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Are real social values a passing trend?Or are people and ethics being put back at the heart of business? Governance opinion article page 6

Will integrated reporting make a difference? IIRC explains what’s happening and the impact it’s having on companies Reporting interview page 10

A key to creating value?Why British Land is changing the way it measures, manages and reports on its business Reporting case study page 16

Do investors value the audit?Survey uncovers what investors really think of the audit and assurance and whether it should evolve Assurance opinion page 19

World Watch

News and opinion on governance, reporting and assurance issues affecting business today

www.pwc.com/worldwatch

Issue 1 2013

2 World Watch Issue 1 2013

Governance news


NewsOpinion

Contents

Governance

24 Investment culture needs to change

Independent review in the UK finds compelling need for change in investment culture to rebuild trust and confidence in equity markets

25 US: More time needed on strategy and crisis response

Survey finds marked increase in time directors dedicate to board work, yet they want more time to oversee strategy and meet with company executives

26 UK: Code revised to tackle international hot topics

Revisions to the Corporate Governance Code address auditor engagement and transparency of annual reports

26 Asset management industry in the spotlight

Consultations in the UK explore how to improve the relationship between asset holders, managers and companies

26 FSA proposals could impact London market’s appeal

Proposed changes to Listing Rules would have an impact on international companies’ board composition and shareholder rights

27 Malaysia: Spotlight on the quality of directors

Changes to the Code of Corporate Governance focus on strengthening board structure and composition

Corporate reporting

28 South Africa: Move to mandatory integrated reporting

Study finds companies are more aware of the impact of non-financial issues on company performance, but still grappling with presentation

29 G4 proposals attract interest and concern

GRI is considering responses to proposed G4 guidelines. PwC calls for clearer structure and stronger links with integrated reporting

29 Global warming: Too late for two degrees?

Findings from PwC’s Low carbon economy index 2012 warn governments and business against a slow response to global warming

30 Japan: IR as a route to greater financial stability

Business leaders, investors and government officials support aims of integrated reporting

30 IIRC: Prototype is step closer to IR Framework

Over 80 businesses and 25 investors are piloting practical implementation of the Integrated Reporting Framework. Final version expected in 2013

30 IIRC: Pilot programme shares its story

Yearbook shares insights from companies participating in development of the Integrated Reporting Framework

30 IFAC and the IIRC agree to collaborate on IR

Memorandum of Understanding seals shared vision for internationally accepted framework for integrated reporting

31 BIS proposes a separate strategic report

UK government proposals don’t go as far as expected but require clear reporting on strategy and business model

31 Clarity in debt and cash flow reporting

Companies are collaborating with the FRC Reporting Lab to provide practical examples on how company reporting can better meet investor needs

Business is developing real social values – passing trend, protective instinct or what?

The emergence of social values is putting people and ethics back at the heart of business, says Dominique Ménard

6

Boards face big challenges on risk oversight

Boards need to respond to risk events in the right way – it’s a balancing act between risk and performance, argues Alpesh Shah

8

Towards better business reporting

In this interview, IIRC CEO Paul Druckman, tells PwC about his vision for more investor-friendly company reporting; Superna Khosla and Jessica Fries discuss how integrated reporting can benefit business

10

What investors want

Investors want voluntary disclosures on net debt, cash flow and segment information. There are risks for those who don’t provide it, say investors speaking at Meet the Experts

13

Social media: time for reporters to join the conversation

Avoiding social media isn’t just virtually impossible these days, it’s a riskier stance than taking the plunge, say Sean Mahdi and Gorham Palmer

14

Case study: British land breaks new ground

British Land believes measuring, managing and reporting the impact of its business is the key to creating value. Alan McGill explains how this is being achieved

16

What do investors really think about the audit and assurance?

Company audits are highly valued and influence investment decisions, but, as Alison Thomas reveals, there is a strong demand for assurance to evolve

19

Standing still is not an option for auditors

Auditors need to take criticism about their performance to heart and take action to put things right, argues Erik Roelofsen.

20

Disclosures – too much, too little, or simply the wrong type?

The essential fashion statement for standard-setters this season is a project on the Disclosure Framework. One is simply not ‘a la mode’ without one, argues John Hitchins

21

Convergence at all costs, or not?

Is global convergence of accounting rules an essential feature of the business world? Peter Holgate asks why some consider it merely ‘nice to have’; or not even that

22

3World Watch Issue 1 2013

32 Survey: Chasm between best reporting and the rest

Survey reveals slight improvement in FTSE 350 reporting but a worrying gap between the most effective reporters and the rest

33 Using integrated reporting to break down silos

Research by the IIRC and Black Sun finds 98% think integrated reporting will improve understanding of how companies create value

34 Are companies doing enough to prevent corruption?

Study concludes that despite improvements, multinational companies are falling short in their reporting of corruption-related issues

34 Banks’ risk disclosures in the spotlight

Enhancing the risk disclosures of banks will help rebuild investor confidence in the industry, says investor

35 Hong Kong exchange encourages clear ESG reporting

Guide recommends: best practice, disclosures and KPIs for transparent ESG reporting

35 US: SASB aims to make sustainability reporting mandatory

New standards board wants consistent and comparable ESG reporting

36 Germany: Regulation moves companies towards IR

New requirements for management reporting focus on strategic goals, non-financial information and forward-looking information

36 ‘Extra-financial’ information used to analyse companies

Report provides insight into how financial markets source, use and are influenced by ‘extra financial’ information

37 Towards integrated reporting award for PotashCorp

Winner demonstrates powerful and insightful reporting, say judges

37 CDP: Managing climate change amid uncertainty

Report explores whether the Global 500 largest companies are strategically focusing on climate change and its long-term impacts

37 PUMA: Environmental impact laid bare

Puma’s EP&L values the environmental impacts of its products from raw material and production processes to final disposal

Financial reporting

38 US: ‘Final’ report on IFRS

SEC staff report on whether, when or how to incorporate IFRS into the financial system – with no recommendations

39 The challenges of global accounting standards

IFRS Foundation reports on suitability of IFRS as a global framework and finds no insurmountable obstacles for US adoption

39 Revenue recognition project nears the end

IASB and FASB get closer to finalising revenue standard

40 Tackling ‘clutter’ in financial reporting disclosures

UK FRC paper sets out a roadmap for a disclosure framework. All parties urged to respond

40 FEE: Reporting of the future

IASB chairman points to integrated reporting as a major development for the future

40 Australia: Managing complexity in financial reporting

Report calls for better use of technology, removal of legal obstacles to material disclosures, and action from the IASB

42 European investors have their say

Investors want a period of stability in standard setting – they say consistency is more important than new standards

42 What’s your view on disclosure overload?

The IASB wants to know whether information in financial statements is valued – public forums are planned

43 Leases marathon passes another milestone

New model to determine when each type of lease accounting should be applied will be re-exposed in early 2013

44 IFRS Foundation consults on governance change

Proposals to separate the role of IASB chairman and IFRS Foundation CEO, already implemented, are being finalised

44 Investors frustrated with banks’ reporting

Investors explain how banks can improve their reporting disclosures

45 Eurozone crisis needs explaining

Investors say disclosures on the potential effects of the eurozone crisis would help them analyse the companies they follow

46 Review draft addresses hedge accounting issues

Review draft offers extended ‘fatal flaw’ review period. Final standard due late 2012 or early 2013

46 New perspective on disclosure framework

EFRAG, the ANC and the UK FRC discussion paper sets out key principles for an effective disclosure period

Assurance

47 IAASB: Proposals to extend auditor’s responsibilities

Revisions will address responsibilities for information in documents accompanying audited financial statements, including management reports

48 The structure of the audit market – under the microscope

EU, UK and US debate about reforming the role of audit and assurance continues to be controversial

49 PCAOB: Views on auditor independence and firm rotation

Proposals for mandatory audit firm rotation lack widespread support from recent public meetings

49 IAASB: Assurance on greenhouse gas statements

Breakthrough standard supports high quality assurance on a company’s GHG emission information

50 IAASB: Designing the auditor’s report for the future

Invitation to comment on the auditor’s report drew divergent views from wide audience. ED due June 2013

51 IFAC: Responding to suspected illegal acts

New proposals might require accountants to breach the principle of client confidentiality when faced with suspected illegal acts

51 Transparency International assurance framework

Voluntary framework will contribute to building robust anti-bribery programmes


Editorial

World Watch team

Editors: Sarah Grey and Nicole Wilson

Consulting Richard Sexton editors: Simon Friend Diana Hillier Alan McGill John Hitchins Peter Holgate Charles Bowman

Contributors: Matthew Kelly, Mark O’Sullivan, Zubair Wadee, Joanna Malvern, Alison Thomas, Bethany Tucker, Graham Gilmour, Richard Gledhill, Diane Walmsley, Roz Crawford, John Patterson, Jessica Fries, Dominique Ménard, Alpesh Shah, Sean Mahdi, Gorham Palmer, Erik Roelofsen, Lay Choon Loh, Rachel Poole, Jennifer Sisson, Emilie Freudon and PwC staff

PwC firms help organisations and individuals create the value they’re looking for. We’re a network of firms in 158 countries with close to 169,000 people who are committed to delivering quality in assurance, tax and advisory services. Tell us what matters to you and find out more by visiting us at www.pwc.com.

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers Legal LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

© 2012 PricewaterhouseCoopers Legal LLP. All rights reserved. PricewaterhouseCoopers Legal LLP is a member of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

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Contact us

PwC has a strong and effective network of people worldwide who can advise on the developments and the implications of regulations. 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 editors.

To subscribe to World Watch magazine (usually published twice a year) or to contribute articles, please email [email protected]

■ www.pwc.com/worldwatch

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The ‘trust deficit’ is clouding the true value of business in society and having a negative impact on business, wider society and our economies. Most business leaders agree that trust is a very powerful asset. Rebuilding public trust is, of course, a key to developing healthy, resilient businesses that can contribute to responsible and sustainable growth in our economies.

I firmly believe that if we all want to succeed in building society’s trust in the institutions we represent, we need a concerted plan of action that we can all contribute to.

Speak upWe need governments to continue to speak up for the importance of business in creating jobs and wealth and to support policies that allow business to flourish.

Business leaders must be prepared to speak up for their own organisations and help people to better understand both their values and the value they create for both shareholders and wider society.

The tone from the top is critical – as the articles on social values (page 6) and risk oversight (page 8) illustrate.

It’s also clear that companies who do measure, manage and communicate their impact and how they create value will have a distinct advantage, as the British Land case study illustrates (see page 16). Sticking to the same old information is not the way forward, if the experience of companies in the Integrated Reporting Pilot Programme is anything to go by (see pages 10-12 and 30-31).

Companies are also being challenged to make their information relevant for different audiences via different channels – and according to some, social media should be part of the mix (see page 14).

Embrace changeThe plan also needs to involve those of us in the professions that support business. We need to embrace change – or as my Dutch colleague says (page 20): “Standing still is not an option for auditors...we need to share our insights so that stakeholders can trust the information companies report.”

We need to and be prepared to engage more constructively with investors and other stakeholders to understand their concerns and help companies meet their expectations appropriately. Have a look at what investors are saying about reporting (page 13) and the audit (page 19)

Building public trust is not about ticking a box – it has to be continually earned by behaviours based on sound principles of honesty and integrity. Some organisations are already reaping benefits from their efforts to build trust, as several articles in this edition illustrate. I urge you to follow their example.

‘Trust deficit’ is a threat; rebuilding trust is key

Richard Sexton

Deputy global assurance leader, PwC


Governance news

OpinionsIn the following articles prominent experts discuss their views on governance, reporting and assurance issues

Social mediaTime for reporters to join the conversation? See page 14

Compelling reportingWhy is British Land measuring, managing and reporting differently? See page 16


The emergence of social values in business is no passing trend. It is a response to the current growth pattern that is putting people and ethics back at the heart of business, says Dominique Ménard

Business is developing real social values – passing trend, protective instinct or what?

Business focus on social values is a movement that could reinstate society’s trust in companies.

The idea of corporate values was integrated into managerial practice long ago. But the financial crisis has brought fresh doubts about the role of business and what it does in civil society as well as a fresh focus on values.

Corporate values started out as professional values – market-winning values such as customer satisfaction and product quality – then began to encompass behavioural and interpersonal values, such as accountability and sharing. They are now being extended to include so-called ‘societal’ or social values, like diversity, job preservation and the conservation of natural resources.

The economic and social uncertainty we have faced in the last decade has triggered a serious divide – a lack of trust between civil society and business.

What’s changed?Business growth is no longer simply accepted – People are demanding that companies justify the choices they make and the means they deploy to achieve their aims. People want businesses to be accountable to the whole of society for the way in which they achieve growth. People want business to offset their economic and financial imperatives against responsible values and to balance short-term goals with sustainable development.

GOVERNANCE OPINION

A serious incident triggers serious questions – Any business affected by a serious incident will today face questioning from the public about its governance, risk management and the effective implementation of its corporate values. The interdependence of economic players and their fragility have become tangible realities.

CSR has an impact on financial performance – There is widespread acceptance of a causal link between the practice of corporate social responsibility and financial performance over the medium and long term. All credit rating agencies now factor so-called ‘non-financial’ elements into their models for assessing business performance.

Over half of the 40 largest listed companies in France, for example, now index part of executive pay to non-financial criteria, compared to just four in 2006.

Communications evolving to build trust – Corporate communications have begun to take account of this stakeholder expectation. Business communications are starting to reconcile corporate performance with social responsibilities – companies’ ability to attract talent, motivate staff, build their customer base and reassure investors depends on it.

Get talking So are these expectations simply a passing trend? Or are they telling us that business is entering a new stage of development, in which companies create value over the longer term, both for themselves and for their stakeholders?

These are questions for the board, whose main duty is to secure the sustainable, long-term growth of the business and reconcile the company’s economic and financial objectives with its social role.

Corporate values and their effective expression in behaviour and practice, or their integration into the business strategy, are still rarely discussed by business directors. So the board’s first job may just be to talk about them!

Does management know what’s at stake?Many businesses do translate social values into concrete, often high-visibility, philanthropy – business foundations have been proliferating and corporate support for humanitarian work is increasing.


Governance newsOpinion

While these may be worthy, they tend to express a limited social commitment as they have little or no connection to the business’s long-term goals and strategy. When the financial crisis hit, budgets earmarked for social projects were, tellingly, among the first to be slashed.

This kind of philanthropy no longer satisfies stakeholder expectations or business needs. Values need to play a new role as an essential management instrument that can enhance the organisation’s culture, humanise it and give meaning to its actions in ways that support long-term financial performance.

Focus on values: the benefits?• Support competitiveness

• Underpin the quality and consistency of decisions taken throughout the group

• Enable better anticipation and management of risk

• Attract talent

• Motivate and retain staff

• Increase productivity and innovation

• Build a positive public image

• Reassure investors

Building social values into the company’s development strategy may finally lead to new, stronger growth models. Lyonnaise des Eaux, for example, says that its growth model changed as a result of its sustainable development drive. They no longer strive to sell as much water as possible, but aim to preserve the resource, and some of their pricing systems are no longer based on volume.

In the current environment, it’s hard to see how the board of directors can afford to disregard corporate values or their application across the business.

Taking action on social responsibilityThe selection of values, validation of objectives and initiatives, and assessment of the company’s maturity often fall to the board’s ethics committee or sustainable development committee, if these exist.

How can boards help the focus on chosen values?• Talk to people or ask for a staff

survey to see if the values expressed in corporate communications are really experienced and shared.

• Make sure that failure to comply with these values elicits appropriate and widely published sanctions.

• Question whether decisions submitted for board approval are at one with the company’s values.

• Make sure that key performance indicators and managers’ performance targets identify adherence to key values.

• Analyse business practices and benchmark performance against your peers.

The attention given by the board to corporate values is in itself a first step in moving from ‘assertion’ to ‘integration’. But turning values into behaviour and practice requires considerable input from the governance bodies that set the tone from the top – it can take time!

The aim of the change process is t o concentrate the corporate culture on the chosen values so that good behaviours are not a matter of observing rules – they come from shared values and life principles.

Convincing stakeholders, especially shareholders, of the sincerity of these values and their long-term relevance is a crucial responsibility for the board – one that requires cutting edge communications. But those who do explain their social ambitions clearly, measure progress and make the links with strategic choices and performance will build trust in their organisation. Trust bridges the divide between business and civil society. And that’s a platform for sustainable growth in anyone’s book.

Values: from inaction to innovation

The four levels of business maturity

1. Inaction: complies with regulations

2. Assertion: communication without action

3. Integration: social values reflected in actions and behaviour

4. Innovation: social values drive development of new economic models

Source: PwC

Dominique Ménard

Partner at PwC


The challenge for boards today is to make sure that they can respond to risk events in the right way. It’s a balancing act between risk and performance, argues Alpesh Shah

Boards face big challenges on risk oversight

GOVERNANCE OPINION

“ If companies and the economy as a whole are to grow in today’s environment, it is vital that directors put risk management at the heart of business strategy. Understanding risk helps you to become more enterprising without jeopardising your business…take the wrong kind of risk and you are heading for disaster…avoiding risk altogether means you are condemned to stagnation.”

Simon Walker, director general of the Institute of Directors

There are few aspects of a board’s functioning that are as crucial to long-term corporate success as risk management. Organisations that understand the risks they face and can articulate their risk appetite and define their risk strategy will tend to make better decisions, have greater agility and a sharper competitive edge.

Discharging the board’s duties and responsibilities around risk oversight is rarely straightforward. At the heart of the challenge are two apparently conflicting desires. First is the push to improve performance – shareholders demand it and basic competition compels it. But the second sets up a tension – it is the need to understand and manage the risks involved in achieving that performance.

Potential tension Non-executive directors often have a less detailed awareness of the key risks within the business compared to management. The nature of the role means they have access to less information than management on which to assess the risks that the organisation takes. Addressing this imbalance of information is often a challenge.

