the International Accounting Standards Board in Kuala Lumpur, a topic highlighted by Malaysia was the application of IFRS to Islamic finance. As a result of the meeting, IASB chairman Sir David Tweedie decided to allocate resources to consider the implication of Islamic finance products to the IFRS framework.

The Malaysian Accounting Standards Board (MASB) acknowledges that a primary concern of financial reporting from an Islamic perspective is the accounting treatment of Shariah-compliant transactions and events. A MASB working group on Islamic financial reporting was formed some years ago, to consider this issue. Its preliminary view is that the primary difference between financial reporting from an Islamic perspective and its conventional counterpart is the extent of the information disclosed rather than recognition and measurement.

‘We do not need another set of financial reporting standards,’ said Mohammad Faiz Azmi, PricewaterhouseCoopers global Islamic finance leader, chairman of MASB and a member of the MASB working group on Islamic financial reporting. ‘We do, however, need to consider how Islamic financial products can be reflected properly under IFRS without tainting their compliance with Shariah.’

In 2008, the global Islamic financial assets of the top 500 Islamic financial institutions were estimated to be $640 billion. ‘There is a large portion of global funds currently untapped by global capital markets because there is a lack of suitable “halal” investments for muslims to invest in,’ explained Mr Faiz. ‘Islamic finance is about integrating communities of all faiths into the global economy, including minorities into local economic activities and providing an alternative faith-based choice for muslims. Islamic products will also be of interest to non-muslims as alternative investments.’

JAPAN

Roadmap provides direction for IFRS

The Financial Services Agency of Japan has released a roadmap for the adoption of IFRS. Certain Japanese listed companies will be permitted to voluntarily adopt IFRS for their consolidated financial statements from the financial year ended 31 March 2010.

Voluntary adoption is likely to be welcomed by Japan’s listed entities that also have a US or European listing, and others with global business operations.

The release of the roadmap by the FSA in June 2009 recognises Japan’s progress towards the adoption of IFRS since the Accounting Standards Board of Japan (ASBJ) and the International Accounting Standards Board (IASB) agreed to work on convergence in 2005.

Since the Tokyo agreement was signed in 2007, Japan has undertaken to accelerate convergence between Japanese GAAP and IFRS with elimination by 2008 of major differences. Remaining differences will be removed by 30 June 2011. This agreement also laid the foundations for Japan to become more closely involved in the IASB’s standard-setting activities.

The European Commission’s decision in December 2008 that Japanese GAAP is ‘equivalent’ to IFRS is evidence of the progress made to date on the convergence.

The FSA’s roadmap highlights Japan’s need for continuing convergence to be internationally comparable and

competitive in the capital markets. It sets a timeline for potential mandatory adoption of IFRS for listed companies. The FSA aims to make a decision on this around 2012, with a view to making adoption mandatory 3-4 years later.

The FSA has acknowledged that it will need to be satisfied that sufficient progress has been made in the International Accounting Standard Committee Foundation’s governance reform programme before a decision is reached on which companies will be eligible to adopt IFRS, and when. Accounting developments in the US and Europe will also influence the decision.

The FSA has set out guidelines covering the scope of voluntary adoption for listed companies. These include:

Preparation and disclosure of •appropriate financial statements on an on-going basis

Establishment of an internal •framework for IFRS-based reporting

Development of in-house accounting •procedures based on IFRS, with relevant disclosure of this in the annual report

Listed companies with financial/•operational activities conducted internationally, and their listed subsidiaries.

The IFRS text must be translated into Japanese, according to the FSA report, so that it can be understood by investors and others.


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EC

Financial reporting in a changing world

REPORTING

Trying to please too many users?

Key financial regulators, standard setters, preparers, investors and other interested parties gathered at a recent conference – Financial reporting in a changing world – hosted by the European Commission.

The conference took place in Brussels over two days in May. European Commissioner Charlie McCreevy opened the event with a keynote address establishing key themes of the conference: the international standard-setting system; accounting and the global financial crisis; and accounting for the future.

Mr McCreevy set the stage: ‘The crisis has thrown up certain issues which need to be addressed. Did the accounting rules accelerate the crisis or aggravate it? Moving forward, there are also medium- to long-term reflections, such as to what extent buffers should be in place and

what model we should use for this. Another broader issue is whether the current corporate reporting model serves the information needs of investors and those that run the businesses.’

Accounting issues raised by the financial crisis featured strongly on the second day, with pro-cyclicality of financial statements and possible solutions such as dynamic provisioning dominating the day’s speeches and panel discussion. Debate evolved over whether loan loss provisioning provides the right solution to prevent pro-cyclicality in bank portfolios and whether accounting and prudential rules should be aligned or remain separate. Mr McCreevy had already highlighted these as priority items on the Commission’s agenda.

David Phillips, PwC senior corporate reporting partner, delivered his vision for the future of the corporate reporting

model. He emphasised that there is more to financial reporting than just accounting, and asked the audience to consider what the reporting model should look like if it is to sustain the needs of society over the next 50 years. He suggested that the information set that underpins regulatory corporate reporting, investor relations activity and sustainability reporting should be considered as one information set.

Other panellists gave airtime to how to keep financial reporting relevant; the IASB’s conceptual framework and presentation of financial and non-financial information; the role of fair value as a methodology to deliver the best information to users; and views from the banking industry.

Further information on the conference can be found on the European Commission’s website at http://ec.europa.eu

The current reporting model suffers from aiming to please too many users, according to a discussion paper from the Financial Reporting Council – Louder than words: Principles and actions for making corporate reports less complex and more relevant. The FRC, the UK’s regulator responsible for reporting and governance, sees reporting as a critical mechanism in the workings of capital markets but suggests that the model needs to be refocused on providing investors with the information that is useful for making resource allocation decisions and assessing management stewardship.

The FRC’s paper is the output of a year’s work looking at the complexity and decreasing relevance of financial reports.

The recommendations in the paper set out a commonsense approach to reducing complexity based on eight guiding principles – four for improving regulations and four for better communication in reports.

Principles for regulation:

Relevant information reflecting the •reality of the business

Limiting constant change and focusing •on cost-effective interventions

Understanding what other regulators •are doing in this area

Delivering an understandable •solution (keeping regulations simple and user-friendly).

Principles for communication: focused; open and honest; clear and understandable; interesting and engaging.

The FRC recognises that there is no easy solution and calls on all those involved in corporate reporting to make concerted efforts. Specific calls for action include:

Improve cash flow and net debt reporting •

Ensure disclosure requirements are •relevant and proportionate to the risks

Ensure requirements for wholly-owned •subsidiaries’ reporting are targeted and proportionate

Improve usability of IFRS – reorganise •standards around accounting topics, with a focus on structure and outcomes

Cut clutter – get rid of immaterial •disclosures and ensure regulation does not add to the problem.

Feedback on the discussion paper is requested by 30 October 2009. See www.frc.org.uk


IASB

Leases – a preview PENSIONS

Downturn impact on assumptions for pensions

Proposals on lease accounting are expected to affect nearly all large companies. Under the proposed standard, all leases will be treated in a similar way to finance leases today. Operating lease accounting will be eliminated entirely.

The IASB is currently considering responses to its leasing discussion paper and is expected to issue an exposure draft in 2010. A final standard is unlikely to be issued until 2011.

The discussion paper focuses primarily on lessee accounting. The boards argue that lessor accounting is more appropriately addressed in the revenue recognition project. For lessees, the high-level direction of the leasing project is clear – the boards have tentatively settled on a right-of-use model. This model would require the lessee to recognise an asset representing its right to use the leased asset, and a corresponding liability for its obligation to pay rent. Under the right-of-use model, operating lease accounting under IAS 17 would be eliminated, and lessees would account for all leases in a similar way to that used for finance leases today.

Issues that remain are the practical problems associated with large numbers of small value and short duration leases, which can be material when aggregated.

Similarly, the boards have set out their preliminary views on some of the common features in lease arrangements, such as options to extend the lease, contingent rental payments, and options

to purchase, but such matters remain contentious even among board members.

Potential implications

The proposals would have the greatest impact on lessees with significant amounts of ‘large-ticket’ items, such as real estate, manufacturing equipment, power plants, aircraft, railcars and ships. However, they would also affect virtually every company, including those that lease computer or telecommunications equipment, copiers and office furniture.

The proposed model would require lessees to re-measure their lease obligation at each balance sheet date, based on updated estimates. This would require incremental effort compared to the current model, where lease accounting is set at inception and revisited only if there is a modification or extension of the lease.

The right-of-use model would also impact on financial statement presentation and financial metrics, including many that tie directly to debt covenants or compensation arrangements.

‘Management teams may need to re-examine their “lease versus buy” decisions as the economics of leases change as a result of the proposals,’ said PwC director John Williamson. ‘Management will also need to consider the implications of these potential changes as they negotiate long-term leases, even before the effective date of the new standard. It is unlikely that accounting for existing leases will be grandfathered.’

The need to reduce pension costs and risks in the current economic environment has resulted in more employers either altering the design of defined benefit schemes or closing them to future accrual. In addition, employers are increasingly looking at removing pension risk through buy-in or buy-out arrangements, offering members inducements to transfer or give up benefits, and hedging investments and longevity.

Assumptions mean more risk disclosures

The significant range in actuarial assumptions adopted for pension accounting purposes calls for greater disclosure of pension risks in employers’ financial statements.

Recent press coverage and market analysis about companies carrying significant pensions burdens has highlighted the huge range of assumptions being adopted, and that some companies are adopting optimistic assumptions to reduce the pensions deficit on their balance sheets. In addition, liabilities presented in financial statements (eg, under IAS 19) are currently much lower than those being agreed with pension scheme trustees for scheme funding purposes. The IASB is proposing possible amendments to pension disclosures to better explain the nature and extent of risks arising from defined benefit plans.

Choosing more optimistic assumptions can significantly reduce the level of pension liabilities disclosed. A 1% increase in the assumption for annual inflation, for example, results in a 20% increase in pension liabilities.

Given the significance of pension deficits to many companies, it is likely that disclosures in annual reports will receive increased scrutiny by regulators going forward.

An exposure draft has been issued to try to create a standard that is a single source of guidance for fair value measurement. The ED does not propose any extension of fair value, and has a definition that is very close to the one currently in IFRS.

Guidance on measuring fair value of some assets, liabilities and equity instruments has been added to IFRSs piecemeal over many years. It is also dispersed across many standards

and is not always consistent. Hence the ED’s objectives are:

To establish a single source of guidance •for all fair value measurements

To clarify the definition of fair value•

To enhance disclosures about fair value.•

Proposed disclosures are extensive, particularly for non-financial assets and liabilities that are not already covered by IFRS 7. This includes a fair value ‘hierarchy’ of inputs into valuations, with disclosures about movements between different levels of that hierarchy. The ED also proposes disclosures about assets that have a ‘highest and best use’ that is different from their current use. The response period ends on 28 September 2009.

