Financial Reporting Brief
Our featured article for October is 'Corporate Reporting – Future Expectations' with Brendan Sheridan commenting on the expectations of investors and other stakeholders for improved, more transparent reporting and the developments in progress to meet expectations.
Our Quarterly Financial Reporting Brief comments on continuing progress with the new IFRS Standards on revenue and financial instruments, developments in Irish/UK GAAP particularly concerning smaller entities together with the new Companies legislation receiving more attention and a plethora of other accounting and regulatory matters.
Corporate Reporting- Future Expectations
With growing demands from investors and other stakeholders for more information and greater transparency from companies, the corporate reporting landscape is constantly changing.
The ability to deliver on meeting these demands from investors and other stakeholders is dependent on effective collaboration between corporate reporters, policy makers and other stakeholders.
Companies are dealing with ever-increasing regulatory disclosure requirements and continuing emergence of new voluntary reporting guidance on matters that are often inadequately addressed, if at all, in financial reporting.
Three noteworthy examples of voluntary guidance in areas of reporting non-financial matters are: -
- Sustainability reporting- the Global Reporting Initiative (GRI) Sustainability Guidelines
- Integrated reporting- the International Integrated Reporting Councils (IIRC) Integrated Reporting (IR) Framework.
- Environmental, social and governance (ESG) disclosures
The importance of sustainability to business and investing is intensifying as financial markets are increasingly forced to address challenges posed by the search for natural resources, the effects of unabated carbon emissions, rapid urbanisation and the widening inequality of wealth and incomes, to name just a few.
As the context of business and investing continues to shift, implementing a framework for allocating capital that embeds sustainability into it will be critical to successfully navigate the way forward. Responsible investment explicitly acknowledges the relevance to the investor of ESG factors, and of the long-term health and stability of the market as a whole. Responsible investment can be differentiated from conventional approaches to investment in two ways. The first is that timeframes are important; the goal is the creation of sustainable, long-term investment returns, not just short-term returns. The second is that responsible investment requires that investors pay attention to the wider contextual factors, including the stability and health of economic and environmental systems and the evolving values and expectations of the societies of which they are part.
Such a wide range of guidance exists that it would be difficult to deal with all in the confines of this article. The focus shall therefore be on Integrated Reporting and the work being carried out by the Financial Reporting Lab.
In the first instance, we take a closer look at one of the major potential platforms for corporate reporting into the future – Integrated Reporting (IR). We then look at the work being done by the FRC’s Financial Reporting Lab, which is currently undertaking a number of projects with the objective of providing more meaningful and transparent reporting by corporates to investors and other stakeholders.
At the head of integrated reporting is integrated thinking, defined by the International Integrated Reporting Council (IIRC) as follows: -
“Integrated thinking is the active consideration by an organisation of the relationships between its various operating and functional units and the capitals that the organisation uses or affects. Integrated thinking leads to integrated decision-making and actions that consider the creation of value over the short, medium and long term.”
Embedding integrated thinking into an organisation’s activities requires better connection of external reporting and the information used for management reporting, analysis and decision-making.
The fundamentals of the IR Framework have been described before in these articles, but to recap, the fundamental concepts of an integrated report that govern the overall content of an integrated report, are: -
- The Capitals- the six categories of resource and relationships on which a business may depend in its broadest sense
- Value Creation – value creation for the organisation and value creation in the broadest sense, considering value for all stakeholders
- The Value Creation Process- the traditional business model concepts (inputs, activities and outputs in the form of goods or services) intended to consider the ‘outcomes’ of the business activities for the IR capitals above.
These are supported by a range of both content elements and guiding principles which support the implementation of Integrated Reporting.
Developing an integrated report could potentially meet the needs of corporate investors while also encouraging more cohesive decision-making within the business to support the long-term value proposition. IR is a journey and requires a change in thinking that takes time to implement.
Recently, a paper written on behalf of the IR Banking Network analyses the application of the multi-capitals approach for integrated reporting in the banking sector, and it aims also to provide industry specific guidance on the application of IR. Of the 20 surveyed banks, eight applied the IR ‘capitals’ terminology as outlined in the IR Framework and three others applied a similar concept but used different terms.
Financial Reporting Lab
The September 2014 article in this series ‘The Financial Reporting Lab - an experiment that works’ commented on the collaborative approach adopted by the Lab to improving corporate reporting and its record of achievement since being founded by the Financial Reporting Council (FRC) in late 2011.