The source of information around risks also varies significantly between organisations. Some rely on risks being identified and reported from lower levels in the organisation and aggregated company wide by someone responsible for risk management. Others rely on senior or executive management preparing a suitable

summary of key risks and responses for board consumption. Such approaches are not always founded on underlying risk indicators from within the business and may be unduly influenced by executive perceptions of risks and board expectations.

Gathering information The key question is how much of this risk information from the business is provided to the board? Management naturally seeks to review and potentially sanitise information before presentation to the board. As a result, board members normally gain some understanding of the effectiveness of risk management, but may lack focus on key or emerging risk issues which can hamper non-executive directors’ (NED) ability to oversee risk well.

It’s a struggle for many companies to prepare an appropriate risk summary for board members that succinctly articulates the key risk exposures, threats and emerging issues. Often such analysis is separate from strategy and performance discussions, so there is little chance of understanding risk in the context of achieving strategic objectives and delivering shareholders returns.


Often the risks that are most material to an organisation will be those that most disrupt the business’s ability to achieve its objectives. Understanding how much risk has been taken in the pursuit of strategic performance is one of the ways that the board can tell if the current risk profile is appropriate.

Understanding and challenging Even if the right information is given to the board, it’s not always easy for NEDs to assess and challenge it, especially if they come from unrelated industries.

Directors’ responsibilities are ever-increasing and NEDs commonly say that they have limited time and resource to discharge them. How much time does the board (and NEDs in particular) devote to understanding and addressing risk issues? Risk does now play more of a role in board discussions, but the growing complexity of organisations and the risk issues they face now demands more time and resource to be properly understood and addressed.

Risk contagionToday risks can manifest themselves suddenly and have an impact on the organisation immediately. In the past, operational failures could often be managed internally with limited impact on an organisation’s reputation.

Today, any risk event is potential headline news that can result in reputation damage and have an impact on the business going forward. This ‘risk contagion’ demands quick and agile responses to minimise the damage to the organisation. It also requires organisations to develop strategies to deal with the growing importance of reputation risk and how it is related to financial and other risks.

Boards and risk management functions need to be prepared to respond quickly and minimise damage if risks events do occur.

Risk thinking Organisations operate within a variety of corporate governance structures. But whatever the framework, clear risk oversight from the board (distinct from management) is essential. Good risk management within organisations is undermined if it lacks the board’s breadth of risk thinking. There is a real danger that risk management focuses only on day-to-day business activity, such as health and safety, financial or operational issues – and in doing so, completely misses the bigger picture.

The board’s diversity and broad perspective on external hazards and strategic threats helps support a richer and more comprehensive risk management process. But demonstrating the potential relevance of these external, independent views to the organisation and getting senior management and executive buy-in present another challenge for the board.

The role of the audit The board will often seek assurance from internal and external audit around the effectiveness of controls intended to manage key risks. However, many risk management frameworks fail to appreciate the true risk exposure that the controls manage. The result? The effectiveness of certain controls in reducing the impact and likelihood of risks is not always appreciated and so their importance is underestimated.

It is often the failure of one or more of these controls that leads to a previously well controlled risk having a material and unexpected impact on an organisation. So boards need to understand the reliance being placed on key controls, as well as keep a grip on the underlying risks for the business.

Consensus around the board table and confidence in management and external stakeholders is a tempting prospect. But NEDs can never lose sight of the good governance essential: challenge. And challenge around risk is no exception.

Appropriate risk information needs to be available to the whole board; the board needs sufficient risk management competency to assess this information effectively; and there needs to be an open and constructive dialogue between executive and non-executive directors around risk issues.

See Business risk – a practical guide for board members, published by the Institute of Directors’ in association with PwC and others, and Winning with governance, risk and compliance, from PwC.

■ www.iod.com

■ www.pwc.co.uk/riskresilience

Opinion

Questions for board members• Is the quality and breadth of

risk information you see as a board member enough for you to really understand the organisation’s risk profile?

• How confident are you in your board’s ability to understand and challenge the organisation on the effective management of risk?

• How prepared and agile is your organisation and the board to respond to risk situations should they arise?

Alpesh Shah

Director in PwC’s Actuarial Risk Practice


CORPORATE REPORTING INTERVIEW

Towards better business reporting

Is integrated reporting (IR)about increasing and monetising sustainability information in annual reports? Or is it simply better business reporting?It’s definitely about better business reporting. We have a very clear definition of integrated reporting and it really is about communicating the strategy of an organisation, together with its prospects and its performance and its governance. It is all about how to create and preserve value in the short, medium and long term and it needs to be a concise communication of value, not just compliance reporting.

It’s very important to understand that investors are our primary audience. We are expecting other stakeholders to have a real interest in it, but we’re focused on investors and that distinguishes us from the sustainability reporting community.

Integrated reporting is a hot topic for companies and investors. In this interview, Paul Druckman, CEO of the International Integrated Reporting Council, tells PwC about his vision for more investor-friendly company reporting

With our pilot programme we found that integrated reporting is helping that integrated thinking and strategy to be pushed right down into the business so that it’s clear – because everybody has to work together.

How far have you got with the framework and tools to enable business to take action?We released the discussion document in September 2011 and we’ve released a prototype of the framework. A full draft for consultation will be published in April 2013 and the v1.0 of the framework is due in December 2013. But all of these are just stepping stones so that people can understand integrated reporting.

So what we’re saying to companies is: be prepared, start the process now because, if you don’t, you will suddenly be confronted with something that you didn’t help to craft and you won’t have the processes inside your business to benefit from it.

What’s the difference between current reporting and what you would like to see in five years’ time?I think we have a compliance mindset in reporting right now. But let’s get out of the reporting cycle that we’re in and look for better reporting. This isn’t about more reporting, we want it to be better. And companies internally have wonderful reporting generally, so let’s actually express that in the external environment so that we can understand the strategy a business has to be able to create value.

What are the other benefits of integrated reporting? Why is it important for business today?One clear driver is that it enables a business to actually tell its own story. There’s a saying: “don’t let others define you”. At the moment there’s no real place for companies to define what the business is trying to do in management’s eyes. And I think companies want to do that, but all sorts of liability issues put barriers in the way.

Another benefit is taking integrated thinking inside the business. At the board level, organisations do tend to have that strategic oversight of their business, but quite often that integrated thinking and integrated strategy doesn’t come through into the rest of their organisation.

Paul Druckman


OpinionOpinion

What is your one key message for companies, regulators and others?Get engaged – make sure you understand what integrated reporting is and don’t assume it’s something that it isn’t. Make sure that what we are producing fits with where you want to go, because there’s still the opportunity to influence that. And certainly in May, June, July of 2013, please take the time to respond to the draft framework.

I think you will be really delighted with what it is and the benefits it can bring.

What’s the experience of companies in the pilot programme?Superna Khosla, relationships director at the IIRC, talks to PwC about the benefits that pilot programme businesses are seeing from moving towards integrated reporting

What are the benefits of integrated reporting?It’s been only a year, but something like 80 companies have come through the pilot programme and some have even got to the stage of being able to produce a more ‘integrated report’. Most companies are experiencing significant internal benefits – we are seeing people really focusing in on strategy, for example. And it’s making people think again about some of the key performance indicators (KPIs) that they manage themselves with. It’s making them challenge some of their internal decision-making processes.

Another benefit is that the silos are now beginning to break down and ‘integrated thinking’ is starting to come through. So for example, the finance teams, who are responsible for a lot of the external reporting, are beginning to work more closely with sustainability teams and others who produce important information on some of the more intangible value that is in the company.

And what are the challenges that companies have been experiencing as part of the programme?The first challenge is that they are actually developing the nuts and bolts of the framework themselves because we only have principles and concepts from the discussion paper to go on. It really is down to a personal commitment from individuals to make this evolution in corporate reporting happen – and it’s fantastic to see the amount of progress they are making.

Integrated reporting also challenges people to think about certain areas slightly differently. So materiality is a real challenge for companies. There is the principle and the objective of having concise communications, but what do you choose to leave out without cherry picking? The business

model is another example where, internally, people have their strategy, but specifically identifying where the value is coming from and reporting that clearly is tough.

Pilot programme businesses have been alerting us to their challenges, so we have responded by setting up working groups on the main areas: materiality, the business model, capitals, connectivity, value creation and assurance. We’re putting some papers out shortly to give people some tools in these areas.

So that’s the preparers’ perspective. How are the investors looking at this?For us the investors are the primary audience for this first version of the integrated reporting framework. So we focus on finding out what gaps they see in current reporting and thinking about how their needs can be met.

We set up an investor network in March this year and 28 institutional investors have signed up to that. They tell us that they want to see how companies perform against their strategy. And they want to know, how strategic objectives actually support the long-term creation of value. So we are taking these messages back to the pilot programme businesses.

Only around 20% of the market value of any company today relates to its tangible assets. So what about the 80% of intangible value that investors really need to understand? And what’s the framework for people to report on those?

We have a number of companies in the pilot programme, such as Microsoft and SAP, for whom intellectual capital is very, very important. So the reporting of that capital using a sensible and consistent framework is important for them. And, of course, it’s crucial for the investors to see where their value comes from.

“ The pilot programme is open for another two years – so companies keen to explore how they communicate value effectively can still get involved”Superna Khosla, Relationships director, IIRC

Superna Khosla


How far have companies moved towards integrated reportingIn this interview, Jessica Fries, a director at PwC and a board member of the IIRC, shares her insights on the move towards integrated reporting

More and more companies are asking questions about integrated reporting and what that means to them. What developments are you seeing on this agenda? We’ve just finished a review of 150 companies’ reporting from about 25 different countries to assess how far they are moving towards ‘integrated reporting’. It revealed great insights into some of the emerging practices in this area.

What were the particular highlights? Leading companies are trying to take a longer-term perspective of their business and starting to centre their reporting on their business model and strategy. Using strategy to structure the whole report really helps users understand what the company is all about. And many companies that did this well also provided interesting segment information that was structured around their strategy.

The clearest reporters were also adept at putting their strategy in context – discussing how external ‘mega trends’ were affecting their business and backing that up with some hard numbers. They are clearly considering (and reporting on) how their company is affected by some of the mega trends, such as debt, energy shortages, poverty and climate change, and how they will respond and identify opportunities for the company.

A great example is the companies that are identifying how many of their products could be affected by these mega trends and where they may need to face up to an emerging resource scarcity and change their product strategy in the medium term.

Can you give a specific example of any companies that are really moving it forward?Yes. Unilever is one of the most recent joiners to the IIRC’s pilot programme and is a good example of a company trying to face up to some of the challenges that their sector faces. They have been grappling with how to make sure that they have the key resources the company needs to succeed and grow. But there’s a real tension between this growth ambition and the recognition that growth can’t be infinite – we’ve only got one planet. Integrated reporting provides them with the right kind of tools to look at what information they need internally to inform their strategy and how they can use it externally to communicate what they are trying to do.

What advice would you give companies starting to look at integrated reporting? Start by stepping back and thinking about your business model. Ask yourself:

• What are the inputs (resources) needed for the business?

• What does the business do with those resources?

• What comes out at the other end?

• And how does that process create value?

When I speak to investors, that’s exactly how some of them are articulating what they want from reporting. Clearly, focusing on the things that matter to the business is a good basis for effective communication.

Who tends to drive this agenda within organisations?If you look at the companies moving forward fast, it is being driven at board level. Without that board support you can really struggle because you need to bring different parts of an organisation together in new ways – that’s much harder to achieve from the bottom up.

Some CEOs already see integrated reporting as an essential management tool to drive more relevant management information, differentiate their brand and build trust in their business.

This article is based on filmed interviews conducted by Simon Friend. The videos are available on the website.


For the integrated reporting outline framework and the pilot programme year book see page 30 and the website.

■ www.theiirc.org

CORPORATE REPORTING INTERVIEW

What is ‘integrated reporting’?

“Integrated Reporting (IR) is the language for resilient business. It is the means by which companies communicate how value is created and will be preserved over the short, medium and long term. This information is used principally by investors to support their capital allocation decisions. It involves a set of processes and activities, one result of which is communication, most visibly through a concise, periodic ‘integrated report’, about the way in which an organisation’s strategy, governance, performance and prospects lead to the creation and preservation of value.”

International Integrated Reporting Council

Jessica Fries


Opinion

What investors wantVoluntary disclosures, on net debt cash flow and segment information are getting better. Those that get left behind could be at risk

This was a key message for company reporters from investors speaking at PwC’s 14th annual Meet the experts conference in London in November 2012.

Members of the Corporate Reporting Users’ Forum (CRUF), the discussion group formed in 2005 to bring investor insights to the reporting debate, shared their experiences and advice in an interactive session. Some key themes emerged:

• Investor trust must be earned through high quality, clear reporting of consistent and comparable information.

• Good reporting isn’t about mere compliance, but about telling the company’s story clearly. Investors want management to explain their strategy and provide information that allows them to assess performance against that strategy, and against the performance of the company’s peers.

• Investors like data, including non-GAAP information. But this should be tagged to audited GAAP information through sensible reconciliations.

• Companies could provide more helpful voluntary information on their acquisitions, including the actual price paid, return on operating assets at historical cost, and how that return is calculated, with reconciliations to GAAP data.

• Cash flow statements should, whenever possible, begin from operating profit as shown in the income statement.

• Investors don’t necessarily agree on whether quarterly reporting is useful. Those in favour suggest it helps understanding where businesses have a lot of seasonality. However, some feel it can encourage the market to focus on short-term noise rather than taking a longer-term strategic view of companies’ development.

“ You cannot take investor trust for granted. The key to earning investor trust is to be consistent in what you say year on year. Keep it comparable. If you do that, you get credibility.” Peter Elwin, head of European Pensions, Valuation and Accounting Research, JP Morgan

“ We are trying to get away from the idea that [good disclosure] is a compliance exercise. If you want to instil confidence, start telling the broad story in a way that [investors] don’t need to search for it in 400 pages.”Crispin Southgate, a founding director of Institutional Investment Advisors

• Investors value information on net debt, including detailed maturity tables and net debt reconciliations that make clear how components of net debt relate to balance sheet amounts.

Key messages• Many companies are already

improving their voluntary disclosures

• Good reporting isn’t about pure compliance, but about telling a clear story

• Reported information must be consistent and comparable where possible

• Investors like data: non-GAAP measures are helpful if tied back to the audited financial statements

■ www.meet-the-experts.org

“ [reporting information is] a tool to help value your companies. We are looking for consistency and for clarity and we are time constrained, so we don’t always read all the footnotes. We value an open communication with management. Non-GAAP measures are important because we are looking for you to give us a story of what your company does, and how you are going to reach your goals.”Terri Campbell, managing director, Liberty Mutual Group Asset Management

“ My view of stewardship is that the primary goal of a management team should be to maximise long-term return on capital. That’s hard to measure, but you [company reporters] can help. The solution is better voluntary disclosure. Talk about how you look at return on capital – explain the internal metric for how you decide whether to invest.” Peter Reilly, head of Industrial Sector, European Equity Research, Deutsche Bank

Note: CRUF members were expressing their own views, not necessarily those of their organisations

What CRUF members told Meet the experts delegates


CORPORATE REPORTING OPINION

Social media: time for reporters to join the conversation What’s holding them back?

Paradoxically, the high visibility and mass market appeal of social media may be a turn-off in a corporate environment dominated by concerns over governance and risk management. The main reasons for not establishing an active social media presence focus on: potential misuse of the medium (by employees or others); cyber security threats to company systems; and reputational damage either through online attacks or from lack of experience.

But the risks of not joining the conversation are even greater. For a start, people talk about organisations whether they participate or not, which leaves a choice: take part in these conversations or let others control your brand. Sticking to just traditional mechanisms and channels to try and control your message doesn’t work any more – people expect richer interaction.

Second, online and mobile communities are, potentially, rich sources of goodwill and positive energy. You can amplify key messages at relatively low cost compared with traditional media. Ask yourself: can my company compete effectively if it doesn’t sharpen up by using this channel for meaningful dialogue with customers, partners and staff?

And finally, social media is already an established channel for recruiting and managing the talent that will take organisations forward. Vibrant social media networks are a key enabler of innovation and efficiencies that have a direct impact on business results. Again, deciding not to take part looks increasingly like life in the slow lane.

Avoiding social media isn’t just virtually impossible these days, it’s a riskier stance than taking the plunge, say Sean Mahdi and Gorham Palmer

Social media is widely credited with helping to bring about major changes in the way that businesses and their stakeholders interact with each other, whether they are consumers, investors, regulators or commentators. Technology is the enabler, but the success of social media lies in the desire to have conversations. And these conversations are public, which calls for a whole new level of transparency.

Corporations that plan and manage their social media presence can address their stakeholders’ demands for increased transparency and have meaningful dialogue about business performance that builds relationships and trust.

The numbers stack upThe sheer scale of its success backs up social media’s attractions as a dynamic route to established and new markets and communities of all kinds. If Facebook were a country, it would be the world’s third biggest after China and India. It took television 13 years to reach a worldwide audience of 50 million; Facebook took only three years from its founding to pass this milestone and in October 2012 it had more than 1 billion monthly active users.

While digital factoids make for lively and entertaining infographics and YouTube presentations, the big story is what this says about everyday consumer and investor behaviour and expectations. Online sources and communities have become go-to sources of information. For example, 78% of consumers trust recommendations from their peers while only 14% trust advertisements, and 88% of customers are very likely to use the internet to research financial products. Closer to home for corporate reporters, around 50% of professional investors in the US regularly use blogs and follow each other on Twitter and StockTwits, and more than 60% of institutional investors say that social media will become increasingly important to them.

Let’s talk about riskGlobal CEOs also expect that social media will prompt a ‘significant change’ in their strategy, according to PwC research. US corporations are leading the way in social media use – some 365 of the Fortune 500 have active Twitter accounts while 22 of the FTSE 100 are yet to send their first official tweet, and follower numbers for most active corporate accounts on the index remain low.