IASB

Fair value in one place


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FINANCIAL CRISIS

Dynamic provisioning – suitable response to the crisis?

FINANCIAL INSTRUMENTS

IASB addresses classification and measurement

Dynamic provisioning has been in the news extensively of late. It is seen as part of the proposed response to the financial crisis, or at least a method of accounting for banks that will ‘help’ by reducing the reported swings in capital and results between good times and bad. Yet it is not a well-defined term. It is generally taken to mean one of two things:

Affecting reported profit by charging •the income statement and building up a reserve (or is it more like a provision?) in good times, and doing the reverse in a downturn. The idea is to build up the bank’s capital so that it can better withstand a downturn. It also has the effect of dampening the swing of profits and losses. It can be viewed as a method of reporting losses on a ‘expected loss’ approach as opposed to IAS 39’s ‘incurred loss’ approach

Not affecting reported profits but •merely making a reserve transfer between retained income and a special reserve. The idea is to regard this special reserve as part of the bank’s capital and not distributable.

Although this concept can easily be trivialised by conjuring images of ‘squirrels and nuts’, it is a serious issue. It involves the interaction of (a) regulatory reporting and banking supervision and (b) true and fair reporting.

‘In my view, the second approach is sounder in the context of general purpose reporting,’ said PwC technical partner Peter Holgate. ‘It secures financial reporting as being the true and fair reporting of economic events, and does not confuse the picture by trying to accommodate financial regulation as well.

‘But to arrive at “true and fair” reporting, it is important that the IASB considers carefully whether the “expected loss” approach to impairment of assets should be used rather than the “incurred loss” approach.’

The International Accounting Standards Board (IASB) has published an exposure draft (ED) that proposes a fundamentally new model for the classification and measurement of financial instruments. This ED is the first phase in a longer process to replace IAS 39, the standard that establishes the accounting treatment for financial instruments, in its entirety.

There is a short comment period, ending 14 September 2009, so that the IASB can meet its commitment to respond to G20 recommendations and publish a standard before the year end. The European Commission has recently called for a final standard by November so that changes can be adopted into European law before the year end.

In this phase, the IASB is proposing that financial instruments will be classified into two measurement categories: fair value or amortised cost. Financial instruments will be available for classification into the amortised cost category if they: contain only basic loan features; are managed on a contractual yield basis. All other financial instruments will be measured at fair value.

‘We support the continuing efforts to simplify IAS 39,’ said PwC partner Pauline Wallace. ‘Simplification of accounting standards should not be an objective in its own right, but moves to reduce unnecessary complexity for preparers and users are welcome, provided that they result in the presentation of information that is useful as a basis for economic decision-making. The recent financial crisis has

highlighted problems for both users and preparers in understanding the existing reporting requirements for financial instruments and the data provided.’

The fundamental changes proposed in the ED are likely to have far-reaching implications for companies with significant portfolios of financial instruments, particularly for those in the financial services sector. Proposals are likely to result in reclassifications between measurement categories in both directions – from amortised cost to fair value and from fair value to amortised cost.

The extent of any net impact on the income statement will depend largely on the complexity of the financial instruments that each entity holds and the way in which they are managed.

The proposed changes may be voluntarily adopted by entities in their December 2009 reports; however, they are not expected to be mandatory until January 2012. ED/2009/7 Financial Instruments: Classification and Measurement is available on the ‘Open for comment’ section of www.iasb.org.

The US Financial Accounting Standards Board is also reviewing financial instruments but is expected to issue one ED next year, rather than three. US thinking currently differs from international proposals in that it will propose that more financial instruments are recognised at fair value on the balance sheet. An ED is expected from FASB at the end of 2009.


BRAZIL

Companies grapple with big changesBrazilian listed companies and banks are required to prepare IFRS-compliant financial statements for their 2010 reports. However, many companies have been so focused on applying the major changes to Brazilian GAAP that it has slowed their IFRS conversion projects and could put successful transition at risk.

Brazilian corporate law (Law 11,638) came into effect at the start of 2008 and introduced the most far-reaching amendments to Brazilian Corporate Law (the underlying basis for Brazilian GAAP) for over 30 years (see World Watch, Issue 2 2008). The Law instructed the Brazilian Securities Commission (CVM) to appoint a body to start converging local GAAP with IFRS. The newly formed accounting standard setter, the Comitê de Pronunciamentos Contábeis (CPC), then issued a dozen comprehensive standards that came into effect the same year. The CPC continues to work on a number of new standards to bring Brazilian GAAP more in line with IFRS.

Two GAAPs required

The amended Brazilian corporate law and CPC standards will be the basis for determining minimum mandatory dividend distribution, and other legal issues. This will require parent company financial information to be prepared under Brazilian GAAP in addition to the IFRS consolidated financial statements.

The Brazilian stock exchange (Bovespa) requires registrants listed under the higher corporate governance standards (Level 2 and Novo Mercado) to present audited IFRS or US GAAP financial information reconciled from Brazilian GAAP. As of 30 April 2009, this new rule affected 117 of the 659 companies registered with the CVM, with 54 companies required to present reconciliations to IFRS or US GAAP for their 31 December 2008 financial statements.

By the April deadline, 80% of these registrants had filed the required information and the remainder had requested extensions. Of those that

filed IFRS or US GAAP information, five registrants presented full IFRS financial statements; 20 provided a footnote with a reconciliation from Brazilian GAAP to IFRS, and the remaining 18 companies presented financial information in or reconciled to US GAAP.

‘The next twelve months will witness a considerable workload for the majority of Brazilian listed companies as they grapple with the expanding volume of new Brazilian standards and convert to IFRS at the same time,’ said Kieran McManus, PwC capital markets leader in Brazil.

The trustees of the International Accounting Standards Committee Foundation have announced the appointment of three new full-time members to the International Accounting Standards Board (IASB) from July 2009.

Responding to calls for increased dialogue between standard setters, preparers and users of financial statements, and prudential regulators, the trustees have appointed a senior Brazilian regulator alongside two leading US investment analysts.

Amaro Luiz de Oliveira Gomes leaves his position as head of the financial system regulation department at the Central Bank of Brazil to join the Board. Mr Gomes was instrumental in bringing IFRS adoption to Brazil, both as a senior official at the Central Bank of Brazil and in former roles at the Brazilian Comitê de Pronunciamentos Contábeis (CPC)

and the Steering Committee for Accounting Convergence. He has also been an active proponent of international regulatory cooperation through his work with the Accounting Task Force of the Basel Committee on Banking Supervision, as the Central Bank of Brazil’s representative in the MERCOSUR Sub-Group IV, and as a member of the Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR).

Patrick Finnegan is currently director of the financial reporting policy group at the CFA Institute Centre for Financial Market Integrity, where he leads a team responsible for providing user input into the standard-setting activities of the IASB, the FASB and key regulatory bodies. He has also co-ordinated the work of the Institute’s Corporate Disclosure Policy Council, which reviews

and comments on financial reporting policy initiatives. Mr Finnegan previously worked at Moody’s Investors Service, as a managing director in the Corporate Finance Group and as a senior analyst in the Financial Institutions Group.

Patricia McConnell has spent 32 years in Bear Stearns’ Equity Research Group. Ms McConnell has established herself as one of the leading analysts in the US on issues related to accounting, with Institutional Investor magazine ranking her the leading US analyst on accounting and tax matters for 16 consecutive years. Her career has included terms as a member of the IASB’s Standards Advisory Council, the International Accounting Standards Committee, the CFA Institute’s Corporate Disclosure Policy Council, and the New York Society of Security Analysts.

IASB MEMBERS

New faces at the IASB


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Changes to legislation in Lithuania have opened the door for non-listed companies to present their financial statements under IFRS as an alternative to local GAAP.

With the arrival of a final international standard on IFRS for SMEs, it is likely that other countries will make similar decisions.

The decision was taken primarily to help subsidiaries of listed companies avoid preparing two sets of financial statements – one for international stakeholders and one to comply with Lithuanian law. However, the choice is also welcomed by other non-listed companies. Linas Obuolevieius, finance director of Palink,

a limited liability company and one of the leading retailers in Lithuania, told World Watch that his company appreciated the choice of IFRS or local GAAP (Business Accounting Standards, or BAS). ‘The option will allow us to prepare only one set of IFRS financial statements instead of two sets. This will reduce the burden on our reporting and accounting teams.’

Lithuania has been a supporter of IFRS since the 1990s – banks adopted the framework in 1998, and all listed companies have applied IFRS from 2005 (as an EU requirement). Local GAAP has evolved to closely follow IFRS but is less detailed, with fewer disclosure requirements. The guidance is also less detailed on complex accounting treatments.

Anrej Kosiakov, PwC director and a member of the Accounting Standards Committee Board with the Authority of Audit and Accounting, commented: ‘The opportunity for non-listed companies to choose local GAAP or IFRS is great news overall. However, companies will need to weigh up all the pros and cons before making their decision. They need to assess their knowledge of IFRS, their capability to comply fully with the standards, and the benefits IFRS brings to their company.’ A ‘tainting rule’ within the legislation means that companies will not be able to revert back to local GAAP for five years once IFRS is adopted.

LITHUANIA

More choice for listed companies

AOSSG

Asian-Oceanian standards setters join forcesThe new Asian-Oceanian Standards Setters Group (AOSSG) has been set up by the region’s standard setters to help coordinate efforts to strengthen economic stability in the global public interest. The new group is due to meet for the first time in November. A preparatory meeting took place in April to discuss wide-ranging topics, including:

Setting up the AOSSG and agreement •to invite other countries to participate

Promoting adoption of (or convergence •with) IFRS in the region

Support for the IASB’s work on •high-quality, global accounting standards

Territory positions on IFRS and •their involvement in the development of the standards

Improving the consistency and •comparability of the region’s standards for reporting

How to enhance the quality of •financial reporting and the public’s perception of it.

Participating countries expect to benefit from sharing their experiences of IFRS adoption or convergence. The move will also enable coordinated participation in the development of IFRS, which will help the IASB to consider situations specific to the region and enhance its public accountability.

The founding of the AOSSG was applauded by IASB chairman Sir David Tweedie, who attended the preparatory meeting with the region’s national standard setters.

What impact will simplified IFRS have?

World Watch spoke to Audrius Linartus, director of the Authority of Audit and Accounting, and chairman of the Accounting Standards Committee Board, to find out whether local GAAP might be replaced by the IASB’s proposed IFRS for Small and Medium-sized entities (SMEs).

‘I do not think that the new IFRS for SMEs will be the panacea for all entities for which full IFRSs are too difficult to apply.

‘First of all there is the lack of guidance for the financial reporting preparers – local state institutions do not have the right to comment officially on IFRS. Preparers often choose to stay with local GAAP

because the local authorities provide help with application free of charge.

‘The second problem is that there are no plans to provide standardised financial reporting forms.’

