Financial Reporting Brief
This month’s article 'Fitness Check on Financial Reporting' comments on the Roadmap recently launched by the European Commission to evaluate whether reporting, both financial and non-financial, is meeting its objectives. Our Monthly Reporting Pack provides a signpost to significant accounting and reporting developments during the month.
Fitness Check on Financial Reporting
The European Commission (EC) has published an evaluation roadmap, a fitness check to assess whether the pubic reporting obligations including financial and non-financial reporting requirements for EU companies are meeting their objectives of effectiveness, relevance and EU added value. The fitness check will take into consideration the Accounting Directive, the Transparency Directive, the Non-Financial Reporting Directive, the Bank Accounts Directive, the Insurance Accounts Directive and the IAS Regulation.
Public reporting by companies aims to inform shareholders, investors, creditors and any other interested parties on the companies’ affairs with the objectives of ensuring protection, market efficiency, access to capital, facilitation of cross-border operations, public confidence, sustainability and accountability.
Challenges to Reporting
Reporting by companies faces important longer-term challenges which may affect the current status. These include:
- Emerging calls for more reporting on sustainability – the focus of public reporting needs to be broadened beyond short-term financial information to mainly capital providers, to providing also insights into companies’ long-term value creation, and impact on ESG (Environmental, Social, Governance) factors in the interest of society as a whole and to support the move towards more sustainable finance; and
- Secondly, digitalisation has the potential to modernise the way this public information is disseminated by companies and accessed by investors and the broader public. In other words, digitalisation could be a way to make public reporting more efficient and effective for all stakeholders.
The fitness check will assess whether the EU Financial Reporting Framework is still fit for purpose. It will look at issues such as:
- Whether the framework is suitable for cross border businesses in the frame of a more integrated single market and well-functioning capital markets;
- How to deal with the emergence of new business models;
- The increasing importance of intangibles;
- Whether the simplifications brought in for small undertakings work properly including the accounting regime for micro-entities;
- The role of IFRS and its interaction with the broader EU accounting framework, as well as specific disclosure requirements for listed companies;
- The size criteria defining SMEs and the accounting regime for micro-companies; and
- Whether the specific accounting framework for financial reporting for financial institutions and insurance companies is still coherent with other financial reporting legislations and with the EU strengthened prudential and supervision framework.
The public consultation on the fitness check will aim to obtain evidence from a wide range of stakeholders, with views being asked on the following:
- Whether the current financial reporting framework meets its objectives and will continue to do so in the digital economy;
- Whether the financial and non-financial disclosures in the area of ESG reporting by companies are fit for purpose, including sustainability disclosures;
- Whether to encourage experimentation with integrated reporting as a way to make the EU reporting framework more effective and efficient and if yes, how; and
- Whether public corporate reporting does take enough consideration of - or at least is not a hindrance to – technological progress and how to make the best use of these tools to do more with less.
Sustainable Finance – Roadmap for Greener Economy
The High- Level Expert Group (HLEG) on Sustainable Finance, established by the EC has published its final report setting out strategic recommendations for a financial system that supports sustainable investments.
HLEG calls on the EC to place greater emphasis on the need to integrate ‘non-financial information’ in the EU Directive on non-financial reporting. The final report states – ‘The ultimate ambition has to be convergence or integration of financial and non-financial or sustainability information ……integrated reporting supports this convergence qualitatively through reporting that links sustainability factors with company strategy'.
The HLEG recommends that the EU Directive relating to financial statements and related reports is updated to place greater emphasis on the need to integrate non-financial information and discuss the governance of addressing long-term and sustainability risks and opportunities. HLEG is also recommending to the EU that they change the IAS Regulation to specify that international accounting standards should only be adopted if they are ‘conducive to the European public good’, including its sustainability and long-term investment objectives.
The HLEG was established by the EC to help develop an overarching and comprehensive EU roadmap on sustainability factors as a fundamental element of company strategy, with its objectives being:
- To request advice on how to steer the flow of capital towards sustainable investments;
- To identify steps that financial institutions and supervisors should take to protect the financial system from sustainability risks; and
- To deploy these policies on a pan-European scale.
As priority actions, the HLEG recommends:
- Establishing an EU economy with sustainability being the primary goal, starting with climate change mitigation, to define areas where investments are needed most;
- Clarifying investor duties to extend the time horizons of investment and bring greater focus on ESG factors into investment decisions;
- Upgrading disclosures to make sustainability opportunities and risks transparent;
- Enabling retail investors to invest in sustainable finance opportunities;
- Developing official European sustainability standards for some financial assets, starting with green bonds;
- Establishing ‘Sustainable Infrastructure Europe’ to deploy development capacity in EU member states for infrastructure necessary for a more sustainable economy; and
- Integrating sustainability firmly in the governance of financial institutions as well as its financial supervision.
The EU is already at the forefront of investing in resource efficiency and social infrastructure. Creating an enabling framework for private investors is crucial to achieving the transition to a cleaner, more resource-efficient, circular economy. There is much support for the view that re-orienting investment flows into long-term, sustainable projects will also improve the stability of the financial system. The EC will now move to finalise its strategy on sustainable finance on the basis of the HLEG recommendations. Delivering an EU strategy on sustainable finance is a priority action of the EC Capital Markets Union Action Plan, as well as implementing the EU’s agenda for sustainable development.
The question to be addressed is whether the EU financial reporting framework is still fit for purpose. There remains room for improvement in financial reporting but financial reporting continues to be a fundamental element in the investment process. There will always be room for improvement of financial reporting and there must remain a commitment to develop standards that bring transparency, accountability and efficiency to benefit financial markets and stakeholders in general.
What's New? Monthly Reporting Pack – February 2018
Irish/UK GAAP & Related Developments
Charities SORP: Update Bulletin 2 - Consultation launched
IFRS & Related Developments
CFA Institute Paper on the new revenue recognition requirements
Legal & Regulatory Developments
Commencement date for section 80 of the Companies (Accounting) Act 2017
Financial Reporting Brief