Opinion

Into the unknown or a step ahead?Even companies that accept the case for social media may balk at the commitment involved. Social media is no different from any other strategic initiative: a good starting point is to have a realistic idea of what can be expected from the experience, in terms of both the potential benefits and the necessary level of investment. A social media programme is not a small undertaking – once started it needs continual care and attention to stand a chance of meeting the expectations of its audience.

While some sectors are further ahead than others in embracing social media, the overall level of maturity of B2B (business-to-business) organisations is still quite low – with a few notable exceptions. Successes that B2C (business-to-consumer) organisations have had with social media hold lessons for their B2B counterparts. There is a real opportunity for progressive B2B organisations to emulate global leaders and differentiate themselves from their competition.

Bringing reports to lifeCorporate reporting, investor relations and other stakeholder communications are as yet relatively under-used topics of social media conversation. Traditional reporting may be changing, but its regulated mix of compliance data and set formats has not readily lent itself to the more dynamic, two-way and free-form arena of social media. Even the best corporate reports are more likely to provide answers than to invite questions and start building relationships.

Understandable concerns are frequently voiced over the speed with which market-sensitive data can be leaked and the difficulties of policing comment on company blogs and social media accounts.

But in today’s mobile and connected world, business audiences and buyers expect higher levels of engagement and richness in their interactions with other businesses. A corporate website alone will not meet all their information needs, and companies should look to other digital channels to build dialogue.

Periodic, formal reports and market updates issued as broadcasts are necessary but can look increasingly like blunt instruments compared with direct engagement with specific online communities. Investing in social media (in a planned and measured way) is increasingly becoming a test of corporate commitment to building the rounded picture of the organisation demanded by key stakeholders. And it will open up more opportunities than even the best collection of corporate reports.

Being social makes better business senseDominic Jones, writing in the IR Web Report, in the US said:

Company disclosure channels that once seemed innovative – such as investor relations websites, webcasting and PR wire services – are struggling to stay relevant as investors grow accustomed to receiving information from companies in real-time on their favourite social networks in formats that are easier to access and use. These changes are irreversible.

Social media offers better user experience Facebook now features prominently in [aluminium giant] Alcoa’s corporate reporting. The company’s page on the giant social network [is] transformed on the day of its [quarterly earnings] into a frequently updated feed of new information that its almost 14,000 followers are able to comment on and share with their friends, things they cannot do on the company’s corporate website.

Alcoa also uses the company’s Twitter account to provide links to the earnings release, earnings call webcast and the company’s investor presentation, which was posted on the SlideShare presentation sharing service. The company also highlighted key facts and quotes from its release for its 2,600 Twitter followers.

I can’t say this loud enough: social media is now mainstream, and companies that haven’t yet started using social media in their investor relations programmes are in danger of finding themselves talking to increasingly smaller audiences.

Source: extract from IR Web Report

Sean Mahdi

Consulting director at PwC

Gorham Palmer

Consulting senior manager at PwC


British Land is using innovative reporting to demonstrate how a better understanding of their broader impacts supports and enhances their business strategy. Their socio-economic impact assessment goes to the heart of the Government’s growth agenda, and provides evidence that private sector-led investment in construction activity in London can generate rapid economic activity not only in the capital but across the UK regions as well.

British Land’s vision is “to build the best real estate investment trust in Europe” – it is one of Europe’s largest real estate investment trusts with a £15.8bn commercial property portfolio. The company’s approach to corporate reporting is no less ambitious. It has an extraordinary commitment to identifying, measuring and managing the wider effects of its activities and this has become a key driver of value for the business.

Measuring socio-economic contributionIn 2010 British Land decided to quantify its contribution to the UK economy, including how many jobs it supports and how much tax it pays. While the company had a tradition of sustainability reporting dating back almost ten years, this was a major commitment, involving a significant extension of impact assessment techniques previously only used at the project level.

Breaking new ground in corporate reporting

CORPORATE REPORTING CASE STUDY

The study broke new ground, calling for an entirely new methodology to measure British Land’s activities (‘own impacts’) as well as the direct, indirect and induced effects of its tenants (‘enabled impacts’).

In 2012, British Land extended the analysis to uncover the socio-economic impact of its £2.1bn construction programme at the national and regional level. Building business, creating growth, published in September 2012, offers stakeholders a deeper understanding of the business by presenting finance, development and tax data together with information on expenditure and sourcing along the supply chain. The report finds that British Land contributed £1.2bn and an estimated 32,300 jobs to the UK economy between 2011 and 2015 (see diagram).

While most of British Land’s construction activity takes place in central London, the analysis identifies projects that directly support jobs for steel workers and washroom equipment suppliers in other parts of the country. The report has been welcomed as an illustration of the national effects of major construction programmes undertaken in the capital.

Total tax contributionAssessing British Land’s tax contribution was a major undertaking. The study examined all the taxes paid by the company to each level of government (including business rates, employer and employee National Insurance contributions, planning and environmental levies and others). British Land tax teams worked with PwC to identify data, structure data collection and communicate clearly all the tax paid and collected relating to its property, product, people, planet (environmental) activities as well as its profits.

The amounts – a £121m direct tax contribution and an estimated £1.5bn paid by its occupiers in 2011 – present a much fuller picture than the tax line in the company’s financial statements (see chart page 18). This last point has special significance for British Land. As a real estate investment trust (REIT), the company is exempt from corporation tax on its property rental business, yet the analysis of its total tax contribution shows that British Land makes a major contribution and that its profit-related taxes have increased.

British Land believes measuring, managing and reporting the impact of its business is the key to creating value. Alan McGill explains how this is being achieved


Corporate responsibilityBeing recognised as a responsible developer, landlord and business partner is not just window-dressing for British Land: it is a key competitive factor in its dealings with investors, tenants, local authorities, community groups and other stakeholders in the planning and letting processes. The company believes that detailed reporting on “the measures that matter most to our business and our key stakeholders” helps sharpen its competitive edge and opens up new opportunities for value creation.

“Our approach shows that we are confident – we set ourselves tough targets. But to get credit for being ethical, you have to be prepared to report progress in some detail, warts and all,” said Justin Snoxall, head of the business group at British Land and corporate responsibility (CR) leader for the company’s managed portfolio. “We are trying to push the boundaries to ensure that we are performing as well as we possibly can and identify where we have to improve.”

Delivering environmental and commercial successCorporate responsibility is fully integrated with the corporate strategic priorities. For example, managing buildings efficiently is a core component of corporate strategy, and British Land invests significant time and resources in working with property management companies to increase their focus on efficiency – and with occupiers to support their own work to reduce energy. Although this does not have a direct impact on their own costs, the company’s measurement and reporting of energy, water usage, waste and greenhouse gas emissions enables it to quantify the savings they can pass on to tenants of their buildings. This has saved £3.3 million over the last three years – helping to attract and retain tenants.

Community charter A new Community Charter was launched by the company in July 2011 to promote best practices and introduce a standardised framework for community support across all its sites. The charter shows its investment in measuring progress towards “being the best neighbour we can be”. Community programmes have direct ties with the company’s local

socio-economic impact through retail sites and office developments where occupiers and suppliers make a difference. Apprenticeship schemes, local education and training initiatives have won plaudits for creating employment and developing skills at key sites in the UK. An estimated 19,400 people benefited from the company’s community programmes last year. This is another example of British Land measuring and reporting on its wider impacts, and considering how its place in local communities can enhance and support its business strategy.

Capturing the benefits Sarah Cary, sustainable developments executive and member of British Land’s CR committee, emphasises the benefits of broader reporting: “By presenting the same level of detail on key non-financial data as we offer for our financial data, we are giving our stakeholders the opportunity to get a better understanding of our social, economic and environmental performance. They have told us this is important to them and we want them to question us on it.”

Opinion

*Our future occupiers’ annual contributions are the portion of those generated by their business activities at our properties, on the basis of our percentage ownership of each property. They were estimated based on the average density ratio of workers per sq ft of space developed and on the average gross value added per worker, once the buildings are fully occupied. estimations do not include multiplier effects through supplier and employee expenditure.

Since 2011, together with our development partners, we have committed £2.1 billion to create 2.3 million sq ft of office space and 1.7 million sq ft of retail space by 2015. We are leading central London’s largest committed office development programme.

Developing buildings is a fundamental part of our business, which sees us working with teams of external specialists, such as architects, engineers, main contractors and trade contractors.

PwC analysed the contribution of British Land and our development partners across our committed UK development programme, as at 31 December 2011. excluding land costs and interest payments, this comprises £1.1 billion of expenditure from 2011 to 2015.

In addition, we have a 1.4 million sq ft committed retail development in Continental europe, at Puerto Venecia in Zaragoza. We also have 2.7 million sq ft of prospective development projects.

Research by the UK Contractors Group highlights the significant contribution that construction makes to the UK economy, both at a national level and in supporting the regions. The construction sector employs 10.5% of the UK’s workforce, providing jobs for 3.1 million people.̂

Our analysis shows that every £1 million we spend on construction generates an estimated 31 jobs

= + + =9 15 7 31£1mBritish Landconstruction expenditure

direct jobs indirect jobs induced jobstotal jobs

British Land generated

^ UK Contractors Group Construction in the UK economy (2012)

OUR CONsTRUCTION PROGRAMMe

£1.2bn2011-2015 contribution

to the UK economy (gross value added)

£1.1bnannual contribution

to the UK economy by future occupiers in our

new buildings*

32,300jobs

supported 2011-2015 through construction

activities

10,200jobs

supported annually by future occupiers in our

new buildings*

2BRITISH LAND SOCIO-ECONOMIC CONTRIBUTIONS REPORT 2012

Source: British Land Socio-economic contributions report 2012

“ To get credit for being ethical, you have to be prepared to report progress in some detail, warts and all.”Justin Snoxall, British Land


British Land is keen to ensure that its data stands up to stakeholder scrutiny. It provides independent assurance on selected data presented in its corporate responsibility reports to demonstrate the credibility and robustness of key performance data presented. And it provides further transparency by publishing the methodology used for the socio economic assessment on its website.

Future-proofing strategyInvestment in broader business reporting is paying off. While data gathering and monitoring requires organisation and discipline, it prepares British Land to meet new mandatory emissions reporting, building regulations and planning requirements without significant extra cost, and building business value in the process. The company cites readiness for regulatory change – including the Energy Act and the Localism Act introduced in the UK last year – and effective relationships with regulators and policymakers as among the key benefits of its holistic approach to reporting.

British Land is recognised as a proactive landlord and property developer that local authorities are keen to partner with on new initiatives. “I think the fact that we demonstrate that we are willing to be transparent and show how we lead, gives us credibility in dealing with government,” said Mr Snoxall.

Lessons from British Land’s CR reportingBusiness firstFocus on the issues that really matter to your business and your stakeholders. Corporate responsibility at British Land is about making better use of assets and focuses on how the company adds value through its portfolio, beyond bricks and mortar.

Be ambitiousSet stretch targets and be confident that you can find ways to achieve them, or at the least learn a lot in trying. British Land’s inclusive approach to CR draws on all the expertise within the company and in its wider stakeholders and interest groups.

Be prepared Broader business reporting can generate significant amounts of data that need to be managed. British Land has taken a strategic approach to collating, managing and validating its data. This includes building close relationships with its outsourced property management agents and key suppliers.

Be strategic Align your reporting of non-financial data with business strategy and be clear about the implications for your business.

The company has built an impressive body of evidence on its economic, social and governance performance and continues to push for greater improvements. And the market is taking note. “Our surveys of office occupiers increasingly show that they are not just coming to our buildings because they are good buildings and in good locations,” Mr Snoxall added. “They are coming to them because they value British Land’s reputation for managing these buildings well. They understand that we are there to provide a good service and support their business needs.”

Key reportsBritish Land includes a summary of the strategically-relevant corporate responsibility activities in the annual report and accounts and uses a suite of reports to present further details, including detailed CR reporting methodologies and independent assurance statements on key performance data. The reports:

Building business, creating growth – Our socio-economic contribution 2012

Being the best at what matters most – Corporate responsibility report 2012

Delivering performance – Annual report and accounts 2012

Our community charter – July 2011

■ www.britishland.com

Alan McGill

Partner in the Sustainability and Climate Change team at PwC

Our occupiers’ tax contributions through business activities at our properties in 2012* (combining amounts borne and collected)

Our total tax contribution in 2012 by type of tax^ (combining amounts borne and collected)

Corporation Tax Business Rates Payroll Taxes Planet Taxes (landfill tax, climate change levy and air passenger duty)

Property Taxes and Levies (business rates, stamp duty and Section 106 payments)

People Taxes (payroll taxes and tax on benefits)

Profit Taxes (corporation tax and tax withheld on property income dividends)

Product Taxes (VAT and insurance premium tax)

£1.5bntaxes borne and collected by our

occupiers

£121mtaxes borne and

collected by British Land

HOW We CONTRIBUTe TO THe PUBLIC PURse

£188m

£1,051m

£0.8m

£49.8m

£37.0m

£22.7m

£10.4m

£247m

^source: Data provided by British Land in the PwC Total Tax Contribution survey for the Hundred Group.

Taxes and levies collected Taxes and levies borne

† In the 2008 financial year, our corporation tax contribution spiked when we paid a one-off corporation tax charge of £291 million to convert to ReIT status, equivalent to 2% of the market value of our investment properties.

Our total tax contributions since 2006^350

300

250

200

150

100

50

0 2006 2007 2008 2009 2010 2011 2012

£52.0m£67.5m

£54.2m

£82.5m £90.6m£120.7m

£322.3m

†

Our status as a Real estate Investment Trust affects the way we pay and administer tax (see glossary on the back cover). It means that our profits are predominately taxed via property investment dividends rather than corporation tax.

*PwC estimated the payroll taxes, business rates and corporation taxes borne and collected by our occupiers. There are other taxes that these businesses pay that were not included, and so the total taxes borne and collected by our occupiers are greater than £1.5 billion.










occupiers




£188m

£1,051m

£0.8m

£49.8m

£37.0m

£22.7m

£10.4m

£247m





300

250

200

150

100

50

0 2006 2007 2008 2009 2010 2011 2012

£52.0m£67.5m

£54.2m

£82.5m £90.6m£120.7m

£322.3m

†












occupiers




£188m

£1,051m

£0.8m

£49.8m

£37.0m

£22.7m

£10.4m

£247m





300

250

200

150

100

50

0 2006 2007 2008 2009 2010 2011 2012

£52.0m£67.5m

£54.2m

£82.5m £90.6m£120.7m

£322.3m

†




Source: British Land Socio-economic contributions report 2012


ASSURANCE OPINION

Although the investment community takes comfort from knowing that financial information has been through the audit process, investors and analysts say they would like audit reporting and the information on which assurance is provided to evolve so that they remain valued in the future.

We recently surveyed over 100 investment professionals in 11 capital markets, to understand their views on audit today and how they would like it to evolve in the future. The findings of the survey, Assurance today and tomorrow, have implications for business and the audit profession alike.

More insightThe investors and analysts we interviewed are keen to gain greater insight from today’s audit process. Some of their suggestions, such as insight into the key areas of judgements made during an audit, are actively being discussed by the global audit community.

However, in all of their observations, they are quick to highlight potential practical challenges that might arise. How in practice can auditors provide insight without added information simply becoming boilerplate statements? Would the conversations between auditors, audit committees and management become less frank if elements of that discussion were subject to public report?

What do investors really think about the audit and assurance?

However, this does not prevent management from taking a proactive approach to meeting this need. Management should therefore consider the information they report that is price sensitive. Is it reliable? Is it consistent over time? In this world of constant challenge and scrutiny, this is arguably a message from the investment community that we should all consider in greater detail.

The challenges set out for the audit profession in Assurance today and tomorrow will not be resolved over night. Nor can the profession make progress alone. If we want an assurance and reporting model that is fit for the 21st century, analysts and investors along with management and other stakeholders will need to be engaged in the debate.

■ Email: [email protected] for a hard or soft copy of the survey

Alison Thomas

PwC director and former investor

It’s also striking that respondents to the survey don’t see the audit in isolation; to them it is part of the overall system of governance. So when thinking about enhancing disclosure, they are not focusing solely on the audit report. For example, investors were generally satisfied with how going concern matters are addressed in auditor’s reports today, but they are clamouring for more transparency from management around covenants.

Hazy understanding of audit committeesWe were surprised by how few of those we interviewed had ever met with any audit committee members. A large number confessed that they had only a hazy understanding of the function that audit committee members perform. As audit committees act as champions of shareholder interests, finding a mechanism to allow investors to understand better the effectiveness of their work is a clear conclusion from this survey.

Measures that move markets In the view of those we interviewed metrics that move markets should, in general, be subject to some form of independent assurance. Ever cognisant of potential unintended consequences, some cautioned against introducing any new mandatory requirements for assurance that might reduce management’s propensity to report key non-financial metrics (they would prefer unassured data to none),

Company audits are highly valued and have a major influence on investment decisions, but, as Alison Thomas reveals, there is a strong appetite among the investment community for assurance to evolve

Opinion


ASSURANCE OPINION

Auditors need to work hard with others to make sure that the audit opinion is clear, its scope relevant and the processes involved fully transparent. We need to anticipate the future better, increase the use of smart technology and tailor information better to the needs of the user.

What are we aiming for? We’re aiming for a capital markets system that creates value for all stakeholders and financial capital that supports the value-creating capability of organisations. And as a result we expect:

• Investors to have more trust in the real value of companies

• Capital markets to believe in the strength of financial institutions

• Banks to trust each other

• Citizens and other stakeholders to trust the information they receive from organisations.

But there are urgent issues to address in our economic, political and social systems to make us successful in our mission. The auditor forms part of these systems, particularly where it concerns corporate information and its audit. Auditors have an important role to play in fixing these imperfections and rebuilding trust in the financial system.

Standing still is not an option for auditors

Auditors need to take criticism about their performance to heart and take action to put things right, argues Erik Roelofsen. The audit opinion should no longer cause any misunderstanding

Innovate to fix reportingTo start, we all need to take help improve the relevance and clarity of companies’ information. At present, company reports don’t satisfy the information needs of investors and other stakeholders. They do not cover some information that is material to the business, and they are often too long, fragmented, complex, inaccessible and compliance-driven.