In Mr Linartas’ view, local GAAPs could still be an attractive option for small and medium-sized entities, particularly those that are not part of an international group.

Who's in AOSSG

The national standard setters involved in the preparatory meeting in Beijing came from: Australia, Brunei, China, Indonesia, Japan, Korea, Malaysia, New Zealand, Singapore, Hong Kong and Macau.

The group will next meet in Malaysia in November 2009.


IFRS ADOPTION

Mexico rides the IFRS wave

Mexico has joined the growing band of countries adopting IFRS for listed company reporting, with the National Banking and Securities Commission (CNBV) announcing the country’s move to IFRS from 2012.

The changes apply to listed entities with publicly traded debt or equity securities, with the exception of financial institutions. These will continue to report under the accounting standards issued by the CNBV.

The CNBV also allows foreign listed issuers (except financial institutions) to report under US GAAP or the entity’s local standards, but in these circumstances entities are required to include a document detailing the differences between IFRS and the local standards applied, without quantifying the impact. When local standards other than US GAAP are followed, a reconciliation of the relevant differences between these and IFRS quantifying the impacts will have to be included. Foreign financial institutions could prepare information under IFRS or other GAAP following certain specific rules.

‘Adoption of IFRS provides overseas companies listed in Mexico with a practical, and less costly, alternative to US GAAP,’ commented PwC partner Michelle Orozco. ‘The recent moves by the US SEC to accept IFRS financial statements without reconciliation to US GAAP for foreign issuers provided welcome support for Mexico’s move to IFRS.’

The accounting framework in Mexico has been on a convergence path with IFRS for almost a decade. However, significant differences remain, particularly in areas such as financial instruments, inflation, employee benefits and deferred tax. The recent decision to adopt IFRS as issued by the IASB was taken as part of the country’s commitment to safeguard the financial system, and in the belief that joining the world’s major economies applying a single set of robust financial reporting standards will reap benefits, such as:

Comparability of financial information •between Mexican listed companies and companies in the world’s major economies

Putting Mexican listed entities on the •same level as international companies

through the use of more transparent IFRS disclosures

Improving the consolidation process •for multinational groups listed in Mexico that have overseas IFRS reporting obligations

Easing the process for foreign entities’ •access to the Mexican market.

Industry challenges

‘In terms of the actual conversion, we expect that oil and gas, utilities, telecom, retail and consumer and pharmaceutical industries will have some of the more challenging conversion issues,’ warned Ms Orozco. ‘However, companies from all industries will need to assess the impacts for them and take action to manage their conversion appropriately. While much of Mexican GAAP has been converging with IFRS over the past years, there are still differences in many areas. Our recommendation is that companies begin to develop a diagnostic of major differences, as well as the steps required for conversion. Adoption may seem to be some way off, but many companies will find there is only just enough time if they start taking action now.’


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OPINION

Financial statement presentation proposals – impact on cash flow? The presentation project has generated heated debate within both the corporate and investment communities. Tony Debell offers insight into the proposals

This is the first step towards the development of a new standard to address how information is presented in financial statements. The discussion paper (prepared jointly by the International Accounting Standards Board and US Financial Accounting Standards Board), proposes a number of changes that

will fundamentally alter the way primary statements are prepared.

The most obvious change is a new format applied to the three primary statements – the statement of financial position (the balance sheet); the statement of comprehensive income; and the statement of cash flows. Each statement would be subdivided into ‘operating’, ‘investing’ and ‘financing’ sections. Management would decide how line items should be split between these categories based on how it uses each item in the business. However, once assigned to a particular category, that line item should appear in the same category across each of the primary statements.

One change – the mandatory use of a direct method cash flow statement – has prompted particularly intense discussion. The standard setters argue that the direct method (which resembles your personal bank statement) is the investment community’s preferred presentation of cash flows. Investors need to see ‘actual’ cash flows, they contend, rather than the numbers that, for most companies today, are derived indirectly from operating profit or net income.

This proposal raises a number of questions. First, does the investment community really want the direct method cash flow statement? Second, what is meant by ‘direct’? And finally, what is the cost/benefit of providing cash flow in this format?

What do investors want?On the first point, there is little ambiguity about the position of the international investor body – the CFA Institute Centre for Financial Market Integrity. It has long argued that direct cash flows should be reported. However, there are other studies (including PwC research – Corporate Reporting: Is it what investment professionals expect?), which suggest that the views of investment practitioners are not so clear cut. PwC research found there are advantages and disadvantages to both the direct and indirect approaches, with some investment practitioners indicating that a

combination of the two methods would be ideal. Under this model some key direct lines (eg, cash receipts from customers) would be presented with some critical indirect items (eg, movement in working capital). In addition, many investors have been vocal about the desire to see a reconciliation between changes in net debt and movements in cash flow.

‘Direct’ cash flow needs definingThe second issue – what is meant by ‘direct’ – is creating perhaps even more controversy. How are terms such as ‘cash receipts from customers’ defined? And how should the cash flow numbers be determined?

Should cash receipts from customers be defined in the same way as revenue? This would mean excluding sales tax and cash received from a customer on behalf of another party (eg, the money received by travel agents on behalf of the airlines). What should be included and excluded from the definition of cash should be governed by the informational needs of investors – but this is a debate that has still to take place.

How management actually generates a direct cash flow statement is perhaps the biggest single point of contention within the preparer community. For a small company, it may be simple to literally add up the cash book to determine the cash receipts from customers (often referred to as a ‘direct direct cash flow statement’). But for a multinational concern this may be hard to replicate. An ‘indirect direct’ cash flow statement is thus used by many companies that prepare direct method cash flows where a cash receipts number is derived by adjusting revenue for changes in debtors and non cash items.

Is this sufficient for investor needs? What would be the costs to preparers of generating a ‘direct direct’ cash flow statement?

Does benefit outweigh cost?All this leads to the third question: what are the costs/benefits of either approach? Is moving to the direct method as costly as some claim? And are the benefits to shareholders sufficiently high?

The boards’ proposals are currently presented as Preliminary Views. The next stage will be a review of comments before publication of an exposure draft.

Tony Debell is a partner in the Global Accounting Consulting Services group at PricewaterhouseCoopers.

Tony Debell


OPINION

Opinion varies on IFRS in the USThe move to IFRS in the US may have moved to a slower timetable, but there is still overwhelming support for a single set of global accounting standards. John Barry offers an insight into responses to the SEC’s proposals, and his view on the direction of travel

IFRS is clearly having an impact on many US businesses already, with frequent changes to US GAAP as part of the ongoing convergence process, and widespread IFRS adoption by foreign subsidiaries of US companies. IFRS is also influencing the behaviours of investors, non-US customers, suppliers and others. It was therefore unfortunate that the SEC only received 240 comment letters on its proposed roadmap for IFRS adoption, despite the 60-day extension to allow respondents more time to analyse the issues.

Four main themes emerged from responses to the SEC proposed roadmap. There was overwhelming support for moving to a single set of global accounting standards, but varied opinion on the path to get there. Respondents consistently requested more time to prepare. The independence of the International Accounting Standards Board (IASB) emerged as a priority, and many also recognised that changing to IFRS will have a wider impact than just on financial reporting.

PricewaterhouseCoopers’ letter to the SEC observed that while the premise behind full convergence with no mandatory change date sounds great, it cannot be achieved within any reasonable time frame. The convergence process has already proved to be too slow, costly and in many instances it has not fully eliminated the differences. This sentiment was echoed by Robert Herz, chairman of the US Financial Accounting Standards Board, at the Financial Crisis Advisory Group meeting in April. When asked about the timeline for full convergence between IFRS and US GAAP, he responded that it ‘won’t be reality for another 10 to 15 years’.

Also, a longer-term, convergence-only approach risks derailing the goal of global standards. If the US is not clearly committed to IFRS, IFRS stakeholders are likely to become less willing to cooperate and may disengage from the convergence process. There are signs that they may already be doing this. Thus we think that the US should establish a mandatory date to change to IFRS as soon as reasonably possible, but continue with convergence in the interim.

Support for global standardsThe fact that a large majority of respondents support the goal of moving to a single set of global accounting standards is consistent with other countries around the world, many of which have already moved to adopt IFRS. In our view, IFRS is the only viable choice for the US because of its growing global acceptance as a high-quality, comprehensive and sufficiently robust set of accounting standards that is continuing to improve. Internationally, US GAAP is seen as too complex and difficult to apply.

Which path to take? Opinions varied on the best approach for the US to adopt IFRS – essentially three broad approaches were suggested: full convergence without setting a mandatory change date (43%), partial convergence coupled with a mandatory adoption date (24%), and establishing a mandatory adoption date immediately (28%). When considering the first year of adoption, 88% of respondents prefer to present just one year of comparative financial statements, to be consistent with companies around the world and limit compliance costs. However, all investor organisations called for two years of comparative data. Virtually everyone agreed that companies would only take advantage of early adoption of IFRS, if offered, if there was a clear commitment from the SEC that there was no risk of reverting back to US GAAP.

Independence concernA number of letters to the SEC made reference to the importance of the IASB’s independence, accountability and funding. Concerns were focused on perceptions of political pressures that have an impact on the independent standard-setting process. In our view, the IASB’s independent funding and accountability should be the only prerequisites for mandating transition to IFRS by US companies. The IASB’s trustees are working to establish independent funding through open-ended, country-specific commitments, and a Monitoring Board (with SEC representation) has recently been formed as a step to address this issue.


IFRS fit in US environment?There were many letters that highlighted the need for the SEC to work with other federal and state agencies, such as the Internal Revenue Service, federal and state industry regulators, and the federal government itself, to ensure that those agencies will also accept IFRS. Otherwise, the move to IFRS could result in significant additional costs and perhaps perpetuate parallel financial reporting for companies in some industries.

We expect that the SEC will take note of the emphasis placed on this matter, particularly as there was no question on this topic in the roadmap proposals.

Many respondents mentioned some concern that increased use of judgement would subject companies to higher scrutiny and increased litigation risk. Our view is that much of the risk comes from reporting errors resulting from the complexity of US GAAP standards. Companies could be better positioned to defend themselves with principles-based standards, provided they have well-reasoned and contemporaneously documented conclusions on accounting matters.

Several letters pointed out actions the SEC should take, such as adopting the recommendations presented by the Advisory Committee on Improvements to Financial Reporting in August 2008.

The financial crisisThe financial crisis has highlighted certain concerns about IFRS that the SEC will consider in its final roadmap decisions. The global focus on fair value accounting, for example, has caused increased pressure on the IASB and the FASB to establish level playing fields and justify how fair-value accounting has improved financial reporting. It has also increased political pressure on the standard setters – further significant European political pressure on the IASB could cause the SEC to react by slowing down the change process in the US.