The Lab’s ‘Clear and Concise Reporting’ project commented on in our previous article has progressed with a number of companies agreeing to take part in case studies. Some of these case studies will look back at initiatives already completed in published annual reports and others are intended to focus on enhancements currently being undertaken. The first case study, focusing on accounting policy disclosures of William Hill PLC, was published in February 2015.
Other projects that have been in progress for some time include: -
- Disclosure of dividend policy and capacity
- Corporate reporting in a digital world
Most recently the Lab announced a new project on effective Business Model Reporting. It is envisaged that this project will assist companies to understand what information the investment community values in business model reporting, and how the information is used. The Lab anticipates that the project will explore a number of characteristics:
- Definition of a business model
- Preparation of business model disclosures
- Investor use of business model disclosure, and
- Attributes that characterise good business model reporting.
The project is the first of a series of projects examining best practice reporting in the following interrelated areas of disclosure: -
- Business model reporting
- Principal risk reporting
- Viability reporting
The overall objective is to enable companies to refine their reporting in these areas to better meet the investment community’s needs. It will also provide the investment community with a better insight into the process by which companies develop and use their business model, and is an opportunity for the investment community to influence reporting in this area. All these disclosure areas were high on the priority list of respondents to the Lab’s 2014 stakeholder survey.
In December 2013, EFRAG together with some national standard-setters published a research paper following a joint project which considered the term ‘Business Model’ providing insight into how this encapsulated how value is captured and net cash flows generated through income in the normal course of a business. The Research Paper argued that the business model should play a role in financial reporting and its consequences for recognition, measurement, presentation and disclosures should be assessed and considered in all aspects of corporate reporting. The Lab project recently initiated continues the process.
Being able to articulate your strategy and business model, as well as link metrics to them, is critical for an organisation to build trust. Trust requires transparency and accountability and is a cornerstone of efficient and integral capital markets.
Corporates need to ensure they are not left behind in the continuing momentum of progress towards improved standards of reporting.
What's New- Monthly Reporting Pack
Irish GAAP / GAAS & Related Developments
IFRS & Related Development
- IASB decides to propose IFRS 9 deferral
- IASB decides to extend the comment period for the Conceptual Framework ED
- EFRAG supports deferral of IFRS 10/IAS 28 amendments
- Applying the Integrated Reporting concept of ‘capitals’ in the banking industry
- EFRAG recommends endorsement of IFRS 9, but withholds comments on insurance industry
- IASB defers effective date of IFRS 15
- ITG discusses implementation of impairment requirements in IFRS 9
Regulatory & Related Developments
- Central Bank review of credit unions
- ICAV Act
- ESMA works on implementing EU-Transparency Directive requirements
- ESMA opinion on accounting for cash contributions to a DGS
- PRA consults on changes to audit committee requirements as a result of EU audit reform
- G20/OECD publishes revised Principles of Corporate Governance
- Regulations made impacting the reversal of goodwill impairment
- IFRS in Focus — Meeting of IFRS Transition Resource Group for Impairment of Financial Instruments
- IFRS in Focus — IASB issues amendments to defer effective date of IFRS 15
- Need to know — Changes to accounting standards as a result of implementation of the EU Accounting Directive
- Thinking Allowed — Materiality
- From brawn to brains
- Payments disrupted :The emerging challenge for European retail banks
- Is RegTech the new FinTech?
Financial Reporting Brief
- September 2015: Conceptual Framework – A New Foundation
- August 2015: IFRS 9 - Moving forward
- Quarterly Financial Reporting Brief: July 2015
- July 2015: Quality of Reporting – Needs to Improve!
- June 2015: Revenue - A Standard in Progress?
- May 2015: Financial Reporting in Ireland – Is It All New?
- Quarterly Financial Reporting Brief: April 2015
- April 2015: Corporate Reporting – A Broader Horizon
- March 2015: Impairment losses – Improved recognition?
- February 2015: The Challenge of Transition
- Quarterly Financial Reporting Brief: January 2015
- January 2015: Integrated Reporting – crossing the chasm
- December 2014: Clear and concise reporting – achievable?
- November 2014: Supervisory authorities - fundamental to consistent reporting
- Quarterly Financial Reporting Brief: October 2014
- October 2014: Group reporting – A way forward
- September 2014: The Financial Reporting Lab – An experiment that works?
- August 2014: Financial Instruments – Accounting we can all understand?