The auditor needs to stimulate organisations to better align their communication with the information needs of stakeholders. An organisation is then better able to provide an integrated picture of the value it creates and its capability to create value in future.

Skill up and innovateThe one-dimensional focus on financial gain has been replaced by an approach in which strategic values, such as good management, client satisfaction, culture and behaviour also play a role. This requires a more broadly developed auditor who is able to recognise and validate all sorts of values, not just monetary ones. Most auditors are not yet fully equipped to do this – a review of the auditor education programmes is therefore essential.

We will also need to integrate innovative audit techniques more quickly into our way of working. New data analysis techniques lead to a more efficient and effective audit. The ongoing digitalisation and standardisation of data will keep misinterpretations and errors to a minimum and company information will always be electronically available.

This trend requires substantial investments from audit firms as well as more frequent and closer interaction with their clients.

Insightful audit informationIt’s no longer tenable for organisations to turn to the public for capital and at the same time not to disclose the auditor’s findings. So companies and auditors may need to share their observations with the public too, if they are relevant for them.

Both companies and their stakeholders need more insight from the audit. But there are major hurdles to overcome on how this might best be done – not least because of the different views around the world.

The road aheadIf we can work with other market participants, we can overcome the obstacles in the road ahead. Stakeholders can’t afford to be passive about demanding the information they need. Company directors can’t allow vague reporting and need to keep wider corporate interests in mind. Auditors can’t just focus on technical matters and the company – we need to share our insights so that stakeholders can trust the information companies report.

If we can all play our part with open minds, engage in robust debate, invest in new technology and training, we can achieve a trusted capital markets system that creates value for everyone.

Erik Roelofsen

Director at PwC


There will also need to be an injection of courage to allow preparers to exercise some judgement in relation to materiality. For a manufacturer, plant and equipment is likely to be a major item meriting some disclosure; but that is not true for many service organisations. Share-based payments are material in many technology companies but not in many others. Let’s have the courage to be selective.

A review of disclosures should not be in one direction only. It may be that a few should be added. And that’s fine, so long as there is a strong enough consensus among users; and so long as (say) five are deleted for every one that is added. Now that would be progress that should help investors see the wood for the trees.

FINANCIAL REPORTING OPINION

The problem is that there is too much disclosure. But also too little. Or maybe not enough of the right type. There is also a popular view that investors and analysts in particular, just want more disclosure, irrespective of how much is already given to them. Ask institutional investors, as we have recently done, and they say that they want disclosures that are material to the business and help to ‘tell the company’s story’ clearly. They do not want just more disclosure.

The process of writing accounting standards more or less automatically involves considering what the additional disclosure requirements should be. Whether the subject is related-party transactions, or financial instruments or subsidiaries and other investments, the result is more disclosure requirements. Not that these are imposed unthinkingly or maliciously: there are usually good reasons for any individual imposition, be it the financial crisis or the concerns about off balance sheet entities. But the result of this process, cumulatively, is an ocean of disclosures, an ocean in which preparers, auditors and indeed users too, often drown.

The US Financial Accounting Standards Board (FASB) and the European Financial Reporting Advisory Group (EFRAG) both have current projects considering how this list of disclosure

Disclosures – too much, too little, or simply the wrong type?

The essential fashion statement for standard setters this season is a project on the Disclosure Framework. But is this really helping investors to understand companies, asks Peter Holgate

requirements can be reduced. The International Accounting Standards Board (IASB) is due to hold a public forum on ‘disclosure overload’ in January 2013. The output from this will help direct its work in this area. Indeed the IASB has already commissioned a report prepared jointly by the Scottish and New Zealand institutes (see page 40, World Watch, Issue 3 2011).

The question is how to make any significant inroads while retaining the usefulness of financial reports for users. Working at the detailed level is unlikely to yield useful results. Even if consensus could be achieved on which are the disclosures that no-one uses (or might use, on the “you never know when it might come in handy” view), the result of this process would be a negligible reduction.

The only way to make progress, it seems to me, is to wield a large axe. Many of the disclosures in annual reports are little more than “accountants’ tidiness” – if we show that we can reconcile the opening and closing figures, we’ll all feel virtuous. But this may not result in any significant advance in the sum of human understanding.

Opinion

Peter Holgate

Senior technical partner at PwC


FINANCIAL REPORTING OPINION

I ask this with some trepidation, as, for a number of recent years, the answer was so obviously “yes, it’s essential” that any alternative view would have attracted the business equivalent of being ‘dis-fellowshipped’: perhaps a stern letter from one’s Institute, or a downgrading at annual appraisal time.

We have all heard the standard reasons in favour of convergence and harmonisation. Business and its financing are now organised on a global scale and investors’ portfolios are international. Why would you not want to have globally-consistent accounting?

And in simple terms the answer is: yes, you would want that. The reasons are very strong. But, suppressed though they were for some years, there are some reasons that point in the opposite direction and we are starting to see them emerge. The reasons include: sovereignty/ local regulation; different legal environments; and possibly varying risk appetites.

We have certainly seen in recent years some national regulators that support, in principle, the use of International Financial Reporting Standards (IFRS), nonetheless taking the view that, in their country, IFRS means this not that. Whether it is impairment provisions or revenue recognition on blocks of flats, or the role of substance over form in relation to the distinction between debt and equity, national regulators have taken it upon themselves to require local companies to depart from what most other people believe that IFRS means. For the most part, these are,

Convergence at all cost, or not?Is global convergence of accounting rules an essential feature of the business world? John Hitchins asks why some consider it merely ‘nice to have’ – or not even that

in my view, poor reasons for imposing departures. Anyone who doesn’t like a standard should lobby to get it changed. In the meantime, uniform interpretations would be preferable.

The second possible reason is different legal environments. Here, the most obvious example is the USA. All countries have litigation; but the USA surely has more per capita than other economies. This has led, over many decades, to a national system of accounting in which rules are specified for almost everything. Under this system, if, as a preparer, you’ve followed the rule, you can’t be criticised or sued. Conversely, if you are faced with the prospect of a system with fewer rules and more space for judgment, you worry about how you will cope and how you will respond to that lawsuit. Against this background – and allowing for other variables, such as it being election year – it is not so surprising that the US Securities and Exchange Commission (SEC) put out an announcement, more realistically termed a non-announcement, in July 2012 saying essentially that there was little enthusiasm for IFRS in the US; and indeed that they have a number of concerns about it, including the allegation (in which there is some truth), that it is not applied in the same way around the IFRS world. (See page 38 for more on US adoption of IFRS.)

A third possible reason why we may end up with less than total convergence is differences in risk appetite. It is a familiar point that companies have different risk appetites. This variety has many types and sources, including: smaller, more entrepreneurial companies versus large more bureaucratic companies; industries (eg, high-tech versus utilities); and stage in the economic cycle.

There may also be national differences in relation to risk. An example is differences in national governance requirements and conventions. Countries that have embraced a system that features high levels of corporate governance, a culture of “no surprises”, and a focus on process and stability will tend to approach financial reporting in a different way to a country that is in a different stage of development and that features more risk taking and cavalier attitudes. So it would be interesting to research the relationship, if any, between risk profile as just described and attitudes towards, say, impairment provisions – both whether a country favours, as a matter of principle, the incurred loss method or the expected loss method; and how they actually put it into operation. Whether this explains the different attitudes between the IASB and the FASB on this topic is hard to say but those different attitudes are certainly an obstacle to convergence at present.

John Hitchins

Global chief accountant at PwC


Opinion

NewsKeep abreast of worldwide news on governance,reporting and assurance, and see how it might affect your business

Only 8% of US directors are ‘very comfortable’ with their social media plans for a crisis See page 25

Over 70% of the UK’s largest companies do NOT base their reporting on their strategy See page 32

No problem!IFRS Foundation tells SEC they are “well placed” for IFRS See page 39


UK

Investment culture needs to change, says governmentThe government has given its support to the findings of an independent review of the UK equity markets and acknowledges that a fundamental change in the culture of investment is needed to rebuild trust and confidence in its markets.


The Kay Review of UK Equity Markets was undertaken by Professor John Kay and published in July 2012. It presented a compelling argument for market participants to change their behaviour and make investment decisions based on enhancing the performance of UK companies and supporting long-term growth, rather than maximising short-term gains. The solutions Kay suggests are firmly centred on the themes of restoring trust and confidence between investors, companies and intermediaries and creating a culture that incentivises the right behaviour.

Kay does not see further regulation aimed at preventing ‘wrong behaviour’ as the answer; he takes a principles-based approach, and wants a regulatory framework that creates a culture of ‘doing the right thing’ and enables and encourages investors to achieve “long-term returns by supporting and challenging corporate decisions in pursuit of long-term value”.

Two really striking recommendations in the report are that company directors, asset managers and asset holders should adopt Good Practice Statements that promote stewardship and long-term decision making, and that an investors’ forum should be established to facilitate collective engagement.

The report is based on ten principles, with 17 specific recommendations arising from them. These are addressed to the government, regulators and some of the key players in the equity investment chain.

The government response is supportive of the idea of good practice statements and looks in detail at each of the recommendations and highlights the steps being taken to deliver them. It has also committed to exploring whether changes in law or regulation are needed to deliver Kay’s principles in practice.

The government will publish an update on progress achieved in Summer 2014.

Kay Review principles – in summary1. Act according to the principles of stewardship.

2. Relationships based on trust and respect.

3. Asset managers to have greater involvement with the companies they invest in.

4. Company directors to focus on their duties to the company, not its share price.

5. Asset managers to observe fiduciary standards in their relationships with their clients and customers.

6. Clear, relevant and timely reporting of performance.

7. Metrics and models to give information directly relevant to the creation of long-term value in companies.

8. Risk management to focus on companies’ failure to meet the reasonable stakeholder expectations. It should not focus on short-term volatility of returns.

9. Market incentives should encourage long-term returns.

10. The regulatory framework should enable and encourage companies, savers and intermediaries to adopt these investment approaches.


Governance news

US

Corporate directors have adjusted to significant changes in the governance environment during the last year, yet they acknowledge more time needs to be spent addressing strategy, risk management, board composition and IT oversight.

The Annual corporate director survey conducted by PwC in the summer of 2012, attracted responses from 860 US public company directors. Of those, 70% serve on the boards of companies with more than $1bn in annual revenue, reflecting the practices and boardroom perspectives of many world-class companies.

There has been a marked increase in the hours directors dedicate to board work, with two-thirds saying they’ve increased their time by 10% or more, and one-fifth admitting to an increase of over 20%. Despite this, three-quarters of directors want to dedicate more time to overseeing strategy and meeting with company executives.

StrategyStrategic planning topped the boards’ ‘wish list’, with over 75% of directors saying they want to devote more time to it – a striking increase from the 60% who wanted to do so a year ago. An overwhelming 99% of directors discuss the continued viability of the company’s strategy at least once a year. More than one third (36%) discuss strategy twice a year and 42% do so at every formal board meeting.

Risk managementDirectors have a significant level of discomfort overseeing their company’s approach to crisis management. More than half (57%) are uncomfortable with their understanding of the company’s social media response plan in the event of a crisis.

More time needed on strategy and crisis response, say directors

More than one third (37%) of respondents say their boards have no clear allocation of specific responsibilities for overseeing major risks among the board and its committees. However, nearly all directors (97%) say they are at least “moderately comfortable” with their board’s understanding of the company’s risk appetite; 91% say they’re moderately comfortable with their understanding of emerging risks such as the European debt crisis and the impact of natural disasters.

Board compositionThe survey found that around half of the companies with a combined chair and CEO are considering splitting the role at their next CEO succession. The prevalence of these conversations suggests that many directors are

re-evaluating their board leadership structure – perhaps in response to continued shareholder activism against combining the role.

Almost one third of directors believe someone on their board should be replaced. Diminished performance because of aging and lack of expertise were cited as the two primary reasons. When asked about sources used to recruit new directors, nine out of 10 directors said they look to the recommendations of other directors, with 11% considering investor-recommended board candidates. A quarter consider racial and gender diversity as “very important”.

■ www.pwc.com/us/directorssurvey

How comfortable are you with your board’s understanding of:

Your company’s risk appetite

3%Not sufficently

35%Moderately

62%Very

Emerging risks that can impact your company (eg, European debt crisis, impact of natural disasters)

Your company’s KPIs on riskmanagement objectives

The company’s social media response plan in the event of a crisis

1%Not at all

8%Not sufficently

38%Very

53%Moderately

7%Not sufficently

52%Very

20%Not at all

37%Not sufficently

8%Very

35%Moderately

41%Moderately

Source: Annual corporate director survey, PwC, 2012


UK

UKIN BRIEF

The Financial Services Authority’s ongoing consultation on the Listing Rules – Enhancing the effectiveness of the listing regime (CP12/25) – proposes a move away from the comply-or-explain principle to protect the minority free-float investors in listed companies with a controlling shareholder.

Among other measures, the FSA is consulting on whether it should be mandatory for such companies to have a majority of independent directors on the board. And whether separate majorities – from all shareholders and from free-float shareholders – should be needed to elect these independent directors.

These proposals could have a significant impact on the attractiveness of the London market to international companies. Many of the recent premium listings would have been affected and the proposals would represent continuing obligations rather than just applying at the time of the IPO.

■ www.fsa.gov.uk

FSA proposals could impact London market’s appeal

Code revised to tackle international hot topicsThe UK Financial Reporting Council (FRC) has made revisions to the Corporate Governance Code to address two areas that are under debate internationally – how auditors are engaged and how to boost the reliability and transparency of annual reports.

The revisions were issued by the FRC at the end of September, and come into effect for all premium listed companies (including those incorporated overseas) from 1 October 2012. The revised provisions say that:

• FTSE 350 companies should put the external audit contract out to tender at least every ten years.

• Directors should state that they consider the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the company’s performance, business model and strategy.

The FRC’s proposals on tendering leave responsibility with the audit committee and, ultimately, the board, which is consistent with the UK’s principles-based framework and the comply-or-explain reporting mechanism.

The FRC has suggested transitional arrangements to stagger the introduction of tendering over the next ten years. Considerable international focus is expected on how this works and the impact it has on companies and their auditors as audit provision continues to be debated at European and international levels.

■ www.frc.org.uk

Asset management industry in the spotlight• The role of the asset management

industry is under scrutiny. We expect the European Commission to address this in December 2012 when they announce next steps on their governance action plan.

• The Chartered Secretary’s Institute (ICSA) in the UK has set up a steering group and issued a consultation on how to improve the quality of the engagement between asset holders, managers and companies.

■ www.icsaglobal.com


The Malaysian Code of Corporate Governance 2012 (MCCG 2012), issued by the Securities Commission (SC) in March 2012, introduces new requirements for listed companies, with a strong focus on the quality of directors on their boards and the role of the nomination committee.

The Malaysian Code on Corporate Governance was first issued in March 2000, and marked a significant milestone in corporate governance reform in Malaysia. It was later revised in 2007 to strengthen the roles and responsibilities of the board of directors, audit committee and the internal audit function. The MCCG 2012 focuses on strengthening board structure and composition, recognising the role of directors as active and responsible fiduciaries. They have a duty to be effective stewards and guardians of the company, not just in setting strategic direction and overseeing the conduct of business, but also in ensuring that the company conducts itself in compliance with laws and ethical values, and maintains an effective governance structure to ensure the appropriate management of risks and level of internal controls.

The MCCG 2012 is the first major deliverable of the SC’s corporate governance blueprint, a five year action plan launched in July 2011 to raise standards of corporate governance by strengthening self and market discipline and promoting a culture of good governance that people ‘live and breathe’. It aims to shift governance

MALAYSIA

Spotlight on the quality of directors

“ Without a doubt, the Nomination Committee’s responsibilities have increased significantly with the introduction of MCCG 2012. The challenge will be the shortage of local talent, the relatively low director remuneration and pressure from shareholders to consider certain individuals as candidates.”Mohammad Faiz Azmi, executive chairman, PwC Malaysia

Governance news

culture from mere compliance with rules to one that improves trust between companies and stakeholders because the essence of good governance is part of ‘business as usual’.

New responsibilities for the boardThe new requirements cover board composition and roles and responsibilities as well as directors’ independence and remuneration. Nominating Committees to oversee selection and assessment of directors are also required. And in future, the board will also need to establish a sound risk management framework to determine the company’s level of risk tolerance and actively identify, assess and monitor key business risks.

The board will also need to ensure:

• Compliance with a code of conduct for ethical standards

• Company’s strategies promote sustainability

• The board’s charter is made public and periodically reviewed.

• A regular assessment of independent directors is undertaken

• Shareholder approval is sought for independent director terms over nine years

• A majority of independent directors: the chairman should not be independent

• Board members are aware of expectations for time commitment

• Appropriate continuing education programmes are available to board members

Higher profile for the Nomination CommitteeThe Nomination Committee has a challenging task ahead.

The committee is responsible for selecting the right directors with high standards of professionalism, integrity, expertise and experience. But these directors should also be capable of adding value to the board as a whole. For this to happen, the committee has to make sure that the board as a whole reflects appropriate diversity of industry, gender, technical and business skills.

The eight principles of the codeThe new code sets out eight broad principles followed by 26 corresponding recommendations

1. Establish clear roles and responsibilities

2. Strengthen composition

3. Reinforce independence

4. Foster commitment

5. Uphold integrity in financial reporting

6. Recognise and manage risks

7. Ensure timely and high quality disclosure

8. Strengthen the relationship between company and shareholders

Governance news


SOUTH AFRICA

Did the move to integrated reporting make a difference?

South Africa’s mandatory integrated reporting (IR) regime is making companies more aware of the impact of non-financial issues on company performance, according to a recent study of integrated reporting practices. Companies now report significantly more social, environmental and ethical information than they did before IR became mandatory in 2010/2011 and reporting is aimed at engaging a wider range of stakeholders, not just shareholders.