Notwithstanding the challenges created by the financial crisis, we continue to believe the US will transition to IFRS for the following reasons:

The global transition to IFRS is too significant to ignore – •transition continues, for example, with Brazil, Canada, and South Korea by 2011 and Mexico in 2012

Approximately two-thirds of US investors have •shareholdings in companies outside the US, most of which have adopted, or are planning to adopt, IFRS

SEC inaction means that global comparability will decrease •for US investors

The current financial crisis has shown the interconnected •nature of capital markets around the world, which demonstrates the imperative to achieve a common accounting language

The January 2009 G20 meeting highlighted the dedication •of the world’s leaders to achieve a single set of high-quality accounting standards.

Although the exact US path to IFRS seems unclear at the moment, we remain confident that the ultimate adoption of IFRS in the US is inevitable. We believe the SEC will continue to approach change with a thoughtful, measured process and will ultimately propose a revised roadmap that is likely to contain a slightly slower timetable for change. We expect the SEC to provide more clarity around the road to IFRS later this year, or into next year.

In the short term, the Memorandum of Understanding between the IASB and the FASB to converge standards will change accounting in critical areas such as revenue recognition, consolidations, financial instruments and leasing. There is also a growing need for US finance executives to understand IFRS so that they can maintain control over financial statements prepared by their overseas subsidiaries, which are increasingly operating in IFRS environments. Companies need to take action now to deal with what is already happening and prepare for further changes ahead.

John Barry is a partner at PricewaterhouseCoopers and the IFRS leader in the US.

Getting ready for IFRS

Companies in the US, and other territories where timing of IFRS adoption is still uncertain, need to consider how to respond to the impact of IFRS today. Some steps to consider:

Focus on the challenge for your business• . The next several years will bring major changes to financial reporting. Whether changes arrive through convergence, a mandated move to IFRS, or continued IFRS adoption by subsidiaries and counterparties, the effect on businesses will be considerable.

Perform an assessment• . Consider the effects these alternative paths could have and identify business, accounting, tax, investor, control, systems and work-force related issues.

Be ready to adapt to ongoing change• . Use scenario planning to incorporate likely convergence and IFRS adoption expectations into your strategy and planning.

Monitor actual changes• . Follow actions of the regulators and standard setters. Consider how they will influence your overseas counterparties (eg, customers) and affect your reporting, long-term contractual commitments, tax structures, financing, systems and controls.

Maintain corporate oversight• . Influence transition timing, strategies, and policy decisions of overseas subsidiaries that are or may soon be IFRS users.

Identify what you can do now• . Be mindful of the specific aspects of convergence and IFRS transition that will take the longest, and consider smaller controlled one-off projects and ‘easy wins’ where desirable.

See www.pwc.com/usifrs

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OPINION

Revenue recognition – changes aheadProposals to change the accounting for revenue recognition could have a significant effect on some industries. Mark Lohmann and Katie Woods explain why companies should look carefully at the impact on current business activities

The IASB and the FASB issued their long-awaited discussion paper on revenue recognition in December 2009. Every industry within the scope of the project may be impacted to some extent – some significantly. This is true for both IFRS and US GAAP reporters, particularly those that have followed industry-specific guidance.

In summary, one of the key changes is a shift to a single, contract-based, asset and liability approach to revenue recognition. In the proposed model, revenue is recognised based on increases in contract assets or decreases in contract liabilities. The boards believe a more consistent application can be attained by using a single model based on changes in contract assets and liabilities resulting from contracts with customers. This is contrasted with the multiple revenue recognition models in use today that are focused on an earnings process, where difficulties can arise in determining when revenue is recognised.

Another key change is the singular focus on transfer of control of an asset in determining when a contract liability is satisfied and revenue is recognised. Current revenue standards take other criteria into consideration, such as when risks and rewards are transferred to the customer or when collectability of economic benefit is reasonably assured. This change could have a considerable impact on the timing of revenue recognition if control of an asset transfers at a different time from risks and rewards.

Contracts – asset or liability?The move to a model where revenue is based on the changes in contract assets and liabilities means that all contracts (the possible exceptions being those for financial instruments, insurance and leasing) would be analysed into contract assets (the right to receive payment from customers) and contract liabilities (an obligation to deliver a service or good to customers). Revenue would only be recognised when either the net contract liability is reduced or the net contract asset has increased, both as a result of the entity discharging its contract liabilities by performing.

For a simple transaction this may seem straightforward. However, with revenue only being recognised when control over an asset has passed to the customer, the question of what the asset is and how control is defined are key. Taking the construction industry as an example, if control over an asset passes gradually to the customer as work progresses during the construction period, then revenue will be recognised in line with the gradual shift of control. On the other hand, if control does not pass until the construction project is fully completed, revenue will not be recognised until then.

Performance obligationsThe focus on recognising revenue when control of an asset is transferred requires that a contract may need to be segregated if assets are transferred at different times. The board refers to these individual obligations as performance obligations (the promise to transfer an asset – either a good or service). Performance obligations are identified so that revenue can be recognised as control of the promised asset for each of the obligations is passed from the seller to the buyer. Telecommunications companies, for example, which might currently bundle together phones with a service contract, may have to identify and recognise revenue for each element of the transaction when control of the assets underlying the promises to provide a phone and services are passed.

Similarly, transactions where products are sold with a standard warranty obligation will be treated as a performance obligation. The seller would have to allocate part of the contractually agreed revenue to the warranty and recognise that allocated revenue as the warranty coverage is provided. Even a simple contract may include many performance obligations. Identifying and separating those obligations may be challenging.

There is some debate over whether performance obligations should be remeasured. The discussion paper proposes that remeasurement should only occur when the obligation is onerous. This will limit how often remeasurement will occur. Certain board members have expressed concern that useful information will not be provided to investors in situations where outcomes are highly variable due to volatile prices or where significant changes in circumstances are likely, eg, some insurance contracts.

Accounting for costsAnother significant area of change relates to costs. Unlike some of the current revenue guidance, the board proposed that preparers should follow the guidance in other standards such as: IAS 2, Inventories, IAS 16, Property, Plant and Equipment and IAS 38, Intangible Assets, to determine how costs are accounted for. The suggestion is that costs associated with a contract will be expensed as incurred unless they meet the definition of an asset under one of these standards. Entities that have previously used the cost guidance in the revenue standards may find they are required to recognise costs earlier if they are not defined as assets in the existing standards.

Mark Lohmann is a partner in the Global Accounting Consulting Services group at PricewaterhouseCoopers. Katie Woods is a director in UK ACS at PwC.

The challenges faced by directors, audit committees and auditors in relation to year-end financial reporting in a downturn are continuing as interim reporting cycles approach. Those challenges include evaluating the effect of the credit crisis and economic downturn on the entity’s financial position and performance, as well as on the entity’s ability to continue as a going concern.

A problem shared…

Over 70 partners and senior executives from 24 international networks of accounting firms met at a Forum of Firms symposium in London in April to discuss going concern and related audit considerations. The event gave attendees the opportunity to collectively share experiences on some of the practical auditing considerations being faced by auditors across various industries. Participants debated current practices on hot topics, such as: companies’ access to funding; implications of going concern on financial statements and audit reports; valuation and impairment; materiality; and internal control implications.

To help guide auditors, the International Auditing and Assurance Standards Board (IAASB) has already released two Audit Practice Alerts: Audit considerations in respect of going concern in the current economic environment (January 2009) and Challenges in auditing fair value accounting estimates in the current market environment (October 2008). The latter highlighted the challenges in auditing the measurement and disclosure of fair values when market information to value financial instruments is hard to obtain.

Tackling interim financial informationFor many companies, issues such as going concern, impairments, valuation, misstatement risk and foreign currency volatility have continued to be significant well beyond signing of the year-end accounts.

The International Standard on Review Engagements (ISRE 2410) outlines responsibilities when conducting a review of interim financial information. It directs the auditor to include an emphasis of matter paragraph to highlight a material uncertainty relating to an event or condition that may cast significant doubt on the entity’s ability to continue as a going concern.

This may be necessary, for example, if the auditor had modified the previous audit or review report and the material uncertainty still exists. Equally, the material uncertainty may come to the auditor’s attention as a result of the auditor’s enquiries or other review procedures.

IAS 1, Presentation of Financial Statements, clarifies that the guidance on going concern applies equally to interim financial reporting. Thus when management and auditors assess whether the going concern assumption remains appropriate in the interim financial information, they will need to take into account all available information about the future that is at least, but not limited to, 12 months from the end of the interim reporting period.

GOING CONCERN

Downturn triggers reporting and audit challenges

Assurance

News


CLARITY ISAS

UK adopts international audit standards

IAASB

SMEs are top priority

The UK Auditing Practices Board (APB) has decided to introduce the Clarity ISAs – recently finalised by the International Auditing and Assurance Standards Board – into UK auditing standards. The new standards will be effective for years ending on or after 15 December 2010. This follows the APB’s consultation last year, which received strong positive endorsement for the planned introduction of ISAs (see opposite page).

Attention now is focused on the APB’s proposed additions to the IAASB’s standards, often referred to as the ‘UK & Ireland pluses’. There are two different types of pluses, those that insert existing law and regulation relevant to

the audit into a relevant place within the standards and those that are intended to raise the level of audit quality over and above the IAASB’s standards. The former are relatively uncontroversial.

The APB has issued a consultation paper proposing a significant reduction in the number of quality-driven UK & Ireland pluses from the current forty-four, down to five. This reduction is prompted by the introduction of most of the additions into the clarity ISA texts. Nevertheless, even the few remaining quality-driven pluses are controversial, as it is not clear that the case has been made for the UK to depart from the international standards on any of them.

The 2008 Global Leadership Survey by the International Federation of Accountants (IFAC) found that addressing the needs of small- and medium-sized entities (SMEs) is among the top priorities for the accountancy profession.

Another important issue for respondents was addressing the fallout of the credit crisis.

In a number of countries, (including many EU countries), there have been debates about the cost/benefit of statutory audit requirements for all entities. Many countries have introduced, or are contemplating, exemptions from statutory audits for SMEs.

While such provisions do not affect group audits of the largest companies, they may be relevant to subsidiaries of those companies with mandatory statutory audit requirements.

These trends have led to considerable debate about alternative assurance services that might better meet the needs of users in this segment.

The IAASB’s consultations last year on its strategic plan showed no support for a ‘light-touch’ audit service – there was resounding support for the principle that an audit is an audit. However, there was strong support for revising the existing international standards for review engagements and compilations, and a project is expected to begin later this year.

EMISSIONS

Framework for assuring the quality of carbon emissions Increasingly, companies are starting to prepare inventories of their carbon emissions. They may be participating in voluntary schemes, or preparing for upcoming legislation for regulated disclosure regimes, such as the Climate Change Bill and the Carbon Reduction Commitment in the UK.

Over the last year, the International Auditing and Assurance Standards Board has held four roundtables – two in Australia, one in North America, and one in Brussels – to seek direction on the development of an assurance standard to provide a consistent framework for assuring the quality of these emissions disclosures. The board is now

developing an exposure draft and aims to expose it for comment later this year.