But with IR still in its early stages, companies need to work harder to make reports more concise and avoid repetition, says the Association of Chartered Certified Accountants (ACCA) in its discussion paper, Reporting pre- and post-King III: what’s the difference? And while sustainability issues have moved from separate sections into the main body of reports, finding ways of structuring and presenting the information in an integrated way remains a challenge.

Non-financial issues do impact the business“We wanted to know what works, what does not; how companies approach IR; and, importantly, whether or not IR makes a difference,” said Rachel Jackson, head of sustainability at ACCA.

“Our findings show there is a difference between then and now, and it appears that the organisations examined have had a growing realisation that non-financial issues have financial implications for their companies. There has been a change in how sustainability issues are now linked to materiality and risk.”

Reporting not yet integratedThe ACCA findings echo those of a PwC report released earlier this year into the reporting practices of the Johannesburg Stock Exchange’s top 100 companies (see World Watch, Issue 1 2012).

Quantifying riskThe ACCA report confirmed that South African companies are increasingly looking to quantify risk. This is a welcome development that shows companies are moving away from broad-based rhetorical statements to more specific discussions that enable the user of the report to make an assessment on a more informed basis, said Zubair Wadee, PwC partner.

A further significant finding is the broader stakeholder model favoured by South African companies rather than the more shareholder-centric model proposed by the IIRC (International Integrated Reporting Council). “It will be interesting to see the way in which this discussion evolves when the companies involved in the IIRC’s pilot project on integrated reporting produce their first integrated reports,” Mr Wadee said.

■ www.accaglobal.com

“ Entities are getting a better understanding of what information needs to be presented, but are grappling with understanding how to pull all this information together. The inability to link the information or present it appropriately may be because it is not yet being used for decision making internally. Integrated reporting will be more successful when information across the economic, social and environmental spheres is actually used in decision making, and the integrated report is then simply a forum for communicating that information externally.”Zubair Wadee, PwC partner


Governance newsCorporate reporting news

LOW CARBON ECONOMY INDEX 2012

SUSTAINABILITY REPORTING

Too late for two degrees?

G4 proposals attract unparalleled interest and some concerns

Should we be planning for a warmer world? To limit global warming to 2°C would now mean reducing global carbon intensity by an average of 5.1% a year, according to analysis in the PwC Low carbon economy index. And this is a performance never achieved since 1950, when these records began.

The index measures developed and emerging economies’ progress towards reducing emissions linked to economic output. It demonstrates that at current rates of emissions growth at least 6°C

The Global Reporting Initiative (GRI) is considering feedback on its proposed new guidelines for sustainability reporting after its second public comment period closed at the end of September. The formal feedback statements – 3,095 in total – reflect the rising level of interest in sustainability reporting.

The latest draft of G4 – the next generation of GRI’s widely used sustainability reporting framework – develops key areas such as: governance and remuneration, supply chain, and disclosures on management approach. Comments on additional G4 proposals about greenhouse gas emissions and anti-corruption reporting, which were published separately, are also being considered.

“We are at a point now where companies and other organisations have to be transparent about their economic, environmental and social performance: customers, suppliers, investors, governments and other stakeholders expect it,” said Nelmara Arbex, GRI deputy chief executive and leader of the G4 development process. “This exposure draft...shows how G4 will help all organisations take a step towards much more focused, relevant reports, covering material topics.”

“The G4 guidelines, as currently framed, represent a significant risk to GRI’s future,” said PwC director of sustainability, Arco ten Klooster. “It is essential that in striving to move forward, GRI does not go so fast as to lose the support of companies and other key stakeholders and make implementation of the guidelines out-of-reach for preparers.

“We recommend that GRI consider a second exposure draft and consultation period...rather than going straight to the final framework. This will be an important signal to stakeholders that GRI has listened.”

■ www.globalreporting.org

“The risk to business is that it faces more unpredictable and extreme weather, and disruptions to market and supply chains,” said Jonathan Grant, a director in Sustainability & Climate Change at PwC. “Resilience will become a watch word in the boardroom. More radical and disruptive policy reactions in the medium term could lead to high carbon assets being stranded.”

■ www.pwc.co.uk/sustainability-climate-change

of warming could be possible by the end of the century.

The report warns that “governments and businesses can no longer assume that a 2°C warming world is the default scenario.” It adds that any investments in long-term assets or infrastructure, particularly in coastal or low-lying regions need to address far more pessimistic scenarios.

As the UN Climate Summit in Doha takes place, the analysis illustrates the scale of the challenge facing negotiations.

GRI aims to launch its G4 guidelines at its global conference in May 2013, following a multi-stakeholder development process that has already seen more than 1,200 people attend workshops. “GRI guidelines are free for public use, so the public should be involved in their development,” added Dr Arbex. “The public and organisations want to engage with the due process. Realism is one major benefit of a public comment period – GRI doesn’t just produce guidance because it’s ‘right’: it has to be realistic and useable.”

Some changes to the guidelines are expected to respond to comments made. PwC, for example, supports the general direction of G4, which has a greater focus on materiality, but calls for a clearer structure, a clearer definition of materiality and stronger links with integrated reporting.


IIRCJAPAN

MEMORANDUM OF UNDERSTANDING

Prototype is step closer to IR Framework

Support for IR as a route to greater financial stability

IFAC and the IIRC agree to collaborate on IR

The Prototype Framework for integrated reporting (IR), released by the International Integrated Reporting Council (IIRC) in November 2012, is a further step towards a final ‘version 1.0’ planned for December 2013. A formal consultation draft of the framework is expected in April.

The prototype is intended to demonstrate progress in defining the

key concepts and principles that underpin IR, and to support organisations who want to improve their communication of value creation.

Over 80 businesses and 25 investors from more than 20 countries are part of the IIRC’s Pilot Programme, an innovation hub that is testing the practical application of integrated reporting and contributing to the development of the framework.

IIRC

Pilot programme shares its storyA yearbook has been published to share insights from companies who have been participating in the IIRC’s Pilot Programme and exploring how to put IR into practice.

At the end of the first year of the pilot programme, around 80 high-profile businesses and more than 25 investors are working together to support the development of the Integrated Reporting Framework.

The programme has now been extended for an extra year to 2014 so that participants will be able to work with the live IR framework when it is released in 2013.

The yearbook also examines the information needs of investors and particularly how IR can encourage a greater focus by investors on the longer-term prospects of a business.

In recognition of their shared vision for the evolution of corporate reporting, the International Federation of Accountants (IFAC) and the International Integrated Reporting Council (IIRC) have signed a Memorandum of Understanding (MoU) to promote cooperation, coordination, and alignment.

There are inherent synergies between the work of IFAC and the IIRC in support of an internationally

accepted framework for integrated reporting,” according to IFAC chief executive officer Ian Ball. “Traditional financial reporting alone is no longer enough information for investors and stakeholders. A more complete picture is needed, and the work of the IIRC will help guide organisations to achieve this.”

The International Integrated Reporting Council (IIRC) reached audiences of over 800 people in Japan recently – it held several events in association with the Tokyo Stock Exchange, World Intellectual Capital Initiative, The Japanese Institute of Chartered Public Accountants and Bloomberg. The aim was to bring together IIRC Council members with Japanese business leaders, investors, government officials and others to discuss how Integrated Reporting (IR) can support the global economy.

“My request to Japan’s businesses is clear: please join the IIRC’s pilot programme and help us to create the international IR framework,” said IIRC CEO Paul Druckman. “Japan’s business leaders increasingly appreciate the contribution that corporate reporting reform, and IR specifically, can make towards achieving greater financial stability and a focus on long-term investment.

Mr Druckman, alongside Jane Diplock, IIRC board member and former IOSCO chair, also met with the Ministry of Economy, Trade and Industry (METI).

At the meeting, Mr Yukuhito Sato, chairman of the Corporate Finance Executive Committee said: “We truly share the ultimate objectives that the Integrated Reporting initiative is pursuing and the government has to play a key role. Japan needs to reapply the principles of long-termism that I remember from when I started my business 40 years ago. I hope that IR will be useful in helping Japanese businesses unlock their corporate value and foster long-term business perspectives.”

■ www.theiirc.org

■ www.theiirc.org


UK FINANCIAL REPORTING COUNCILUK

Lab encourages clarity in debt and cash flow reporting

BIS proposes a separate ‘strategic report’Draft regulations from the UK government Department for Business Innovation & Skills (BIS) propose a separate ‘strategic report’ to replace the business review and include requirements for companies to report on their ‘strategy’ and ‘business model’. They also address human rights issues and gender diversity. Refreshingly, the current proposals also remove some reporting obligations from all companies.

There has been a real sense of anticipation around these proposals for some time and debate about how far BIS would and should go. But proposals are not as radical as the ideas discussed in last year’s consultation, so some stakeholders are likely to be disappointed.

“I can’t help thinking that the government has not made the most of the opportunity to help reporting catch up with the needs of today’s capital markets and other key stakeholders,” said PwC partner Charles Bowman. “Having said that, it is encouraging to see that government is engaged on this important topic and keen to move the reporting agenda forward to help build trust in business and its performance.”

In their current form, the proposals don’t actually permit anything that companies with a bit of imagination cannot already do but BIS has highlighted the need for companies to think outside the compliance box and communicate clearly about what is strategically important.

Straight away guidance on the proposals is available from PwC – email: [email protected]

■ www.bis.gov.uk

Corporate reporting news

A trio of reports issued by the Financial Reporting Lab in autumn 2012 have added substantially to the advice available to companies seeking to improve the usefulness of their reporting on debt and cash flows.

Lab director Sue Harding outlined the key recommendations when speaking at PwC’s 14th annual Meet the Experts conference in London in November 2012. “We are providing practical examples of what companies can do to better meet investor needs,” she said.

In November the Lab issued two reports, Debt terms and maturity tables and Operating and investing cash flows. These show how some companies are disclosing information on debt and its effect on liquidity risk and interest cost, and on cash flows generated and invested. They follow the Lab’s September report on Net debt reconciliations (NDRs).

In preparing its observations, the Lab, set up by the Financial Reporting Council to encourage higher quality corporate reporting, worked closely with five companies – BT Group, National Grid, Royal Dutch Shell, Vodafone and Xchanging – as well as a range of investors.

The Lab’s report on debt terms and maturity tables shows that investors want to understand the nature and timing of the ultimate amounts payable. Companies therefore need to disclose information (generally by obligation) on:

• The principal amount of debt.

• The currency of denomination, and the ‘economic’ currency of the principle if it has been hedged.

• Maturity months and year when amounts are due.

• The interest rate and the overall interest rate profile, before and after any significant hedging.

When it comes to maturity tables, greater granularity is encouraged. For example, investors want to see separate amounts for the principal and interest payments.

The Lab’s report on operating and investing cash flows emphasises investors’ significant interest in understanding, and in having companies explain, the conversion of earnings to cash. It suggests that, where permitted, companies start the cash flow statement with operating income or loss. Companies are also advised to list separately adjustments between the starting profit or loss figure and operating cash flows, such as individual components of working capital changes, pensions and provisions.

Turning to NDRs, the Lab’s September report makes numerous recommendations for company reporters, including that they make clear how components of net debt relate to balance sheet amounts.

■ www.frc.org.uk

“ We are providing practical examples of what companies can do to better meet investor needs.”Sue Harding, director, Financial Reporting Lab


Chasm between best reporting and the rest Business information, reporting and assurance have to change, according to a new report by PwC – Trust through transparency. Why? Because they have to respond to the dramatic changes businesses are undergoing as they adapt to fast-moving global issues, economic uncertainty and new technology; and because there is constant demand for clear and relevant information from stakeholders.

The PwC report probes the reporting of FTSE 350 companies in the UK and although it shows a slight improvement in the effectiveness of reporting overall, there is a worrying gap between the most effective communicators and those whose reporting has not kept pace with new requirements, emerging practice and stakeholder demands (see table).

Business model reportingAlthough 77% of the companies used the term ‘business model’ (or similar) in their reports, 16% of those had no further information at all and only half provided meaningful insight into what really makes their business tick.

Remuneration reportingReward for performance is a hot topic so almost all companies identified their key performance indicators and a good proportion – 78% – made some reference to these being connected with executive remuneration. But only 25% provided sufficient information for readers to be able to make a direct link between the performance outcomes of the business and how management were rewarded.

REPORTING SURVEY

Governance reporting“With increasing scrutiny of how companies are run by their boards and management, it is worrying to see just 49% of the governance reports referring to the culture and values of the company,” said PwC Corporate Reporting director Mark O’Sullivan. “Only 34% clearly explain what the board and its committees have actually been doing during the year.

“At best, poorly conceived reporting is largely ignored by stakeholders. At worst, the quality of management can be questioned,” said Mr O’Sullivan. He added that the key challenges that companies talk about are:

• Articulating strategy and business model

• Data collation, consistency and reliability – particularly across diverse business segments

• Pulling together a report that involves many parts of the business – all with differing agendas

• Management time

“ We know many have found articulating their business model difficult. However, a start up company lives or dies by how well it can articulate its business model and what it stands for – it seems that some larger companies have lost sight of this.

“ The best reporters aren’t doing this out of a sense of altruism. They do it to communicate effectively with stakeholders and retain their trust. The last thing businesses or capital markets need is the risk of an overnight loss of trust from unseen issues. Just because ‘trust’ doesn’t feature on the balance sheet, it doesn’t mean it can be overlooked.” Charles Bowman, senior corporate reporting partner at PwC



“ Companies can either produce the annual report smartly, or they can produce it just because they have to. Those who do it smartly will positively impact their position in the capital market”An investor’s view

“ Top performing finance teams spend 17% less time on data gathering and 25% more time on analysis than typical functions”Finance effectiveness benchmark study, PwC (2012)

IIRC AND BLACK SUN

Business thinks IR helps to break down silos and connect departments

New research finds that 93% of businesses believe that moving towards an Integrated Reporting (IR) framework helps to break down silos between teams and leads to better connected departments.

The report – Understanding transformation: Building the business case for integrated reporting – published by Black Sun in association with the International Integrated Reporting Council (IIRC), tracks the behavioural changes of businesses during the first year of the IIRC’s pilot programme initiative.

Key findings from the report include:

• 98% agreed that the shift towards IR leads to a better understanding of how the organisation will create value over time.

• 74% agreed that it will lead to more consistency in external communications.

• 93% agreed that it leads to better quality data collection.

• 64% think that analysts will benefit significantly from integrated reporting in future.

• 95% think that employees will benefit.

Sallie Pilot, director of research & strategy at Black Sun explained that the benefits for companies identified in the research included: connecting departments; improved internal processes leading to a better understanding of the business; and a better articulation of the strategy and business model, which helps stakeholders.

“It’s clear that much of the change to achieve integrated reporting needs to be driven by businesses themselves, said IIRC CEO Paul Druckman. “It is up to them to demonstrate what constitutes good business, and an integrated report is an important tool to achieve this.”

■ www.theiirc.org


Company reporting: what’s clear and what’s not

Reporting framework category

What’s clear in reporting

What’s not clear

Strategy 95% include strategic priorities 28% base reporting on strategic themes

Business model 77% include the term ‘business model’ in their reporting

53% provide insightful detail on their business model

External drivers 86% discuss future market trends 21% link market discussion to strategic choices

Tax 62% of 50 leading tax reporters include some discussion about how they approach their tax affairs

34% mention taxes other than corporation tax

Cash and debt 89% of companies report on their debt position

32% have annualised debt maturity information

Sustainability 78% include some relevant insight into their sustainability issues

20% comprehensively embed sustainability in overall strategy

Segments 92% have narrative consistent with segment notes

7% comprehensively communicate across reporting elements by segment

Performance fundamentals

86% report non-GAAP measures 33% clearly explain and quantify underlying drivers of financial performance

Risks 95% explain the nature and mitigation of risks

24% explain how risks have changed over time

Measures of success

93% explicitly identify KPIs 25% have detailed alignment of multiple KPIs and executive remuneration

Governance 49% of governance reports mention the company's culture/values

34% clearly explain actual board/ committee activities in the year

Integration 62% have some alignment of KPIs with strategy, with 28% explicitly linked through tables, numbering, colours etc

38% have some integration between business model and other reporting areas, most commonly sustainability

Source: PwC, 2012 survey of FTSE 350 reporting – Trust through transparency


Are top companies doing enough to prevent corruption?

Banks’ risk disclosures put under the spotlight

A recent study concludes that despite improvements, multinational companies are falling short in their reporting of corruption-related issues. It suggests that companies’ failure to provide transparent, publicly-available information on their global activities and anti-corruption programmes is one reason why economic recovery is stalling in some countries.

The study, Transparency in corporate reporting: Assessing the world’s largest companies, was undertaken by Transparency International (TI) to measure how well the world’s 105 largest publicly-listed multinational companies disclose information on their anti-corruption programmes, organisational transparency and country-by-country reporting of revenues, transfers and value sharing. The data was collated from companies’ global websites, with information driven by a questionnaire.

Reporting on anti-corruptionA general improvement was noted since TI’s 2009 report on corporate reporting practices, with 68% of those reviewed now reporting on anti-corruption programmes. Three European multinationals achieved full transparency with a maximum score of 100%. However, there is significant room for others to improve. In particular, 82% of companies scored zero for reporting on prohibition of ‘facilitation payments’ and 56% didn’t get any points for their disclosure of political contributions.

Areas where investors seek better information about banks’ risks – and where banks agree improvements to disclosure are needed – are highlighted in a report by the Enhanced Disclosure Task Force.

Speaking at PwC’s 14th annual Meet the Experts conference in London in November 2012, Crispin Southgate, a founding director of Institutional Investment Advisors and a member of the task force, said: “We need to rebuild investor confidence in the banking industry, and responding to investor demands about disclosure is one part of the path towards succeeding in that.”