In the US, the Environmental Protection Agency recently launched its guidelines on Scope 1 Emissions (primarily for the utilities sector) and it is considering mandatory reporting and assurance.


IAASB

Clarity has worldwide support

IAASB

New directions for the IAASB

The International Auditing and Assurance Standards Board (IAASB) has completed its Clarity project, meaning that auditors the world over now have access to 36 newly updated and clarified International Standards on Auditing (ISAs) and a clarified International Standard on Quality Control.

The Clarity project was launched in 2005 to improve the clarity and consistency of IAASB standards. Redrafting of the standards using one consistent format and language (for example using the present tense to describe actions by the auditor) has made them easier to understand and should remove any possible ambiguity on what is required, and what the guidance is globally.

Completion of the project has been welcomed by the Forum of Firms, an association of international networks of accounting firms that perform

audits of financial statements. ‘This is one of the most significant projects in the history of the IAASB,’ commented David Maxwell, chairman of the Forum of Firms. ‘Completion of this project will result in many improvements to the ISAs and significantly advance global convergence of auditing standards.’

The Forum’s members are being encouraged to plan now for the timely implementation of the revised ISAs to help promote consistent and high-quality standards of financial reporting and auditing practices worldwide.

‘We have been encouraging Forum members to consider implementation matters as and when the standards were promulgated so they have sufficient time to update audit methodologies and training programmes in advance of the effective date,’ advised Nick Fraser, chairman of the International Federation of Accountants’ Transnational Auditors Committee, the executive arm of the Forum of Firms. ‘However, there is no doubt that timely adoption of the ISAs by national regulators will also provide significant impetus in promoting the convergence process, and we look forward to seeing rapid progress in this respect.’

On 1 January this year Arnold Schilder took up his role as chairman of the International Auditing and Assurance Standards Board (IAASB) for a three-year term.

Professor Schilder was formerly the executive director of De Netherlandsche Bank NV, the prudential supervisor of financial institutions in the Netherlands. He will be the first non-practitioner to

assume the role of chairman of the IAASB. He was a member of the Basel Committee on Banking Supervision, and served as chairman of its Accounting Task Force from 1999 to 2006. He was also an inaugural member of the IAASB’s Public Interest Oversight Board (PIOB). Thus, he has been involved at an oversight level in seeing the IAASB’s Clarity project through to completion.

Professor Schilder was a senior international audit partner at PricewaterhouseCoopers in the Netherlands until 1998 and therefore has an understanding of auditing practice. But his recent experience in a regulatory position will undoubtedly bring a different perspective to the role.

The completion of the IAASB’s Clarity project is expected to bring further momentum to the overall convergence of auditing standards. National auditing standard setters in a number of

jurisdictions, including Australia, Canada, Hong Kong, the Netherlands, South Africa and the UK, anticipate adopting them with a similar timeframe as the ISAs globally, which are effective for audits of financial statements in 2010.

Next steps

The IAASB is now turning its attention to supporting and monitoring the implementation of the Clarity ISAs, and to new projects, including:

Reporting on pro forma financial •information in a prospectus

Revision of ISA 610, • Using the work of internal audit

Auditor’s responsibilities and •assurance on XBRL

Assurance on carbon emissions •information (see article on page 30).

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EUROPEAN UNION

EC moves to adopt ISAs IOSCO

Global regulators give thumbs up on ISAs

Adoption of the ‘clarity’ International Standards of Auditing (ISAs) is on the cards for statutory audits of European companies. The first step is a public consultation by the European Commission (EC).

‘The use of international standards, accepted worldwide, for statutory audits in the EU is an opportunity to enhance the quality and credibility of the financial statements of EU companies, to the benefit of investors and citizens,’ said EC Commissioner Charlie McCreevy.

The consultation paper states that the ‘governance of the IAASB has matured to a stage where it may be justifiable to adopt ISAs in the European Union’. It sites four reasons for this:

The EC has been included in the •process (eg, attending IAASB and Consultative Advisory Group meetings) and there is evidence that the standard setter has been responsive to over 30 comment letters from the Commission on the Clarity standards

The EC is also linked to oversight and •last year it appointed two out of the ten members of the Public Interest Oversight Board, which oversees the standard setting process

In May this year, the European •Parliament and Council agreed – at political level – to provide a legal base for funding the PIOB from 2010 to 2013 up to a total of €1.2m

The current governance structure and •the due process remains subject to regular effectiveness reviews by the Monitoring Group so that it can constantly be improved and adjusted to future needs. A review is scheduled for 2009 and 2010.

EC endorsement of the standards is also dependent on sufficient international acceptance of ISAs. The paper acknowledges, however, that there is a lot of evidence supporting international acceptance of the ISAs – to date more than 100 jurisdictions’ audits are based either directly or indirectly on ISAs. The commission must now decide whether the European Union should take international leadership by adopting the ISAs at

European level or whether it should take a ‘wait and see’ stance until international acceptance is even further confirmed.

The evidence set out in the paper certainly makes a strong case for going ahead with adoption. It covers, for example, ISA recognition by public authorities, regulators and investors and highlights that: ‘Reliance on auditor’s reports could be enhanced if the investors know that a single set of auditing standards are being used in the European Union (and at a global level).’

At the same time Commissioner McCreevy is keen to ensure that the EC hears from people who have questions about use of the Clarity ISAs in Europe. ‘I encourage all those who have a view or experience to share it with us.’

Scope of adoption

The paper asks interested parties to state their views on the scope of ISA adoption for Europe:

Should ISAs be made mandatory •for all statutory audits and/or all limited companies (apart from ‘small’ companies)?

What should the timetable for •adoption be?

Is it acceptable for the EC to amend •the standards?

Should the auditor’s report say •that the audit was conducted in compliance with ISAs as adopted in the EU?

It is clear that if responses to the consultation are generally positive, ISAs could be applicable within a relatively short timeframe in the EU.

Benefits outweigh costs

The EC’s consultation coincides with the launch of an independent study conducted by the University of Duisburg-Essen. This indicates that adoption of the ISAs in Europe would result in quantitative and qualitative benefits for companies, investors and regulators, and that the benefits of adoption would outweigh the costs.

The International Organization of Securities Commissions (IOSCO) has welcomed the completion of the IAASB’s ‘Clarity ISAs’ as an important milestone. It has endorsed the new standards and noted their improvements over the previous standards.

‘There is an important role to be played by a set of international auditing standards in contributing to global financial reporting and supporting investor confidence and decision making,’ said the IOSCO statement. ‘…ISAs are able to play an important role in facilitating cross-border securities offerings and listings in the [global capital] markets.’

IOSCO encouraged securities regulators to accept audits performed and reported in accordance with the clarified ISAs for cross-border offerings and listings, as well as for purely domestic offerings and listings, where possible.

The statement continued: ‘ISAs – either of themselves or as a touchstone for the determination of national auditing standards – provide a basis for a common auditing language that investors, auditors, audit oversight bodies and securities regulators can use as they carry out their respective roles in the global capital markets.’

IOSCO has also called for continued progress with ISAs in terms of their translation, continuous improvement over time and other efforts to facilitate global audit practices.

For further information see www.iosco.org

News & Opinion

The European Sustainable Investment Forum (Eurosif), has called on European institutions to consider greater transparency from companies and institutional investors on Environmental, Social and Governance (ESG) issues.

To foster a longer-term, sustainable economy within the EU, the position paper recommends that the European Commission adopt three proposals to increase transparency from various stakeholders:

Companies.• Disclosure of ESG data by large, listed companies should be mandated. Such reporting would be principles-based and use a limited number of standardised Key Performance Indicators (KPIs), some of which would be sector specific.

Institutional investors.• Investment funds should have to comply with a Statement of Investment Principles (SIPs) in which trustees would state the extent (if at all) to which ESG considerations are taken into account in the selection, retention and realisation of investments; and disclose their policy on the exercise of the rights (including voting rights) attached to investments.

Shareholders’ rights.• Measures should be adopted to allow shareholders to keep control of their rights at all times, improve accountability of service providers within the proxy voting chain, and allow issuers to know who their shareholders are at any moment so that they can communicate with them efficiently.

‘The current global financial crisis is a wake-up call for European policy makers to address long simmering

issues around transparency in capital markets,’ said Matt Christensen, executive director of Eurosif. ‘This is an historic opportunity to adopt policies that encourage longer-term performance and discourage short-term bubbles.’

‘Eurosif would like the European Institutions to consider enhanced regulations that encourage all participants in the European capital markets to focus greater attention towards long-term financial performance. Within this framework, ESG issues have a critical role to play in developing a greater understanding of overall risks and opportunities that companies and investors face.’

The proposals have already been discussed with the European Commission at a European Parliament roundtable on sustainability disclosure in Brussels.

Professor Dr Harry Hummels, director at SNS Asset Management said: ‘Without information about materially-relevant environmental, social and governance information, no institutional investor can take full responsibility for knowing and managing all risks involved in the management of its investments. We therefore wholeheartedly support Eurosif’s plea for greater transparency and the use of shareholders’ rights. Moreover, the binding force that results from Eurosif’s initiatives is both laudable and necessary to help companies and investors contribute to a more sustainable and responsible economy.’

A copy of the position paper can be found at: www.eurosif.org

SUSTAINABLE INVESTMENT

Open up on ESG, says Eurosif

Broader Reporting


MAURITIUS

Reward for better reporting during volatile timesThe overall winner of the Mauritius Corporate Reporting Awards for 2008 was Air Mauritius. Awards were presented by PricewaterhouseCoopers in Port Louis to several companies (see box) for demonstrating that they are building confidence in volatile times through better corporate reporting.

Companies were assessed for the quality of their reporting in areas such as:

Management discussion, including •corporate governance disclosures and the financial information available on the company’s website

IFRS financial statements•

Design and ease of navigation for •reports available on CD

The judges noted for the first time that several companies circulated their annual reports on CD, and applauded those companies that used recycled and eco-friendly paper for their reports.

Compliance with the Code of Corporate Governance was found to be improved and the judges noted that the word ‘strategy’ was appearing more frequently in management discussions. The judges also found that simpler language made some reports a better read.

In terms of financial reporting, the judges focused on financial instrument disclosures and made suggestions about where preparers should focus their attention.

Category Award winnersSEM 7*: Naïade Resorts

Investment companies: CIEL Investment

(Other) Public interest entities: Air Mauritius

Design: Maurice Publicité Ogilvy for Phoenix Beverages

Corporate governance disclosures: Robert Le Maire

Management discussion: The Mauritius Commercial Bank

Special jury award: Central Electricity Board*The SEM 7 comprises the seven largest eligible share of the official list, measured in terms of market capitalisation on the Stock Exchange of Mauritius (SEM)

AUSTRALIA

Charities step up to challenges of transparent reporting

Oxfam Australia was recently named winner of the second annual PwC Transparency Awards, introduced to recognise and encourage ongoing improvement in the quality and transparency of reporting in the Australian not-for-profit (NFP) sector. World Vision Australia was named as runner-up.