The task force’s report, Enhancing the risk disclosures of banks, sets out seven fundamental principles, that say disclosures should:

1. Be clear, balanced and understandable

2. Be comprehensive and include all of the bank’s key activities and risks

3. Present relevant information

4. Reflect how the bank manages its risks

5. Be consistent over time

6. Be comparable among banks

7. Be provided on a timely basis

The task force, formed with the encouragement of the Financial Stability Board in May 2012, brings together users and preparers of banks’ financial reports, as well as audit firms. Its recommendations are intended to improve users’ understanding of banks’ financial reports in a number of key areas, including their business models and associated key risks, liquidity position, and calculation of risk-weighted assets.

Examples of best practice from published reports are included in the report, as well as templates designed to extend best practice.

■ www.financialstabilityboard.org

TRANSPARENCY INTERNATIONAL

ENHANCED DISCLOSURE TASK FORCE

Organisational transparencyThe study also looked at disclosure of ‘material’ entities, as defined by accounting standards, regulations and stock exchange rules. Forty-five of the 105 companies scored 100%. Most disclosed fully-owned subsidiaries but many related entities remain under the radar. These entities are most likely to be in developing countries and jurisdictions known for their secrecy.

Country-by-country reportingTI looked at country-by-country reporting for: revenues, capital expenditure, income before tax, income tax and community contributions. The results were disappointing, according to TI. Few companies disclose financial data on a country-by-country basis. The best company only managed to get half the points available (50%) and only four disclosed financial data for all the countries where they have a presence; 41 companies failed to score any points.

TI is calling for companies to fight corruption by disclosing more information about how they mitigate corruption and by making public how they are organised and how monies flow in the countries in which they operate.

“Multinational corporations can and must play a significant role in the global fight against corruption,” said Huguette Labelle, chair of Transparency International. “As the world continues to recover from the deep economic pain of 2008, the leadership at more companies must commit to stopping corruption.”

■ www.transparency.org



Exchange encourages clear ESG reporting

SASB aims to make sustainability reporting mandatory

The Hong Kong Stock Exchange has published a guide to help companies report environmental, social and governance (ESG) information clearly. This is a response to investor demands for companies to provide this information.

The guide introduces recommended best practice in ESG reporting and sets out recommended disclosures and key performance indicators (KPIs) for workplace quality, environmental protection, operating practices and community investment. It will apply to listed companies from the end of 2012.

Companies will need to disclose ESG information either within their annual report or in a separate report. The stock exchange plans to require companies to ‘comply or explain’ on certain recommended disclosures from 2015, subject to further consultation. It has

Requiring publicly-listed US companies to disclose material sustainability issues could create a ‘race to the top’ in US corporate reporting, according to the new Sustainability Accounting Standards Board (SASB). Launched on 4 October 2012, the SASB aims to develop sustainability reporting standards for 89 industries in 10 sectors “for the benefit of companies, investors, and the public” – all in 30 months.

SASB is setting out to become for sustainability what the Financial Accounting Standards Board (FASB) is to financial accounting and reporting. By focusing on industry-specific material issues, SASB will address the central problem of making reporting on environmental, social and governance (ESG) performance consistent, comparable and – eventually – mandatory for public US companies.

HONG KONG

US SASB

aspects of ESG relevant to their company; and ensure their systems are capable of processing the information in a reliable and efficient way. We recommend that companies also consider what level of assurance they need to give management and stakeholders confidence in the quality of the ESG information reported.”

■ www.hkex.com.hk

“SASB will be the US voice for material non-financial issues and how to recognise and account for them as part of corporate reporting,” said Jean Rogers, SASB executive director. “The standards we develop will promote sustainable value creation and ultimately enhance the competitiveness of all US industries on the most pressing challenges facing industry and society today.”

SASB’s first initiative is to produce a ‘materiality map’ that prioritises sustainability issues by industry across 10 sectors: health care, financials, technology and communication, non-renewable resources, transportation, services, resource transformation, consumption, renewable resources and alternative energy, infrastructure. The first draft standards are expected before the end of 2012.

The map is intended to inform asset allocation strategies and help users to understand exposure to ESG risk.

While the Global Reporting Initiative framework is raising awareness of sustainability reporting (see page 29), it has been slow to catch on in the US – fewer than 200 out of 35,000 listed companies reported to GRI standards in 2010. By focusing on identifying and designing standards and measures that fit in with established SEC reporting frameworks, the SASB believes its work will encourage companies to meet investors’ needs for relevant, comparable information.

The SASB will work with the accounting profession to ensure that sustainability information can be audited and assured in line with SEC reporting requirements.

■ www.sasb.org

indicated that no concessions will be made for companies who fail to prepare before this date.

The guide is not intended to replace existing practices (especially where issuers already report more than the required information) but will bring all issuers up to a minimum standard. The exchange believes that an ESG report will help external stakeholders understand the company and its approach to ESG issues.

“These proposals reinforce the value the stock exchange places on transparent reporting,” said Gayle Donohue, PwC assurance partner in Hong Kong. “Companies will need to start preparing now – they can assess any gaps between their existing disclosures and the guide; engage stakeholders to identify material


‘Extra-financial’ information used to analyse companies

New regulation moves companies towards integrated reporting

Investors and analysts use a broad scope of information to help analyse company performance and ultimately inform investment decisions, according to new research published by GRI, Accounting for Sustainability Project (A4S) and Radley Yeldar. The survey – What investors and analysts said – aims to provide insight into how financial markets source, use and are influenced by ‘extra-financial’ information.

The report shows that extra-financial information – such as disclosures on governance and environmental issues – has become an important and influential consideration for investors and analysts.

What information is ‘very relevant’ to investors and analysts?

• 70% said governance information is very relevant

• 64% said information on natural resources

• 52% said social and community information

How difficult is it for investors and analysts to compare information?

• 61% said they find social information difficult to compare – which might explain why they find it less relevant

From the start of 2013, German companies’ reporting is expected to focus more on strategic goals, non-financial information and forward-looking information to meet requirements of the new regulation – German Accounting Standard 20. This is seen as a significant further step towards integrated reporting.

GAS 20 builds on GAS 15 which has made management reporting mandatory in Germany for some years. In the forecast section of the management report, management teams have to explain their expectations of the group’s potential development, highlighting major opportunities and risks. They also have to refer to the economic environment, the outlook for the industry and any major positive or negative trends along with their key impact on the company. Forward-looking information (at least a year ahead) will have to include more detailed forecasts of the company’s most important KPIs (non-financial as well as financial KPIs under GAS 20). The nature of the information and any uncertainties will have to be made clear.

Management reporting already has to be assured by the auditor and it includes elements similar to those mentioned in the International Integrated Reporting Council’s Prototype framework, such as:

• Business and operating environment.

• Non-financial key performance indicators (if such factors are regularly assessed by management and are significant for the business activities).

• Performance information (results of operations, financial position).

• Report on opportunities and risks, including forward-looking information.

• Corporate governance information.

INVESTOR RESEARCHGERMANY

• 41% said the same for environmental information

• Just 3% find it difficult to compare financial information

Talking to investorsThe research also found that investors and analysts use a wide range of sources for financial and extra-financial information. But they rely most on tried and tested channels of communication – namely reporting (eg, pdf on websites) and dialogue with companies. “Reporters need to clearly guide these audiences through their disclosure, which often appears in a number of places on their corporate websites,” said Ben Richards, head of sustainability at Radley Yeldar.

“ The investor community is increasingly seeking extra-financial information as part of their decision-making processes.”

“ The report highlights the importance of integrated reporting, but it is important to remember that companies also need ‘integrated thinking’... as the precursor to successful integrated reporting.”

Sarah Nolleth, A4S project director

Building public trust: The movieSome people ask: why is there such a ‘hoo-ha’ about changing business information and reporting? And then they can wish they hadn’t. The answer can sound either complicated, or boring, or both.

Over 5,000 people have watched this three-minute animation instead.

If you want to see it, search online for: PwC reporting animation or email [email protected]

■ www.pwc.co.uk



Impact of consumer products laid bare

Managing climate change amid uncertainty

PUMA, with the support of PwC and Trucost, has launched the results of its first product level Environmental Profit & Loss (EP&L) accounts which value the environmental impacts of its products in euros and cents.

The results compare the environmental impacts from cradle to grave of a conventional shoe and T-shirt with more sustainable alternatives and illustrate how a sustainable approach to production reduces the impact on the environment by a third compared to conventional products.

The analysis focused on the impact of greenhouse gas (GHG) emissions, waste and air pollution, as well as the use of natural resources such as water and land along the entire value chain from the raw materials and production processes to when customers use and finally dispose of the products.

“By putting a value on even one product’s environmental impacts, it brings into sharp focus the debates over commodity pricing, natural resource security and supply,” said PwC partner Alan McGill. “Even as an emerging methodology, it challenges conventional business thinking – and consumers’ views – on how we measure and monitor the embedded environmental value and impacts of what we buy.”

■ www.about.puma.com

Despite the economic downturn, recent extreme weather events have helped keep climate change on the boardroom agenda, according to the 2012 results of the Carbon Disclosure Project (CDP). The report investigates whether the Global 500 largest companies are strategically focusing on climate change and its long-term impacts.

The main findings of the report are:

• 96% of companies have board or executive level oversight of the issue.

• 78% have integrated climate change into their wider business strategy.

• Companies continue to invest in emissions reductions, but these are typically short-term, cost-cutting measures, such as energy efficiency, rather than long-term capital investments in low carbon technology.

PUMACARBON DISCLOSURE PROJECT

Global 500: Responses to climate change

Disclose GHG emissions

% of CDP respondents

Board or executive-level oversight

Disclose absolute and/or intensity emissionsreduction targets

Rewarding climate change progress

Assurance and/or verification of emissions

Evidence of disclosure of climate change information inmainstream filings or other external communication

2012 2011

0 20 40 60 80 100 120

99100

96

8275

8078

7364

5541

97

Source: Carbon disclosure project 2012

Towards integrated reportingThe winner of PwC’s first international award for moving ‘Towards integrated reporting’ is the Canadian mining company PotashCorp. Akzo Nobel and Vodacom were highly commended. The award was presented by Peter Bakker, IIRC council member and president of the World Business

INTERNATIONAL AWARD

Council for Sustainable Development at the Building Public Trust dinner in London for the leading company chairmen, chief executives, CFOs and audit committee chairmen. “Put simply, integrated reporting is the future of corporate reporting,” said Mr Bakker. “Global business leaders not only need to change the way they think and behave, but also need a new language to communicate how they are creating and preserving value, beyond the current financial definition of it.”

The independent judges said that PotashCorp’s reporting is: “readable and highly accessible...structured around its business model, with clear linkage between key value drivers, why they matter, objectives, strategy and performance, both financial and non-financial. The CEO’s account of the challenges...both powerful and insightful, and is well-supported with data. The analysis of operations by segment is also excellent.”

■ www.bptawards.com

• Although 82% of companies have set targets to reduce emissions, these are not nearly ambitious enough to achieve governments’ goals to limit warming to 2°C.

“Businesses face a period of high uncertainty, subdued growth, and volatile commodity prices,” said PwC partner Alan McGill. “In this context, companies are increasingly challenged by their shareholders to demonstrate long-term resilience.”

This research is conducted on behalf of 655 institutional investors representing US$78 trillion of assets under management. The size of CDP’s investor coalition reflects the growing interest of the investor community in environmental, social and governance (ESG) reporting.

■ www.pwc.com/cdp2012

US

‘Final’ report on IFRSDoes the US Securities and Exchange Commission (SEC) have the will to find a way towards International Financial Reporting Standards (IFRS)? This question has been posed by the CFA (a global association of investment professionals) as a response to the recently published final report by the SEC staff entitled: Work plan for the consideration of incorporating IFRSs into the financial reporting system for US issuers.

The report, published in July 2012, was the result of work the SEC asked its staff to perform. It wanted them to consider specific areas and factors relevant to its decision on whether and how to incorporate IFRS into the US reporting system.

But what’s most interesting about the SEC staff report is that it does not include a staff recommendation, nor any sense of what the next steps might be. Indeed the final report makes it clear that it “does not imply – and should not be construed to imply – that the Commission has made any policy decision …”

The CFA clearly sees the SEC’s final report as an historical exercise – reiterating what is already known. They also pointed our that the challenges are not uniquely American, but similar to any developed economy converting to IFRS.

The CFA state that they “believe it is imperative for the SEC to define the way forward, as failure to act or provide clear direction is, in substance, a decision not to incorporate IFRS... investors would prefer the SEC to provide a path forward with a decision.

But where the SEC is silent, others are being vocal in their own views. IFRS adoption by the US is not coming any time soon, according to Gregory Anton, chairman of the board of directors at the American Institute of Certified Public Accountants (AICPA). Speaking at a recent conference in Florida, he told delegates not to expect any movement until after the US presidential election. Although he supports giving US companies the option to use IFRSs and supports one set of high-quality, global standards, he warns that the “absolute soonest” for IFRS in the US will be five to six years.

There is growing support in the rest of the world for convergence and frustration by some at the lack of progress in the US. Stephen Haddrill, chief executive of the UK Financial Reporting Council said: “It is disappointing that transition is not yet clearly recommended. It is imperative that this is not allowed to affect the continued development of high-quality standards.” Similarly, the International Federation of Accountants (IFAC) recently wrote to the G20 outlining its recommendations, which included the global adoption of

IFRSs. And following the recent G20 meeting in Mexico, the Leaders’ Declaration references financial sector reform and states: “We support continuing work to achieve convergence to a single set of high-quality accounting standards”.

In October the International Accounting Standards Board published its own analysis of the SEC staff’s report alongside the findings from independent research commissioned to look at the international benefits and consequences of global accounting standards. These concluded that the US would face challenges, but is in a good position to achieve a successful transition to IFRS. (See page opposite).

It appears that the rest of the world will continue to ask whether the SEC has the will to move toward IFRS, and if so when.



IFRS

A closer look at the challenges of global accounting standardsResearch into the suitability of International Financial Reporting Standards (IFRSs) as a global framework has concluded that although jurisdictions have faced challenges when adopting IFRS, these have not proved insurmountable. The report points out that adoption in the United States would be no different.

The research was initiated by the trustees of the IFRS Foundation, prompted by the US Securities and Exchange Commission’s (SEC) final staff report on International Financial Reporting Standards, published in July 2012 (see page 38). Shortly after the SEC report was published the foundation issued a statement indicating its commitment to give careful consideration to the report’s observations.

The trustees asked the IFRS Foundation staff to assess the SEC report in detail for the International Accounting Standards Board (IASB) and the international community, incorporating relevant research undertaken in countries that have been through a transition to IFRS.

To help staff review the SEC report, the foundation commissioned a study of existing academic research on the benefits and consequences of global accounting standards for publication alongside the staff’s findings.

The staff presented their report to the trustees on 22 October 2012. The analysis of the SEC final staff report complements the findings of the SEC staff report with academic research and territory experiences as requested. It addresses each of the points in the SEC report, welcoming many as correct assumptions and presenting clear arguments for those it considers flawed.

“While acknowledging the challenges, the analysis conducted by the IFRS Foundation staff shows that there are no insurmountable obstacles for adoption of IFRSs by the United States,” said Michel Prada, chairman of the trustees. “The US is well placed to achieve a successful transition to IFRSs, thus completing the objective repeatedly confirmed by the G20 leaders.”

■ www.ifrs.org

IFRS staff responds to SEC comments on US adoption

Key matters raised by the SEC staff IFRS Foundation response

FundingReliance on large public accounting firmsFewer than 30 countries contributingLack of funding for the portion of budget allocated to the USUS sources are providing ‘in kind’ funding (eg, FASB)

European Commission is largest funder, representing 27 nationsIn total, 69 countries contribute either directly or indirectlyNeeds to be resolved by US authorities, not the IFRS FoundationJoint working arrangements benefit both parties and should not be factored in to US contribution

Standard settingInterpretations Committee slow to respondMore involvement with national standard setters needed

Raised in trustees’ strategy review, 2011 – recommendations being implementedWork is underway to establish an Accounting Standards Forum to address this

Adoption, endorsement and transitionNeed for endorsement mechanismFASB needs influential role in standard setting and endorsementCost of transition

Most jurisdictions follow an endorsement process to ensure their sovereignty is maintainedFollowing an endorsement approach would give FASB more weightCost should be lower compared to other countries. US companies will have to adopt ‘converged’ standards anyway

IFRS

Revenue recognition project nears the endAfter many years of ongoing debate, the boards of the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) have indicated that we can expect to see a final standard on accounting for revenue recognition in the first half of 2013.

However, that’s not the end of the story. They will continue to redeliberate over the coming months and perform targeted outreach on some of the more significant changes. This will include further analysis on certain aspects of the variable consideration constraint and presentation issues relating to collectibility as well as discussions on: licences, contract modifications, allocation of transaction price, disclosures and transition.

The aim of the boards was always to achieve convergence between the International Financial Reporting Standard (IFRS) and the US standard for revenue recognition. The same principles will be applied to similar transactions under both standards – so the main point of convergence has been achieved. But differences might continue to exist where the new guidance requires reference to other standards.

The final standard is likely to be effective no earlier than 2015. Companies applying IFRS or US GAAP are expected to be affected to some extent, but for those following industry-specific guidance the effects will be greater.

■ www.ifrs.org

Financial reporting news


A report by a task force of the Australian Financial Reporting Council (FRC), Managing Complexity in Financial Reporting, calls for better use of information technology (including XBRL), the removal of legal obstacles to more effective material disclosures, and action from the International Accounting Standards Board (IASB).

AUSTRALIA

Managing complexity – more work to be done

The Financial Reporting Council (FRC) in the UK has become known as an advocate for removing ‘clutter’ from financial reports and improving the quality and relevance of disclosures. A new discussion paper takes its commitment to enhancing the quality of corporate reporting one step further.

The discussion paper, Thinking about financial reporting disclosures in a broader context, complements the Council’s recent work with the European Financial Reporting Advisory Group (EFRAG) and the Autorité des Normes Comptables (ANC) in France and the resulting joint discussion paper, Towards a disclosure framework for the notes (see page 46). It sets out a roadmap for a disclosure framework for financial reporting aimed at improving the quality of disclosure and its value to the users.