The awards were introduced by PricewaterhouseCoopers in collaboration with the Institute of Chartered Accountants (ICAA) and the Centre for Social Impact (CSI) because now, more than ever, NFPs need to present a clear and complete picture of their performance and future prospects if they are to successfully raise public and private funding to support their stated cause.

These organisations face a challenging environment – lack of a consistent reporting framework specific to the

sector, fierce competition for donations, and an economic climate that discourages discretionary spending.

The judging process involved an extensive review by PwC reporting experts, consideration by a four-member judging panel and final deliberations by an external jury. There is no single regulatory regime for NFPs in Australia and, perhaps as a consequence, the quality of reporting in the sector is highly variable. An overall improvement was noted in the quality of submissions compared to the inaugural Awards in 2007, particularly among those organisations entering for a second time in 2008. However, there are still areas of disclosure warranting greater attention by NFPs, such as:

Few NFPs focus on strategic direction •and draw a clear link between their activity and their strategy

Few include quantified targets against •which performance can be measured and reported

Governance information needs •greater depth, including on board operations, composition and performance assessment

Reporting on key stakeholders, •such as employees, typically does not provide sufficient insight to be of value to readers

More focus is needed to balance •what NFPs achieved with how they achieved it, the challenges and outputs – important to understand an organisation’s purpose and methodology.

For more information, including the full Jury Report on trends and reporting issues across the Australian NFP sector, visit www.pwc.com/au/transparencyawards


WORLD BUSINESS SUMMIT

Business is ready for action on climate change At the recent World Business Summit on Climate Change – the last major business gathering before the UN meeting to agree a new deal on climate change in Copenhagen in December – over 550 business leaders, plus experts, gathered to develop ideas and recommendations for policy makers to support an ambitious global deal.

The overriding message from the meeting is that the economic downturn should not temper the ambitions of governments to achieve a robust climate treaty. The summit recognised that, while action to tackle emissions growth will result in short-term costs, these will be outweighed by the long-term benefit of avoiding dangerous climate change.

Turning risk into opportunity The summit focused on nine issues, ranging from technology collaboration to adaptation, which are critical in the transition to a low-carbon economy and form key parts of the UN negotiations. Four consistent messages from participants underpinned the recommendations from the meeting:

Investors need robust, clear and •long-term regulatory signals – whether trading programmes, performance

standards or taxes – that provide greater predictability when making long-term capital allocation decisions, such as investment in infrastructure

New collaborative financing •mechanisms – such as green infrastructure funds, public-private partnerships, or ‘climate bonds’ – are needed to support low-carbon technologies that are currently not commercially viable, and to scale up the deployment of those technologies that are commercially viable

Governments should be ‘technology •neutral’ and enable all cost-effective greenhouse gas emissions reductions. The governments should focus on and incentivise energy efficiency improvements and limit deforestation,

as these can deliver significant, cost-effective carbon emissions reductions, as well as provide a range of other benefits

Better disclosure is essential to drive •change among investors and consumers. This includes: disclosure of corporate strategy and capital investment decisions; greater use of carbon labelling and energy-efficiency performance; robust monitoring, reporting and verification protocols; and transparency about the costs and benefits of new government policies.

More details of the recommendations from the summit can be found in the summary of the discussions produced by PwC and the Copenhagen Climate Council, see www.pwc.co.uk/publications

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STANDARDS FOR CARBON

Global position needed on carbon reportingA clear need for a global position on what and how to report on carbon is emerging as many different agencies plan to launch guidance. This year, for example, new carbon reporting guidelines have been published by the Climate Disclosure Standards Board (CDSB), the Confederation of British Industry (CBI), and the UK government (Defra).

In the US, the Environmental Protection Agency has launched its own version of what mandatory carbon reporting will look like for Scope 1 emissions for US corporations. The direction of travel can be clearly seen – it covers not just what to report on carbon, but also how to report decision-useful information.

At the recent World Business Summit on Climate Change, the CDSB launched their exposure draft on a global reporting framework around climate change disclosures. This report, as well as the CBI one, is centred on the factors that a company needs to consider when measuring and managing the impact of carbon on its business. The CDBS framework is the first to demonstrate how reporting on emissions connects financial and non-financial data to see the value and impact of carbon emissions on a business.

PricewaterhouseCoopers has launched the first example carbon report that combines all the elements of these standards to illustrate for companies

what they will need to do (see Typico article, page 38).

‘There is a clear need for a global position on what and how to report in this area,’ said Malcolm Preston, PwC global sustainability leader. ‘This is essential to aid comparability for investors and help companies deal with carbon reduction targets and the emerging transparency requirements around carbon and climate change issues. This area of reporting will increasingly become part of the mainstream model, and all stakeholders need to consider how it can be developed in a way that enhances user understanding, rather than being seen as an additional regulatory requirement.’


DENMARK

New law raises the bar for CSR reportingThe Danish government has passed new legislation that requires many of the country’s largest companies to include information on their corporate responsibility policies and practices in their annual reports.

The new Social Responsibility for Large Business law amends the Danish Financial Services Act and came into force from 1 January 2009. It is estimated that around 1,000 of the largest companies, both listed and state-owned, are affected. In effect, those companies must report on: their current social responsibility (CSR) policies; how they are being implemented; the achievements that have resulted from those policies; and forward-looking implications for the business.

The CSR information must be included in annual reports from 2010, verified by the company’s auditors. However, the law has a ‘report or explain’ clause, meaning that a company can choose

not to report on CSR, in which case it should disclose that fact, together with the reason why. A company with no CSR policies should include an explanation in the management commentary.

The Danish government is encouraging companies to join the UN Global Compact or UN Principles for Responsible Investment by allowing members to refer to these in their annual reports as an alternative to reporting under the new rules.

Deputy Prime Minister Lene Espersen supported the change: ‘Many Danish companies are good at working with CSR. However, often they don’t tell the outside world about their efforts. I hope that this law will strengthen the knowledge abroad that Denmark is capable of creating responsible growth. In a globalised world facing a financial crisis and climate changes, CSR becomes an even more important competitive parameter.’

UK CARBON REDUCTION COMMITMENT

League tables for emissions reduction plannedFrom April 2010, thousands of organisations in the UK will have to take part in a mandatory cap and trade scheme for carbon dioxide emissions know as the Carbon Reduction Commitment (CRC), if proposals go ahead as planned.

Those covered by the regulation will have to report emissions each year and will be ranked according to their success in reducing them. The results will be published in a league table and there will be an incentive to reduce emissions by distributing some of the revenue from the worst performers to the best. The scheme is expected to be revenue-neutral to government.

The CRC will not include emissions covered by other regulations such as the

EU Emissions Trading Scheme (EU ETS). Eligible emissions are those arising in the UK from the use of gas, electricity and other fuels for non-transport uses. The first sale of allowances will be in April 2011.

The scheme is different from other carbon trading schemes in that it falls on the organisation, rather than a particular facility. The implications of this approach are very different from the EU ETS. For example:

Holding companies will need to •consolidate emissions from across UK operations

Investment funds that constitute •owners of a business under the 2008 Companies Act will be treated as the parent company. They will need to consolidate data from companies in their portfolios.

CEO WATER MANDATE

Response to looming water crisis

At the CEO Water Mandate meeting in Istanbul in March this year, investors made it clear that disclosure around water was still inadequate for their purposes. The mandate was launched in July 2007 by the UN secretary general, together with several international businesses, in response to the growing recognition of a looming global crisis in water.

The mandate is part of the UN Global Compact and aims to engage businesses in promoting sustainable water management. Signatories of the mandate voluntarily pledge to focus efforts on developing and promoting sustainable water management around six key areas: direct operations, supply chain and watershed management, collective action, public policy, community engagement and transparency.

In October 2008, the mandate published the Transparency Framework (phase one). This identified the need for a materiality assessment around water and for stakeholder engagement to determine the scope of information reported. Harmonisation and convergence around metrics, indicators and approaches are promoted as a means to develop best practice in reporting and to develop water disclosure norms that are credible, relevant and valuable.

‘Companies need to monitor developments in this area and consider, as part of the larger corporate reporting agenda, how they can report in this area in a strategic and proportionate way,’ commented PwC partner Richard Gledhill.


CARBON DISCLOSURE PROJECT

Investment community wants environmental disclosure

Three quarters of the institutional investors signed up to the Carbon Disclosure Project – who together have $55 trillion of assets under their management – factor climate change information into their investment decisions and asset allocations, according to new research by the CDP.

Survey respondents included asset managers, pension funds, insurers and socially-responsible investment funds including Allianz, AXA Group, BlackRock, Goldman Sachs, Hermes Investment Management and Swiss Re.

Over 80% of respondents consider climate change important relative to other issues impacting on their portfolio. Some of the institutions surveyed were willing to go beyond merely requesting disclosure on climate change, and were prepared, for example, to ask companies to reduce their greenhouse gas emissions.

Corporate engagement emerged as the principal area in which investors are currently using CDP data, both as

a stand-alone resource and to back up information from other sources. A number of investors also commented that they are starting to systematically incorporate CDP data into their financial analysis.

The research found that carbon risk and potential legislation are the primary motivators for utilising CDP data, which is the main source of climate change information among respondents.

CDP’s chief operating officer, Paul Simpson, commented: ‘Following clear indications, from the new US administration and other governments, we can expect to see a marked increase in climate change regulation globally. This will increase the materiality of climate change for investors and drive up costs for companies unable to manage their greenhouse gas inventories.’ Institutional investors require listed companies to report to CDP as climate change-related information becomes increasingly important to investment decisions.’

CDP’s information request focuses on the following areas that may affect a company’s value:

Comprehensive corporate greenhouse •gas emissions data

Emissions reduction targets and use •of energy

Risks and opportunities applicable to •companies in relation to climate change

Management strategies to •address climate change – including emissions trading.

The results of the 2009 annual request for climate change data from 3,700 listed companies will be available from September. See www.cdproject.net

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Investor views‘We want to understand what a company’s risks and opportunities may be from climate change, and of equal or more importance, we want to assess how companies are managing these challenges.’

Bennett Freeman, Calvert Group

‘Climate change strategy, energy efficiency and carbon emissions are increasingly important aspects of companies’ ability to uphold competitive advantage across global industries. We incorporate company responses to the Carbon Disclosure Project within our research methodology.’Marc Fox, Goldman, Sachs & Co

CAPITAL MARKETS

Online support for sustainable recoveryThe UK Sustainable Investment and Finance Association (UKSIF) has launched an online resource and a library to support the growing debate on how to build a robust operating framework for sustainable investment and finance.

The online support is aimed at the growing number of industry roundtables

and meetings about sustainable capital markets. It includes a Sustainable Recovery discussion log, which will enable easy access to the analyses and recommendations from sustainable finance practitioners.

The Sustainable Capital Markets Library will bring together key documents on the impact of capital

market structures and incentives on long-term responsible investment within the UK and worldwide. It is intended as a key resource to assist policy makers, the finance industry and all who influence or study the changing nature of the capital markets.

More information can be found at www.uksif.org


TYPICO PLC

Model for carbon emissions reporting

SWEDEN AND NORWAY

Transparent sustainability reporting wins support

A carbon emissions reporting model that provides an illustrative example for business on climate change and greenhouse gas emissions reporting has been developed by PricewaterhouseCoopers.

This follows the UK government’s launch of the world’s first legally-binding carbon

budget, aimed at achieving an 80% reduction of carbon emissions by 2050. It is also a response to the Climate Disclosure Standards Board, the new regulatory reporting guidelines in the UK being launched by Defra, and the CBI.

The model is based on a fictitious technology company, Typico plc, which produces consumer durables and IT products with operations in Asia, UK and the US. It illustrates how to report the strategy, targets, performance and benchmarking of a company’s work to reduce its impact on, and adapt to, climate change.

To date the format and composition of information published by business on their sustainability strategy has varied widely. While the extent of disclosure will vary according to the nature and size of the company, the Typico example sets out what PwC believes to be good practice for larger companies that will potentially face mandatory reporting of greenhouse gas emissions by 2012.

‘This model is the first to demonstrate how reporting on emissions connects financial and non-financial data to see the value and impact of carbon emissions on a business and its strategy,’ said Alan McGill, PwC sustainability and climate change reporting partner. ‘Information presented in this context will more accurately reflect the real risks – and opportunities – that climate change presents.’

‘I expect that forward-looking analysis and statements of the risks and opportunities affecting a business will become an established part of the reporting cycle. This model will support companies’ preparations for that by helping them identify the right questions to ask, the right data to measure and report on, resulting in them taking the right actions for their business.’

The Typico plc model forms part of PwC’s contributions to the work of the international Climate Disclosure Standards Board, and the CBI Carbon Reporting Group.

The Ministries of Foreign Affairs in Sweden and Norway have recently pledged their support for the use of Global Reporting Initiative (GRI) guidelines. The move highlights that governments are now taking an active interest in transparent sustainability reporting, as well as investment communities and the corporate world. Both Sweden and Norway also have representatives in the GRI Government Advisory Group.

‘GRI is strengthening its relations with governments,’ said Teresa Fogelberg, GRI deputy chief executive. ‘In the past, GRI had a resource base that was almost completely provided by the corporate sector. Today, thanks to the support from an increasing number of governments, the financial basis is more balanced and therefore more robust.’

Margareta Kristianson of the Swedish Ministry of Foreign Affairs commented: ‘We are happy to have engaged with GRI, both because of our domestic CSR practices, where Swedish state-owned companies issue GRI-based reports; but also because of our international CSR policy. For example, we have a Memorandum of Understanding with China in this field, and see that Chinese officials visiting Sweden want to learn about the GRI Guidelines.’

The Norwegian government’s white paper on CSR explains that it considers GRI a suitable tool for reporting on economic, social and environmental business impact. The government will contribute with relevant information and guidance as well as financial support, focusing on improving the relevance of GRI for developing countries, and small and medium-sized enterprises.

An illustration for business climate change and greenhouse gas emissions reporting

Typico plc

Greenhouse Gas Emissions Report

pwc


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ENVIRONMENTAL, SOCIAL AND GOVERNANCE

Boost to ESG reportingMALAYSIA

Sustainability reporting awards adopt broader perspective

Continued pressure for listed companies to disclose sustainability information in their annual financial statements has led to the launch of environmental, social and governance (ESG) reporting standards, which are aimed at helping financial institutions boost their reporting and disclosure on these issues.

The United Nations Environment Programme Finance Initiative (UNEP FI) was launched at Davos in January. It is a global partnership between the United Nations Environment Programme and a range of partner organisations, working

closely with over 170 financial institutions that are signatories to the UNEP FI Statements.

UNEP FI’s mission is to identify and promote best practices in environmental and sustainability reporting practice and ensure these are adopted at appropriate levels within the operations of financial institutions. This is done through regional activities, a comprehensive work programme, training programmes and research.

More information can be found at www.unepfi.org

A shift in Malaysian companies’ understanding of sustainability reporting and the wider context of corporate responsibility has prompted the Association of Chartered Certified Accountants (ACCA) to re-launch its Malaysia Environmental and Social Reporting Awards as the ACCA Malaysia Sustainability Reporting Award (MaSRA).

The awards celebrate excellence in environmental, social and sustainability reporting. They aim to identify and recognise innovative attempts by companies world wide to communicate corporate sustainability performance.

‘When the ACCA first introduced the award in 2002, we already knew that it would ultimately progress towards sustainability reporting,’ said Datuk Khalid Ahmad, ACCA Malaysia Advisory Council president. ‘By enlarging the award to embrace sustainability, the ACCA hopes to encourage organisations to examine and account for their holistic impact on society, the economy and the environment.

‘This is the only way in which the public can separate “greenwash” and cherry-picking from true sustainability efforts. It also forms the basis for any company to engage with critics or sceptical stakeholders.’

SUSTAINABILITY ASSET MANAGEMENT

Investors’ sustainability activities under scrutinyCompanies that adhere to sustainability are not contradicting their primary function, which is to maximise profits for shareholders. That was the foremost finding from analysis by Sustainability Asset Management (SAM) in its annual sustainability assessment of large companies worldwide.

The research is published in the Sustainability Yearbook 2009 by SAM in collaboration with PricewaterhouseCoopers. It is a comprehensive assessment of how well companies meet industry-specific sustainability criteria and perform against their peers.

SAM seeks to identify companies that demonstrate a core ability to manage sustainability issues and represent an attractive investment opportunity. Only the top-scoring 15% of the companies in each of the 57 sectors assessed are eligible for inclusion in the yearbook, with the best companies from each sector qualifying as a SAM sector leader.

Key sustainability trends that can benefit investors and long-term goals were discussed at the inaugural SAM forum,

where the yearbook was launched. At the forum, leaders in asset management, commerce and non-governmental organisations focused on sustainability trends such as:

The vital role institutional investors •play in the shaping and enforcement of corporate governance regulations and risk management rules

The emergence of a ‘greentech •revolution’ and the significance to investors with a long-term investment horizon

The expectation that investing in line •with sustainability criteria will become a mainstream approach in the asset management industry.

‘Institutional investors have to become engaged,’ said Tim Barron, CEO of Rogerscasey, a US investment solutions firm. ‘The worst thing you can do is not to understand the impact of sustainability upon your investment portfolio. To put your head in the sand – which is a common solution – is very likely at some point in the future to be considered irresponsible in your fiduciary function.’


SURVEY

Commitment to sustainability pays offCompanies with a commitment to sustainability tend to outperform their peers during the financial crisis, according to the recent study undertaken by A.T. Kearney.

In 16 out of 18 industries, companies with a commitment to sustainability were the clear leaders in the financial markets, outperforming industry averages by 15% over the six months from May through November 2008. This superior performance averages out to $650m in protected market capitalisation per company.

The report – Green Winners: The Performance of Sustainability-focused Companies in the Financial Crisis – looked at 99 companies identified as having a strong commitment to sustainability (on the Sustainability Index and Goldman Sachs Sustain Focus List) and compared their performance with industry averages.

‘Our study indicates that the market rewards specific companies,’ said Daniel Mahler, author of the study. ‘We find common characteristics among the leading companies that show that sustainability goes far beyond the narrow definition of being environmentally friendly.’

These characteristics include:

A focus on long-term strategy, •not just short-term gains

Strong corporate governance •

Sound risk-management practices •

A history of investment in green •innovations.

Reducing packaging and fuel consumption are expected to become increasingly common in the current cash-strapped economy, but the report concludes that investing in sustainability for the long term may be the best way to protect a company’s value.

GLOBAL TRENDS

Sustainability reports on the riseThe number of companies worldwide publishing sustainability reports rose 8% between 2007 and 2008, according to the global online directory corporateregister.com. However, this is a lower rate of growth than in previous years. Europe stands out as the clear regional leader, with 11,570 reports published since 1992; some way behind are North America (3,486 reports) and Asia (2,910).

There has been a significant shift in the type of reports that companies issue. Throughout the 1990s companies were issuing predominantly environmental reports. However, in the last nine years the trend has moved towards sustainability and corporate social responsibility reports, perhaps due to greater global emphasis on this and greater awareness of the potential impact companies can have on various stakeholder groups.

A new trend that has emerged in the last three years is the small, but growing, number of companies that are integrating their sustainability reporting with their main annual report.

‘We expect this to be the way forward for many more companies in the next few years,’ said PwC sustainability partner Alan McGill. ‘With sustainability considerations now integral to business planning and operations, it makes good sense for companies to include them in their main report and show how they are material to the business.’

Sector breakdownCompanies operating within the chemical sector lead the way in sustainability reporting. These are followed by those in the energy and banking sectors. However, looking at just 2008, the banking sector led the way, followed by support services, construction and building material industries.

The leading country by the number of reports published is the UK, with companies issuing a total of 2,909 reports, including 384 published in 2008. The US is in second place, closely followed by Japan.

The corporateregister.com findings are valid as of April 2009.

Global report output

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

3,500

Num

ber

of r

epor

ts

3,000

2,500

2,000

1,500

1,000

500

0

Top 10 sectors

Chemicals

0 200

1992-2007

2008

400 600 800 1,000 1,200 1,400

Electricity

Banks

Transport

Oil & Gas

Mining

Support Services

Construction & Building Materials

Electronic & Electrical Equipment

Forestry & Paper

Number of reports

602 96

134

178

209

147

128

174

234

171

143

669

764

735

967

988

971

997

1,165

1,213


Broad

er Rep

orting – NE

WS

IASB

Opinion varies on merit of management commentary

The International Accounting Standards Board’s proposed guidance on management commentary that accompanies financial reports has highlighted differences of opinion among board members.

The IASB’s proposals respond to calls from the user and investor community for companies to use non-financial information in their company reports as an opportunity to explain how the financial position, financial performance and cash flows relate to management’s objectives and its strategies for achieving those goals. The IASB believes this is particularly important in the current volatile trading conditions.

Many countries are already required by regulation to include narrative reporting along the lines of the proposed management commentary, albeit under another name. For example, the UK

follows the requirements of the Business Review (previously the Operating and Financial Review) and US companies prepare Management Discussion and Analysis (MD&A) information as mandated by the Securities and Exchange Commission.

In countries where narrative reporting is the norm, investors use this non-financial information to help inform their decisions. In countries where there is no guidance, this becomes harder. The IASB believes that providing non-mandatory guidance will lead to greater consistency and improve the comparability of management commentary across jurisdictions.