The roadmap is framed around four key questions:

1. What information do users need?

2. Where should disclosures be located?

3. When should a disclosure be provided?

4. How should disclosures be communicated?

The FRC released the discussion paper in October 2012. The timing will allow the FRC’s findings to influence, and provide input to the International Accounting Standards Board’s (IASB) project on the disclosure framework, which has yet to start. The FRC has gone so far as to include ‘action points’ for the IASB, including setting the principles as part of its conceptual framework project. It also suggests: the early involvement of users; guidance on ‘materiality’; and consistently defined terms within IFRS.

UK

Tackling ‘clutter’ in financial reporting disclosures

“We believe that there is a need to curtail the piecemeal approach to disclosures and develop a coherent framework for disclosures in the financial report,” said Roger Marshall, director of the FRC. “We anticipate that this will lead to disclosures in financial reports being more relevant to the needs of the users…whilst at the same time cutting clutter.”

The paper is intended to stimulate debate on a disclosure framework rather than suggest solutions. The FRC hopes standard setters, regulators, preparers, auditors and users will all respond. They have until 31 January 2013 to do so.

■ www.frc.org.uk

“We welcome the task force’s focus on ‘managing complexity’ rather than ‘reducing complexity’, and agree with the view that increasingly complex reporting requirements are a consequence of increasingly complex business operations rather than a source of such complexity.”

“Managing complexity and perceived complexity by de-cluttering financial statements would benefit all stakeholders involved in financial reporting, including businesses and the investor community.”Jan McCahey, Partner, PwC Australia

FEE

‘ Reporting of the future’ needs to keep faith with pastThe chairman of the International Accounting Standards Board (IASB), Hans Hoogervorst, has promised renewed efforts to tackle fundamental questions in financial accounting in the next revision of the International Accounting Standards Boards’s (IASB) conceptual framework.

Mr Hoogervorst made his promise at a recent conference, Corporate reporting of the future, organised by the European Federation of Accountants (FEE) in September. His speech pointed to integrated reporting as a major development for the future,


The report, published in May 2012, identified four main sources of reporting complexity in Australia: increasingly complex business operations; the regulatory framework; risk aversion by businesses and stakeholders; and developments in integrated reporting. Recognising that “it is unlikely that complexity can be significantly reduced in the short term”, the task force’s report proposes strategies to help all stakeholders of financial reports.

Better use of the internet and company websites is recommended to present reports in an “interactive online format” so that users can “filter information and access the level of detail suited to their needs”. The use of XBRL format in the preparation and use of financial information should be monitored with a view to following the lead of other countries in which filing in XBRL format is mandatory.

Limited legal protection for directors under Australia’s ‘safe harbour’ or ‘business judgement’ provisions of the Corporations Act 2001 is identified as a possible source of over-disclosure in financial reports. Stronger provisions allowing directors to exercise broad-based business judgement would help reduce complexity by focusing on material disclosures rather than an all-inclusive approach. Better board education would also help.

The report supports calls by the Australian Accounting Standards Board (AASB) for the IASB to rationalise disclosures under a simplified presentation framework, noting that “confusion at the standard-setting level makes it difficult for preparers and users to convey results in a straightforward way”.


Following a consultation period, the task force recommended in October 2012 that the FRC considers how to clarify Australia’s current financial reporting regime – including the possibility of further deregulation of the type of entity that needs to report and a reduced disclosure regime. The task force also recommends the FRC encourages the Australian Securities and Investments Commission (ASIC) to emphasise that only material disclosures are required under accounting standards, and to support ASIC’s call for more meaningful Operating and Financial Reviews (Management Discussion and Analysis) in annual reports. Other areas raised by the consultation include: simplification of the remuneration report, board education on financial reporting, and monitoring integrated reporting.

■ www.frc.gov.au

but focused on the need to show progress on clear definitions of assets, liabilities and income.

“These are all the thorny issues that we need to resolve in the next phase of the revision of our conceptual framework. We are planning to write new chapters on measurement and presentation including a solid disclosure framework,” said Mr Hoogervorst. “This is perhaps the most important work we can undertake. Get the underlying concepts right, and you have sound and consistent reference points for the rest of our standard-setting work.”

According to Mr Hoogervorst, ongoing “intense controversy” over the concept of prudence – replaced by “neutrality” when the IASB revised its conceptual framework in September 2010 – underlines the need to focus on fundamentals. “Ever since [the revision], IFRSs have been periodically criticised for actually being

imprudent, allegedly leading to overstated profits and/or understated liabilities,” he added.

Mr Hoogervorst pointed out that the old concept of prudence counselled against overly rosy assumptions and included the necessary element of caution required to make the judgements that are central to financial reporting. “Excessive conservatism”, however, is a danger in that it artificially depresses profits in an upturn and investors may miss out on an opportunity; in a downturn, hidden reserves can be used to hide a decline in earnings, overstate profits and encourage investors to hold on to their stake too long.

Given the absence of a definition of prudence in US GAAP and a widespread association of prudence with “cookie jar accounting” (using reserves for income smoothing between good years and bad), the IASB and US Financial Accounting Standards Board (FASB) decided to emphasise

the importance of neutrality and remove the concept of prudence from the conceptual framework. “A systemic bias towards conservatism undermines the value of earnings as a performance indicator…IASB felt a need to be completely unambiguous about this issue by removing the concept of prudence from our conceptual framework,” noted Mr Hoogervorst.

But the principle of “if in doubt, be cautious” is still present in IFRS. “The basic tenets of the concept of prudence are still vital for our work,” he concluded. “Indeed, the exercise of caution is visible in many of our standards and is also an important issue in the development of new standards…the old concept is not dead, but alive and kicking…I have absolutely no problem with that.”

The conference papers are available.

■ www.fee.be


SURVEY

European investors have their say

Investors are asking for a period of calm once the International Accounting Standards Board (IASB) has completed its major projects. They believe it’s more important to get consistency in the implementation of current standards than to produce new ones – although they would still like changes to accounting standards.

These observations were made by 30 investors and analysts from six European countries during interviews with PwC to gain insight into what investors need in financial reporting. Questions focused on: IASB agenda overview, convergence of accounting standards, financial statements, joint ventures and fair value. Although there were a number of different opinions expressed, there were some powerful observations for each of these topics.

Agenda overviewAll but one of the investment professionals interviewed agree that a period of stability in accounting standards will be welcomed once the IASB has completed its projects on revenue, financial instruments, leases and insurance contracts and the new standards have come into effect. Although views were mixed on what changes are needed to develop IFRS, most agreed that the IASB should improve financial statement presentation and develop a disclosure framework.

ConvergenceEuropean investment professionals want high-quality standards more than they want convergence with US GAAP, with the majority saying their preference is for IFRS as a single set of global standards. Some of those interviewed warned that, in their view, continuing with convergence runs the risk of too many compromises being made.

IFRS

What’s your view on disclosure overload?The International Accounting Standards Board (IASB) is looking to preparers, auditors, regulators, investors and standard setters for their views on the value of information presented in the financial statements – and whether there is ‘disclosure overload’. The findings will guide the board’s work on improving the usefulness and clarity of financial disclosures, as part of its Conceptual framework project.

Financial statementsThe survey questions attempted to find out how well the information currently provided in financial statements helps respondents with their investment decisions. Views were mixed – which may be a reflection of regional reporting differences. However, there was general agreement that: non-GAAP measures are important for understanding companies’ performance; there is a need for improved segment reporting; and they would like more relevant disclosures, not more disclosure.

Joint venturesInvestors were asked whether they preferred the proportional consolidation method in accounting for joint ventures (this option has recently been removed by the IASB), or the equity method. The proportional method won the vote, but there are significant differences in view between countries. For instance, 50% of the French respondents worry that the equity method will impact their analysis by not providing the information they need.

Fair valueThe financial crisis has highlighted problems in applying fair values. For financial instruments, there is an overwhelming support for the mixed measurement model. Respondents also voiced a consistent desire for improved disclosure of fair value information.

The survey findings can be explored further in Financial reporting priorities: A European investor view.

■ www.pwc.com/corporatereporting



IFRS

ASIA-OCEANIA

Leases marathon passes another milestone

International office represents local views

The IASB and the FASB proudly announced in July that they had substantially completed their discussions and that a revised leases exposure draft would be published by the end of the year. It didn’t take long for that deadline to slip to the first quarter of next year, but nevertheless the boards do seem to be approaching the end of this phase of the project.

One of the principal criticisms of their 2010 proposals on expense recognition was that they would result in a front-loaded expense profile for lessees, regardless of the payment profile. The boards spent several fruitless months last year in search of a solution, but the issue refused to go away, even when the impact was reduced following decisions concerning lease terms and contingent rentals. The lobbying continued, and the boards have now agreed on an approach that will result in different expense recognition for different types of leases: some will

The International Financial Reporting Standards (IFRS) Foundation has opened its first international office outside London, choosing Tokyo as the location for its Asia-Oceania regional office.

The office will support greater regional outreach and participation in the International Accounting Standards Board’s (IASB) standard-setting activities. It will act as a focal point for Asia-Oceania research and viewpoints to ensure the region has direct input to the IASB’s due process at an early stage.

“The Asia-Oceania region is home to some of the largest capital markets and fastest growing economies in the world,” said Michel Prada, chairman of the IFRS Trustees. “It is also a highly diverse region, hence the need to establish a local presence to ensure that views across the region are heard and considered as part of the standard-setting process.”

■ www.ifrs.org

apply the approach proposed in 2010, similar to today’s finance lease accounting (with its resultant expense front-loading); others will apply a straight-line expense recognition pattern, similar to current operating lease accounting.

A new modelThis might sound as if several years of debate have resulted in the status quo adjusted only for the capitalisation of operating leases. Actually, that is not too far from the reality, but importantly the new model will include a different basis for determining when each type of lessee accounting should be applied. In principle, the new ‘bright-line’ will depend on whether the lessee acquires or consumes more than an insignificant portion of the underlying asset. But this might be quite difficult to work out, so the boards have decided on a couple of presumptions (around economic life and fair value) depending on the nature of the underlying asset.

The IASB is planning a public disclosure forum on 28 January 2013 to give those with an interest in financial reporting disclosures a chance to air their views. The forum will include presentations from invited speakers as well as discussion sessions. Participants are expected to debate:

• The current state of financial reporting disclosures

• Concerns around disclosures in financial reports, and their possible causes

• Potential ways that entities can improve the clarity of financial reports within the context of the current IFRS requirements

• The disclosure and presentation sections of the board’s Conceptual framework project

■ www.ifrs.org

“ It has become increasingly clear that we are suffering from disclosure overload, Standard-setters are not blameless, but neither are preparers, auditors or regulators. So, the idea is to get everybody in a room and see what we can do to address this topic.”

“ No one should expect quick wins. One investor’s disclosure clutter is another investor’s golden nugget of information. Taking information away is never easy.”Hans Hoogervorst, chairman of the IASB.

References to the leased asset’s useful life and fair value compared to the present value of the fixed lease payments might sound familiar, but the new test will be different, especially for equipment leases. And in order to accommodate a straight-line expense while measuring the lease liability by an effective interest method, asset amortisation will, in practice, be a balancing figure.

We won’t know exactly what constituents think of these revised proposals until mid-2013, however early signs are that a number of stakeholders including those involved with equipment leases have not warmed to the model. A few members of IASB and the FASB don’t sound too keen either.


CAPITAL STRENGTH

Investors frustrated with banks’ reportingInformation on capital strength has a key role to play in restoring the level of market confidence that is needed to increase financial stability, according to analysts and investors in the banking sector.

Banks can set themselves apart from the pack by making improvements to their regulatory reporting disclosures. Investors would like to see a reconciliation of regulatory capital to the amounts reported in the financial statements. They would also appreciate disclosures of how the regulatory capital will change under Basel III and the European Commission’s Capital Requirement Directive (CRD IV).

Risk-weighted assetsRisk-weighted assets (RWAs) are one of the key metrics that investors and analysts use when looking at capital and tier 1 ratios. Investors have limited confidence in RWA numbers, as they don’t understand how the metric is derived and why it has changed. “Management are woeful in how they describe the balance and its movement period on period,” said one investor.

Many investors think that comparing the RWA numbers between banks is meaningless because the models banks use to calculate them are not consistent. Investors say that disclosure of the basis of the RWA calculation would improve the usability of the number significantly. Given the complexity of the calculation, this may be difficult; an analysis of movements with explanations might be an alternative approach.

“Investors tell us there’s an opportunity for individual banks to gain advantage by improving the detail of disclosures,” said Henry Daubeney, PwC UK partner. “They would also like increased transparency around movements in RWAs and for banks to provide some assurance over the RWA number.”

Liquidity reportingAnother key area of disclosure is liquidity reporting. Current liquidity reporting is “like the Wild West”, analysts tell us.

“Investors and analysts want management to explain their funding sources – including where concentrations exist – and to disclose funding by major currency,” said Mr Daubeney. “Again, consistency in reporting across the banks is key, as comparability is crucial for their analysis.”

Investors would also like a detailed explanation of the banks’ key metrics, including loan-to-deposit ratios, new Basel and European Union requirements and the net stable funding ratio. Disclosing the basis of these calculations is important for comparability.

Investors encourage management to discuss expectations around deposit outflows and re-investment, with particular focus on the wholesale business.

Further investors’ views are available from PwC.

■ www.pwc.com/corporatereporting

IFRS

Foundation consults on governance changeThe IFRS Foundation has issued a drafting review of its constitution to reflect the separation of the role of chairman of the IASB and chief executive officer of the IFRS Foundation. The separation of roles was implemented at the end of 2011 with the introduction of the new role of IFRS Foundation executive director. Yael Almog was appointed to this role in the first quarter of 2012.

The IFRS Foundation is responsible for the governance and oversight of the International Accounting Standards Board (IASB). The new draft constitution reflects a key recommendation of a governance review carried out in 2011.

■ www.ifrs.org

“ Investors tell us there’s an opportunity for individual banks to gain advantage by improving the detail of disclosures.”

“ They would also like increased transparency around movements in RWAs and for banks to provide some assurance over the RWA number.”Henry Daubeney, PwC UK partner



INVESTORS

Eurozone crisis needs explainingThe investment community say there are a number of disclosures that would be useful to them in assessing the potential effects of the eurozone crisis on the companies they follow. Investors involved in the Corporate Reporting Users’ Forum want to understand: the current exposure to eurozone sovereign debt, the impact of a country exiting the euro, and what would happen if the eurozone broke up?

Total eurozone exposureWhile the focus has, until recently, been on Greek debt, the investor community wants to see disclosure of the direct and indirect exposures that companies have to all eurozone sovereign debts. This will help them in their analysis. They need to understand the exposure of a bank or company to the eurozone − preferably on a country-by-country basis where material. This is important because there are different risks from exposure to Greece, Spain, Ireland and Germany, for example.

“Many companies made steps forward with these disclosures at the year end, but investors need this information from all companies with a material exposure,” noted PwC director Alison Thomas. “Investors tell us the exposures they need to understand are not just on lending to eurozone countries and companies, but also the risk to revenues, funding and operations; so qualitative disclosure is as important as quantitative.”

“Investors would like to see exposures of assets and liabilities presented gross, as the net or asset-only position does not give the full picture for their analysis. They would encourage companies to explain how they are managing their exposures, rather than just quantifying them,” added Dr Thomas.

Funding, covenants and impairmentInvestors want companies to explain their funding sources − including where concentrations exist − and to disclose funding by major currency. This will help in their analysis of funding needs, including whether companies are likely to be able to refinance existing borrowing on similar terms.

Where assets are impaired, disclosure of the methodology for calculating the impairment is very helpful to investors, as different companies use different methodologies. Investors need to understand the impact on the company, as well as the likelihood of future revaluations or further impairments. They would appreciate management making additional disclosure of the potential indicators of impairment of assets.

As performance suffers or assets are impaired, there is a risk that debt covenants may be triggered. Analysts encourage companies to disclose information on their material covenants so they can consider the potential risks as a result of changes in the current valuation of assets.

Financial instrumentsInvestors would like to see counterparty concentration risk on derivatives; this will allow them to assess the potential impact of counter-parties’ exposures to the eurozone. They would like to see more narrative explanation of movements in AFS reserves to allow them to better understand the swings since available-for-sale (AFS) gains due to movements in the bond markets are significant in the current market.

Upside riskIt is also important to investors to understand upside risks − for example, possible appreciation of new currencies should the eurozone break up, or the benefits from production or other operational cost decreases.

“Clearly management won’t want to disclose information that gives away their competitive advantage,” noted Dr Thomas. “But any disclosures companies can make around their strategy for managing the current environment would be helpful.”

The Investor view series can be found on the website.


■ www.cruf.com


IFRS

New perspectiveon disclosureframework

This latest report by the EFRAG, ANC and the FRC looks at the issue from a different angle. It does not suggest removing or changing disclosure, but rather suggests principles for a new disclosure framework. The paper is intended to stimulate debate and influence future standard-setting by providing timely input into the IASB debate.

It moves the debate on “how to improve the quality of what is disclosed to better serve the objective of financial reporting”.

The paper highlights five points to consider when developing the new disclosure framework:

• The purpose of the notes – this drives what information to include in the notes

• Principles for identifying what information to include in the notes

• The form of the disclosure requirements (ie, detailed requirements or more principled ones needing greater judgement)

• Materiality considerations so that disclosure is what’s needed to understand financial performance

• Key features of what effective communication looks like, to deal with the way disclosures are organised and presented

The disclosure paper includes detailed questions on all these matters. The deadline for completing the questionnaire is 31 December 2012.

■ www.efrag.org

IFRS

The International Accounting Standards Board’s (IASB) requirements on hedge accounting have frustrated many preparers as they have not been well linked with common risk management practices. The detailed rules (in IAS 39) have at times made achieving hedge accounting impossible or very costly, even when the hedge has been an economically rational risk management strategy. Users have also found the current distinction between achieving hedge accounting, or not, is meaningless. They have often struggled to fully understand an entity’s risk management activities based on its application of the hedge accounting rules.