‘Management commentary is one of the most useful sections of an annual report, yet many countries applying IFRSs do not have guidelines that cover how to prepare or present this information,’ said

IASB chairman Sir David Tweedie. ‘In today’s uncertain financial climate it is particularly important for entities to explain their financial performance relative to their expectations and strategies.’

The fact that management commentary would not be a mandatory part of company reporting, and is subject to management bias, has caused dissent among board members – some have questioned whether they should be spending time on this project at all because they do not think that optional guidance will improve reporting.

‘This view may be short-sighted,’ commented David Phillips, PwC corporate reporting partner. ‘Management commentary has a critical role to play in achieving an integrated reporting model. Without it, today’s financial reporting model would be even more the domain of the technical few. I strongly believe that reporting would be in a healthier position today if more time had been committed to this area of reporting over recent years. Modern regulatory thinking, in my view, has to go beyond the setting of standards to the promotion of best practice.’

The exposure draft Management Commentary is open for public comment until 1 March 2010.

UK

Accountants top up their green credentials As sustainability issues become more material to business, the accounting profession is taking action to make sure its members can help business adapt to the changing environment.

The green agenda has been pushed into corporate boardrooms as the requirements of the Climate Change Bill hit home. Under this bill, the UK must cut emissions by 80% before 2050 (from 1990 levels).

Tomorrow’s accountant has a central role to play in sustainable development, according to the Association of Chartered Certified Accountants

(ACCA). To assist accounting professionals with the green regulations and targets, it is publishing a series of five sustainability briefing papers covering the core accounting disciplines in relation to sustainability:

Reporting•

Economic instruments•

Audit and assurance•

Governance•

Accounting.•

Two of the sustainability briefings have been published to date. The reporting sustainability briefing looks at how

businesses deal with diverse, non-financial information (such as on customers or climate change) that drives reputation, innovation and ultimately, profitability. The economic instruments paper looks at how these can provide an efficient and effective way of achieving sustainable development policy objectives.

‘The next significant development is the emergence of sustainability issues within core business practice,’ said Rachel Jackson, head of social and environmental issues at the ACCA. ‘The briefing papers will help accountants understand the implications for them.’


ACCOUNTING FOR SUSTAINABILITY

Report finds drive for connected reporting

US

Giant wakes up to climate change?

There is a move away from sustainability reporting as a separate and ‘siloed’ activity, and towards connecting it with financial performance and the strategic direction of the organisation, according to a recent report from Accounting for Sustainability.

Connected reporting in practice was compiled from the results of six case studies of organisations that have used the Connected Reporting Framework (CRF) to present key sustainability information alongside more conventional financial information to provide a more joined-up overview of performance.

The survey found consistency in the issues, benefits and challenges faced by those using the framework, despite the diversity of companies involved.

Consistent findingsDesire to connect sustainability •reporting with financial performance and strategic direction

Data already available – little additional •time to collate, compile and present the report

Framework helped to identify cost •savings by bringing together the analysis of financial and sustainability information

Adopting the CRF increased •sustainability awareness, both internally and externally

Use of the CRF drove increased •collaboration between different parts of the business (eg, finance and sustainability teams), leading to behavioural change and greater integration of sustainability issues into decision making

Participants want continued •development of the CRF’s scope to include material social impacts and enhanced guidance on the link to overall strategy.

www.accountingforsustainability.org

The Obama administration has precipitated a significant shift in the US stance on climate change. Landmark climate legislation – American Clean Energy & Security Act – was passed by the House of Representatives and President Obama has already commented on the ‘historic achievement’ to provide clean energy incentives for business.

Already the National Associate of Insurance Commissioners has issued the first US rule to require US entities to make disclosures around climate change. This was followed by the SEC announcing that it was time to take a ‘very serious look’ at requiring all listed companies to report more fully on their carbon footprint and climate change impact on their financial health. The SEC has held a series of meetings with managers of large investment funds and many expect the commission to make progress with formal guidance this year. However, the SEC has noted that there is a learning

curve here – as Commissioner Walter said: ‘This is not an agency populated with climate experts.’

SEC chairman Mary Shapiro is no fan of the hands-off regulatory approach but she does support greater transparency to the markets – an assertive stance on climate disclosures is one way she can deliver that.

Despite criticism that legislative proposals fall far short of what’s needed, these developments are a significant indication that the US has woken up to the need for action on climate change. If recent developments progress as expected the implications for US businesses will be massive – they could be required, for example, to effectively put a price tag on climate-related costs, which is bound to have an impact on investor decisions.

The size of the US market also means that progress here will have a profound ripple effect internationally.

American Clean Energy & Security Act The US House of Representatives passed the act on June 26 by a vote of •219 to 212.

It would establish an economy-wide, greenhouse gas (GHG) cap-and-trade •system and complementary measures to help address climate change and build a clean energy economy.

It has been sent to the US Senate for consideration•

Henry Waxman and Edward Markey introduced the bill in May 2009, after •floating a discussion draft in March


Broad

er Rep

orting – OP

INIO

N

OPINION

What does your reporting say about you?The information available for effective strategic decision-making and external reporting is a barometer of the quality of management and governance, argues David Phillips

The financial crisis left CEOs and their teams in all industries around the world questioning the scope and quality of the information they have available for strategic decision-making. Earlier this year, we published findings from a global survey of over 1,000 CEOs that hints at the extent of the challenge companies face as they set about enhancing this information.

Management’s decision-making is only as good as the information at its disposal. The chart below graphically illustrates the breadth of information that CEOs hold to be critical as they assess what needs to be in place for the long-term success of the business. The chart also highlights the degree to which management information systems struggle to produce reliable non-financial data. CEOs believe that agility, customer service, talent and management/ reputation are the most important factors in long-term competitive advantage, so the information they identify as most critical to the business (below) is no surprise. Yet it is precisely these areas where information is considered inadequate and the biggest gaps exist.

Far-reaching implicationsIt is clear from over a decade of research with investors and corporates, as well as intelligence gathering from non-executive directors, that a knock-on effect from the inadequacies of internal information highlighted above, is that reporting to the board and external stakeholders is not meeting expectations either. This has far-reaching implications:

Management is expected to plan using hindsight, instead •of being given insight

Effective governance and oversight is undermined because •boards are restricted to a diet of voluminous, often out-of-date financial information

Companies are struggling to rebuild market trust because •the quality of engagement with shareholders and other stakeholders is disjointed and unstructured and the appropriate information set is not available.

Inaction is not an optionWhen change is the only constant, it is perhaps not surprising that CEOs say the information they have to support their decision-making falls far short of the mark. Re-evaluating corporate strategy in the light of evolving influences is tough enough. Adapting internal information systems to monitor and manage that new strategy is all too often, in practice, a step too far.

Because of this, instead of building new information systems, management has typically adopted a series of ad hoc ‘workarounds’, which is a breeding-ground for risk. Inadequacies in day-to-day management information can expose organisations, leaving their boards to fly blind and inhibiting their ability to exercise effective oversight. And, because external reporting is incomplete, investors’ reliance on other sources of information increases.

Expectations of business are changing, and current spotlight on governance, risk and remuneration driven by the economic downturn has only exacerbated the pressure on the reporting model, management information and companies for greater transparency. Inaction is no longer an option. These issues need to be properly investigated and understood so that urgent issues can be addressed and a clear vision established for how to meet the information needs of management, the board and external stakeholders.

Managing for the long-termThe right information

How joined up is the information in your organisation?•

Has management assessed the scope of information •that is available for decision-making?

Who ‘owns’ that data within the organisation? Is it •reliable? Is it subject to internal audit?

If it is a critical input into investors’ decision-making, •should it be subject to independent review?

Is the information investors need to forecast with •confidence routinely reported to the capital markets?

Does your reporting – internal and external – present a •coherent picture of the business that is likely to build trust in the quality of management?

David Phillips is a senior corporate reporting partner at PricewaterhouseCoopers.

CEOs’ views on the information gap

%

100

Information gap

80

60

40

20

0

21 23 20

31 3035

23 2617

38

7372

89889284

9395

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Current adequacy

Date Key upcoming events Location / Contact Sponsors / Organisers

10-11 September 2009

World Standard Setters Meeting

London, UK +44 20 7246 6434 www.iasb.org/meetings

International Accounting Standards Board

28-30 September 2009

Forbes Global CEO Conference 2009

Kuala Lumpur, Malaysia www.forbesconferences.com

Forbes

12-13 October 2009

11th Annual Meet the Experts Conference

London, UK +44 20 7017 7484 www.meet-the-experts.org

PricewaterhouseCoopers in association with the IASCF and IIR

14-15 October 2009

Business and Sustainable Environment (BASE)

ExCeL, London, UK +44 20 3170 6040 www.businessandasustainableenvironment.com

BASE Communications

14-16 October 2009

NAPF Annual Conference Manchester, UK [email protected]

National Association of Pension Funds

27-28 October 2009

CSR Asia Summit 2009 Kuala Lumpur, Malaysia www.csr-asia.com/summit09

CSR Asia

12-13 November 2009

Standards Advisory Council To be confirmed +20 7426 6434

International Accounting Standards Board

16-17 November 2009

Current Financial Reporting Issues Conference 2009

New York, US www.financialexecutives.org

Financial Executives International

Autumn 2009 WWF One Planet Leaders Programme

Zurich, Switzerland +41 22 364 9111 www.panda.org

World Wildlife Fund

2-4 December 2009

2009 Human dimension of global environmental change

Amsterdam, Netherlands www.earthsystemgovernance.org/ac2009/

Institute of Environmental Studies

Diary Dates

pwc.com

Corporate reporting hot topics and the emerging issues that companies, investors and other interested parties need to think about are discussed in the PricewaterhouseCoopers blog. It was set up in recognition of the growing importance and rapid changes in this area.

Written by David Phillips, PwC’s corporate reporting partner, the blog is updated at

least twice a month. The blog is aimed at all those with responsibility for communicating and analysing corporate performance.

Recent topics have included: highlights from a New Economics Foundation report on ‘Why good lives don’t have to cost the earth’ and the importance of a positive picture of what a zero carbon economy can offer and globally consistent carbon measurement.

Corporate reporting blog – www.pwc.blogs.com/corporatereporting

‘ I am always pleased to hear your views and comments on the postings and to take questions about corporate reporting,’ said David Phillips. ‘A blog works best when it’s interactive.’

Meet the Experts conference The 11th annual Meet the Experts Conference will offer perspectives from leaders in financial reporting, such as standard setters Stephen Cooper of the International Accounting Standards Board (IASB), Bob Herz of the US Financial Accounting Standards Board (FASB) and Stig Enevoldsen of the European Financial

Reporting Advisory Group (EFRAG). Preparers, investors, regulators and auditors will also share their views and debate today’s toughest issues.

The conference is designed to help attendees navigate the rapidly changing environment – it is the biggest conference

in Europe devoted to addressing the latest developments in international financial reporting.

For more details – visit www.meet-the-experts.org, speak to your usual PwC contact or telephone +44 (0) 20 7017 7484

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