The IASB has addressed several of these concerns in the third phase of its replacement of IAS 39 with IFRS 9 and has issued a review draft (RD) detailing the new hedge accounting requirements. This RD is not open to comment. Instead, it provides an extended ‘fatal flaw review’ period, largely to ensure it is operational.

In particular, the RD introduces:

• More leniency in the requirements for hedge effectiveness assessment and consequently the eligibility for hedge accounting

• A number of changes to the rules for determining what can be designated as a hedged item

• A relaxation in the rules on using purchased options and non-derivative financial instruments as hedging instruments

The RD offers an extended fatal flaw period ahead of a final standard being published in late 2012 or early 2013.

■ www.ifrs.org

Review draft addresses hedge accounting issues

The debate on how to improve the quality of what is disclosed in financial reports is moving forward in Europe, with the publication of a discussion paper that looks at reporting through a new lens.

The discussion paper, Towards a disclosure framework for the notes, sets out key principles required for an effective disclosure framework. It is published by the European Financial Reporting Advisory Group (EFRAG), the French Authorité des Normes Comptables (ANC) and the Financial Reporting Council (FRC) in the UK. The project was carried out in cooperation with the US Financial Accounting Standards Board (FASB). In August 2011, EFRAG and the FASB agreed to work together on their respective projects to develop a consistent framework for both US and International GAAP.

The desire to reduce the volume of disclosure requirements in IFRSs is widespread and numerous reports have already been published on the matter, including Cutting clutter: Combating clutter in the annual reports, which was published by the UK Accounting Standards Board (ASB) and the FRC in April 2011 (see World Watch, Issue 2 2011, page 24). The UK FRC has gone a step further in its review of financial reporting disclosures with the publication of a complementary discussion paper in October 2012 (see page 40).

IAASB

Proposals to extend auditor’s responsibilities for the annual reportThe International Auditing and Assurance Standards Board (IAASB) is proposing revisions to the auditing standard that address the auditor’s responsibilities for information in documents that accompany audited financial statements, such as, the director’s or management report.


The proposed revisions respond to stakeholder feedback that more value could be forthcoming from the knowledge auditor’s gain during the audit. The proposals would extend the auditor’s responsibilities in a number of ways.

First, the exposure draft proposes to extend the auditor’s focus from identifying material inconsistencies between the audited financial statements and other information to considering the consistency of the information ‘in light of the auditor’s understanding of the entity and its environment acquired during the course of the audit’. This is a much broader perspective because many matters come to the auditor’s attention during the audit, such as industry and regulatory trends, internal control, and the entity’s broader objectives and strategies as well as its financial performance.

In the existing ISA, the auditor identifies inconsistencies by ‘reading’ the other information. The exposure draft goes further to set out expectations of procedures that would be appropriate when ‘considering’ the other information. The actions include: agreeing financial

information to the financial statements; seeking management’s reconciliations of the numbers derived from financial statement amounts; and considering whether the meaning of qualitative information is the same.

The scope of documents is broader too. The current ISA focuses on documents containing the financial statements – chiefly, the annual report. But financial statements are released in different ways around the world and, for some, that focus was limiting. Therefore, the proposed standard redefines the scope to include any information or documents that are issued as part of the initial release of the financial statements when their primary purpose is to provide commentary to enhance the intended users’ understanding of the audited financial statements and the financial reporting process. Judgement will, therefore, be needed on both the timing, and intended purpose of documents issued around the release of the financial statements to decide if they are within the scope of the standard.

The revised International Standard on Auditing (ISA 720) will also deal with reporting on these responsibilities in the auditor’s report (see page 50).

“ Given the significance of the proposals, it will be important that all stakeholders, including investors, preparers and auditors, carefully weigh the costs and benefits of the proposals. The comment period for submitting responses to the IAASB on the exposure draft is expected to be in February 2013.”Diana Hillier, PwC partner


The world is re-examining its view of the capital market system and the associated reporting models, and as part of that, the role of audit and assurance is under the microscope. Consultations are under way around the globe to consider the need for changes to the existing legislative arrangements.

Audit reform continues to be a controversial topic. Over the last year there has been a lot of engagement from market participants, particularly those seeking radical changes, and politicians, regulators and authorities must now look to respond in a balanced and considered way.

“Outcomes in the UK and Europe over the coming months could profoundly affect the structure of the audit market,” observed Richard Sexton, PwC deputy global assurance leader. “The discussions are an important part of assessing ongoing market relevance. It is important that proper consideration is given to the potential unintended consequences of regulatory intervention. We need to avoid a situation where it could impair audit quality or add cost and complexity for business, which jeopardizes growth, reduces competition and potentially undermines important governance principles.”

AUDIT REFORM

Audit market structure – under the microscope

USThere have not been any significant audit reform developments in the US during the second half of 2012. Market responses to the Public Company Accounting Oversight Board’s (PCAOB) 2011 concept release on audit independence and audit rotation and discussions at three ‘round tables’ have shown a marked lack of support for rotation (see also page 49). The PCAOB chairman, Jim Doty, has indicated that mandatory audit firm rotation is only one of the options being examined and that it does not represent the PCAOB’s preferred choice. Similarly, while the International Auditing and Assurance Standards Board (IAASB) has been pressing ahead with its auditor reporting project (see page 50), the PCAOB has not issued anything on the subject since 2011.

In addition to the debates in Europe and the US there are many other relevant discussions going on around the world, some led by governments and politicians and others by regulators.

■ www.europa.eu

■ www.competition-commission.org.uk

■ www.pcaobus.org

European UnionThe European Commission (EC) published draft legislation in December 2011 proposing wide ranging and major changes to the statutory audit arrangements for EU companies that would significantly affect the structure of the audit market (See World Watch, Issue 3, 2011). The proposals have continued to be debated during the course of 2012 by both the European Parliament and the Council of Ministers.

In the European Parliament (EP) the rapporteurs of the three key committees (JURI, ECON and ITRE) have all published their draft reports, which will be debated and amended. At this stage, the committees seem to have little, if any, support for the EC proposal for ‘audit only’ firms. Views on restricting audit tenure and on competitive tendering are less clear. Options under consideration include mandatory firm rotation, mandatory tendering or a combination of the two. A full debate in the lead committee, JURI, is expected in early 2013, with a full EP discussion sometime later in 2013.

The Council of Ministers is also moving slowly. The main focus is currently on the form of the draft legislation – whether regulation or directive is their preferred route. Again, the debate is likely to continue well into 2013, and final legislation is unlikely to be effective before 2016.

UKIn the UK, the Competition Commission’s (CC) investigation into the statutory audit market for large UK companies (which started shortly before the EC’s proposals were published), is not now expected to publish its provisional findings until early 2013 (see World Watch Issue 3, 2011). There is little indication of what those findings might be, but it will be interesting to see what this evidence-based review of the market shows and what influence it has on the debate in Europe.


Assurance news

The US Public Company Accounting Oversight Board (PCAOB) hosted its third public meeting in Houston, Texas in mid-October to hear feedback on its proposals for mandatory audit firm rotation and auditor independence. Previous meetings had been held in March and June in Washington DC and San Francisco.

Panelists included several academics who presented research that challenged the view that rotation would not aid auditor independence.

Nathalie Berger, head of the European Commission’s audit and credit-rating agencies unit, indicated that in the ongoing deliberations on the EU audit proposals, they continue to see support in the European Parliament for some form of firm rotation (see page 48).

Mandatory re-tendering continues to be identified as an alternative to mandatory rotation. This has been introduced for example, in the UK on a “comply or explain’ basis in the recent revisions to the UK Corporate governance code. Not all panellists thought it would be as effective, however.

PCAOB

Views on auditor independence and firm rotation continue to be heard

Cindy Fornelli of the US Centre for Audit Quality argued that the responses the PCAOB had received on its concept release from a broad range of stakeholders showed that mandatory rotation and tendering do not have support and, in fact, present significant risks to audit quality. She urged global dialogue and exploration of alternative ideas and actions that have a more direct and demonstrable link to audit quality.

An alternative supported by the National Association of Corporate Directors is rigorous annual evaluation of the external auditor by audit committees. While sharing the PCAOB’s view that external auditor independence, objectivity and scepticism are critical objectives, they do not believe that firm rotation would be an effective way to achieve them. They challenged whether there is any evidence that rotation would increase the quality of financial reporting and, therefore, investor confidence.

PCAOB Chairman Doty concluded the hearing with the observation that the comments they had heard – both in favour and not in favour – should not alone determine the issue.

The International Auditing and Assurance Standards Board (IAASB) has entered new territory with its standard for assurance on a company’s greenhouse gas (GHG) emission information.

The new International Standard on Assurance Engagement (ISAE) 3410, Assurance engagements on greenhouse gas (GHG) statements, addresses practitioners’ responsibilities to identify, assess, and respond to risks of material misstatement when engaged to report on GHG statements. It responds to the emerging need for

IAASB

Assurance on greenhouse gas statementsassurance on a broader spectrum of companies’ performance. Increasingly, organisations are quantifying their GHG emissions – whether for internal management purposes, as part of a regulatory disclosure regime, or as part of voluntary broader external reporting. Both companies and their stakeholders seek assurance on this reporting to ensure that it is both reliable and credible.

“Today, there is clear and growing demand for companies to disclose their environmental impacts and initiatives and to report detailed emissions information, often through GHG statements,” said Arnold Schilder,

IAASB chairman. “As this demand increases, public confidence in assured GHG emissions information becomes more significant, if not essential.”

This standard is a breakthrough for assurance standards because it supports high quality assurance in areas beyond purely financial reporting. It also deals with engagements that usually need to be undertaken by a multidisciplinary team with different experts – such as specialists in engineering or environmental science – being brought in at various stages of the engagement.

■ www.ifac.org


The International Auditing and Assurance Standards Board (IAASB) has been seeking views on its vision of the future auditor’s report in an Invitation to comment on improving the auditor’s report (ITC).

Today’s auditor’s report is, in most jurisdictions, a short standardised report. The cornerstone of this is the auditor’s opinion – often referred to as a “pass/fail” model. It is a long-standing model in many countries and is acknowledged to have many benefits.

“More than ever before, users of audited financial statements are calling for more pertinent information for their decision-making in today’s global business environment with increasingly complex financial reporting requirements,” said Arnold Schilder, the IAASB Chairman, in his opening remarks to the ITC. “Change, therefore, is essential.”

The Board’s proposals, summarised in the table, range from changes in wording and structure to more profound changes to the underlying auditor reporting model.

The IAASB has received far more responses than is usual for the development of a new auditing standard from a broad range of stakeholders, including investors, preparers, regulators, and academics as well as audit networks and professional bodies.

The issues involved are complex and the responses reflect a wide and divergent range of views. Some think the IAASB’s proposals go too far and could have unintended consequences. Others believe the IAASB proposals don’t go far enough and that the auditors’ reports should be able to provide even more insight into auditors’ views and procedures. A number of the responses emphasise the importance of weighing the proposals against key underlying principles –including the fact that the auditor should not be the original source of facts or other information about the entity, and should not provide subjective views.

IAASB

Designing the auditor’s report for the futureThe debate has challenged auditors to examine how the auditor’s report can continue to meet evolving capital market needs. But it has also reaffirmed the fundamental importance of audit to the capital markets. Our survey of investment professionals (see page 19) found that they derive a high level of value from the fact that an audit has been undertaken. Most have an appetite for the auditor’s report to provide more insight. At the same time, they understand the tensions in making valuable enhancements to today’s auditor’s report without inadvertently doing harm.

Next steps for the IAASB are to develop an exposure draft (ED) of the proposed revisions to the reporting ISAs. The aim is to release the ED for

comment in June 2013, and to finalise the new reporting standard(s) in June 2014. Over the next few months, the IAASB will be analysing the responses to the ITC and determining the positions to be reflected in the ED in light of stakeholders’ views.

“It will not be easy to reconcile the various visions of a report that will best meet the needs of capital markets and society in the future”, said PwC partner Diana Hillier.

“Auditor commentary and going concern will be particularly tough issues. Many challenges lie ahead, but the PwC network, working together with other stakeholders, are keen to be part of the debate.”

The IAASB’s key proposals

Auditor commentary(possibly mandatory for audits of public interest entities only)

A new section in the auditor’s report to highlight matters that are, in the auditor’s judgement, likely to be most important to users’ understanding of the audited financial statements or the audit.

Going concern Making explicit the auditor’s conclusions on the appropriateness of management’s use of the going concern assumption and a statement as to whether material uncertainties related to going concern have been identified.

Other information A statement as to whether any material inconsistencies between the audited financial statements and other information have been identified.

Structure of the report Prominent placement of the auditor’s opinion and other entity’s specific information in the auditor’s report.

Transparency and clarification Identifying the engagement leader’s name and the involvement of other auditors in a group audit, as well as clarification of respective responsibilities and key terms and concepts.

“ More than ever before, users of audited financial statements are calling for more pertinent information for their decision-making in today’s global business environment with increasingly complex financial reporting requirements.”Arnold Schilder, IAASB chairman

■ www.ifac.org


Assurance news

New proposals might require accountants (in business or in practice) to breach the principle of client confidentiality when faced with suspected illegal acts. The International Ethics Standards Board of Accountants (IESBA) has issued an exposure draft setting out far-reaching proposals about the responsibilities of professional accountants when faced with information that indicates an illegal act may have occurred.

The amendments to the code would apply not only to accountants in public practice, but would now extend reporting responsibilities to accountants serving non-audit clients and those in business, such as finance directors and those in the finance function. In certain circumstances, an accountant would be required to breach the fundamental principle of client confidentiality. This is, therefore, quite a significant revision to the code and could have a major impact on companies, accountants, auditors, other service providers and their clients.

IFAC

Far-reaching proposals on responding to suspected illegal actsWhen the IESBA started this project, it set out to address:

• The process to be followed when a professional accountant encounters a suspected illegal act.

• The circumstances in which a professional accountant would be required, or have a right, to override the fundamental principle of confidentiality and disclose a matter to an appropriate authority.

The ED sets out proposed escalation procedures for professional accountants in public practice and for professional accountants in business to take reasonable steps to confirm or dispel the suspicion and raise the matter with increasingly higher levels of management (including the audit committee), as necessary.

If the response is not considered appropriate and, in the judgement of the professional accountant, the suspected illegal act is “of such consequence” that disclosure would be “in the public interest”, and the entity has not disclosed the matter:

• A professional accountant providing professional services to an audit client would be required to disclose certain illegal acts to an appropriate authority.

• A professional accountant providing non-audit services to a client that is not an audit client, and a professional accountant in business, would be required to disclose the matter to the entity’s external auditor, if any, and, in certain circumstances, would have a right to disclose certain suspected illegal acts to an appropriate authority and would be expected to exercise that right.

If the proposals are adopted, an accountant might be required to breach client confidentiality even in circumstances when law or regulation does not require them to do so (and does not otherwise preclude disclosure), which goes further than the responsibilities auditors currently face under International Auditing Standards.

■ www.ifac.org

TRANSPARENCY INTERNATIONAL

Assurance framework contributes to building robust anti-bribery programmes

Boards and management that fail to respond to stakeholders about their efforts to prevent bribery and corruption are liable to lose the trust of those stakeholders, according to Transparency International (TI). Employees, customers, business partners and others are interested in the robustness of companies’ anti-bribery programmes. Businesses that give stakeholders confidence in their integrity, TI argues, will build trust in their organisations – a critical success factor in today’s increasingly complex and challenging markets.

But for trust to develop, the information communicated to stakeholders must be credible. This is why Transparency International has launched its Assurance framework for corporate anti-bribery

programmes with the support of the World Economic Forum Partnering Against Corruption Initiative (PACI).

This voluntary framework is primarily designed to help businesses strengthen their anti-bribery practices and enhance the credibility of their efforts to prevent corruption, in light of what is material to stakeholders.

For many companies, however, the framework will provide a path to ready them for external reporting and assurance on their anti-bribery programmes. One of the most useful elements of the framework for this is a set of control objectives that companies can use to design and assess their anti-bribery programmes ahead of independent assurance.

“Anti-bribery programmes are being driven higher up the corporate agenda by increasing stakeholder focus on corporate responsibility and accountability, several new national bribery laws, and bribery scandals in the press,” said Richard Porter, PwC UK Performance Assurance leader. “Companies that adopt a structured, controls-based approach will be in a stronger position to respond to stakeholders and gain credibility on their public reporting and anti-bribery programmes.”

■ www.transparency.org

Diary datesDate Key upcoming events Location/contact Sponsors/organisers

17 December 2012 9th Transatlantic Corporate Governance Dialogue Brussels, Belgium www.ecgi/org/tcgd/index.php

European Corporate Governance Institute, Brookings Institution, Columbia University

2-5 January 2013 Global Conference on Business and Finance, Winter Conference

Las Vegas, USAwww.theibfr.com

The Institute for Business and Finance Research

18 January 2013 Corporate Accountability Reporting Conference Boston, USAwww.hbs.edu

Harvard Business School

22-24 January 2013 IFRS Foundation Trustees Meeting London, UKwww.ifrs.org

International Accounting Standards Board

23-27 January 2013 World Economic Forum Annual Meeting Davos, Switzerlandwww.weforum.org

World Economic Forum

11 April 2013 IFRS Foundation Trustees Meeting London, UKwww.ifrs.org

International Accounting Standards Board

22-24 May 2013 Global Conference on Sustainability and Reporting Amsterdam, Netherlandswww.globalreporting.org

Global Reporting Initiative

28-31 May 2013 Global Conference on Business and Finance, Summer conference

San Jose, Costa Ricawww.theibfr.com

The Institute for Business and Finance Research

26-28 June 2013 ICGN Annual conference and AGM New York, USAwww.icgn.org

International Corporate Governance Network, TIAA-CREF

www.pwc.com/worldwatch

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• The latest reporting opinions and debates

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