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Crowe Horwath Reporting Insights

2016 - Issue 3

Director's Update

David Chitty

Welcome to our December newsletter for the clients and contacts of the member firms of Crowe Horwath International.
 
This newsletter includes a guest article by Neil Stevenson of the International Integrated Reporting Council (IIRC). Neil spoke at our recent Audit Partners' Meetings about the growing importance of Integrated Reporting. He presents his view of the opportunity for the firms and clients of Crowe Horwath International.
 
Crowe Horwath International has introduced a Compliance Services Brochure detailing the services that our member firms offer to Multinational Corporations.
 
The immediate focus for financial reporting is the implementation of IFRS 9, 15 and 16. This newsletter includes a link to our recent article about IFRS 9. We shall publish more practical commentaries about implementing these standards in the coming months. Businesses and their advisers should be thinking about their transition now.

The accounting profession is facing major change, and the new accounting standards are one part of this. I addressed these changes in a recent article Changing Dynamics of Accountancy Worldwide.

To keep up to date with professional developments follow me on LinkedIn and Twitter.  


Integrated Reporting: an integrated approach to managing your business and communicating on value creation

By Neil Stevenson, Managing Director, Global Implementation, IIRC (integratedreporting.org)
 
I have had the great pleasure to present to partners of Crowe Horwath around the world in recent months. Our discussions centred on the role of accountants as trusted advisers to business, whether as external professional advisers or internal finance managers and leaders.
 
In this context, accountants are needed more than ever to understand and promote value creation in their organisations. This is especially true in a world of disruption and fast-moving innovation, where value is frequently created through human or intellectual capital, and through relationships, as much as through traditional finance and fixed assets. Furthermore, there are increasing calls for companies to be transparent about the way in which they conduct business and the resources they rely on, or deplete as part of the process.

Integrated reporting journey
 
Integrated Reporting represents a global evolution in reporting to meet the opportunities and challenges of business today. It allows organisations to communicate a clear, concise and integrated story about how all their resources are creating value. It is therefore helping organisations to think holistically about their strategy, performance, governance and prospects, enhancing decision-making and long-term performance.
 
The International <IR> Framework, released in December 2013, is a strong foundation which introduces a 'multi-capitals' system for understanding and articulating value creation as the best way of achieving harmony between the human, social, natural, intellectual, manufactured and financial resources that make up a modern economic system.  It positions financial reporting as an essential part of a broader canvas of resources that must be managed holistically, not in isolation. It is an approach that helps to deliver greater cohesion and bring an end to the silo mentality that can conceal material risks, making them virtually impossible to manage, let alone disclose.
 
Integrated reporting around the world
 
<IR> is taking off around the world, with over 1,000 organisations now adopting the <IR> Framework or on the journey towards it. It is a requirement for listed companies in South Africa and around 300 companies are preparing integrated reports in Japan. In Europe, there is strong alignment between corporate reporting practices and <IR> (for example, the UK's strategic report). In the US, some prominent names are producing integrated reports, including GE.
 
Relevance to today's opportunities and challenges
 
We believe that <IR> offers an opportunity for Crowe Horwath and its clients to collaborate to grow cross-border business in an international and technological age. It can help companies to position themselves as a business partner, access finance or develop the organisation to embark on an IPO. <IR> also offers a practical means for companies to make sense of reporting requirements, especially as many companies are now facing new disclosure rules (non-financial reporting, conflict minerals, etc.).
 
Furthermore, and perhaps most importantly, it should assist in enhancing systems and focusing teams on better information for decision-making. Integrated thinking is a prize for all organisations. As one private company put it to me recently, <IR> is helping them to professionalise their management of the business. This is vital not just for performance and decision-making but for stakeholder confidence.
 
We commend Crowe Horwath for its engagement in Integrated Reporting and for bringing innovative ideas to its organisation and clients. Innovation and insight, alongside rigour and professionalism, are the hallmark of trusted advisers.
 


Brexit: Five Months On

Now available on crowehorwath.net is an up-to-date account of what has happened since the Brexit vote in the UK on 23 June 2016 (click here). This article has been prepared to help bring clarity and to dispel some of the misinformation circulating around the situation. Businesses and investors working with the UK and other EU Member States are advised to check our UK member firm's Brexit Hub.


IFRS 9 Financial Instruments implementation

We recently presented an article about the implementation of IFRS 9. The article includes link to a recording introducing the standard. It is important to remember that IFRS 9 applies to all businesses that report under IFRS and early transition is essential.
 
The effective date of IFRS 9 Financial Instruments is periods commencing on or after 1 January 2018. Entities that report under IFRS should now be thinking about their transition to the new standard. The definition of "financial instrument" is broad and it is fallacy to think that IFRS only applies to "complex" instruments or entities that are financial institutions because all entities have financial instruments such as bank balances, receivables, payables and sources of finance such as loans and overdrafts. Therefore all entities will have to apply IFRS 9.
 
The International Accounting Standards Board (IASB) has issued a webcast that looks at incorporating forward-looking information into the application of the Expected Credit Loss impairment requirements.
 
Crowe Horwath International is preparing a resource for testing Expected Credit Loss impairments and will announce more details about this in early 2017.


Crowe Horwath International Compliance Services

Crowe Horwath International has published a Compliance Services Brochure. The brochure lists the package of compliance services that our member firms offer to multinational corporations (MNCs). The brochure details the following services - Statutory Audit, Corporate Income Tax Compliance, Corporate Income Tax Accounting, VAT/GST Compliance, Financial Reporting Support, Outsourced Accounting, Supply Chain Compliance and Global Mobility Services. 
 
The delivery of compliance services to MNCs is a significant opportunity. Crowe Horwath International member firms are in a position to deliver solutions that enable MNCs to efficiently and effectively comply with existing and prospective tax and reporting regulations.
 
Supply Chain Compliance is a growing opportunity arising from both regulation and greater transparency about the origins of goods, services, and component materials. The EU is to implement legislation about conflict-minerals reporting that is similar to requirements that have been in place in the US for several years. Camillo Giovannini (Crowe Horwath Boscolo, Romania) and Chris McClure (Crowe Horwath LLP, USA) have co-authored an article that anticipates the EU legislation on conflict minerals.


IFRS Standards Applicable for 31 December 2016 year-ends

There are no complete new standards applicable this year, but there are many detailed requirements including amendments to IAS 1 arising from the IASB's Disclosure Initiative. Click here for a summary as to which new or revised IFRS standards apply to 31 December 2016 year-ends.

 


Good Practice in Annual Reporting

The UK FRC (Financial Reporting Council) is a regulator that is prolific in publishing its views about the quality of financial reporting and audit. Their commentaries are well researched and provide good guidance on best practice to reporting entities and auditors outside the UK. Recently the FRC has published two commentaries that provide good practice guidance for the presentation of annual reports.
 
Improvements to Annual Reports
 
The first of these is advice to UK listed companies highlighting key issues and improvements that can be made to annual reports for the 2016 reporting season. The advice and a letter from the FRC can be found here. Although the advice is UK specific, aspects of the guidance are relevant to all companies listed on all markets that are looking for best practice guidance on improving the presentation of their annual reports and the message conveyed by the report.
 
The advice comments on the following areas where investors look for better reporting:

  • The relationship between IFRS measures and any alternative performance measures used should be clearly explained.
  • Business model reporting should provide clear explanations of how the company makes money and what differentiates it from its peers.
  • A clear link between the business model and the revenue recognition policies should be disclosed.
  • Dividend disclosures should detail how dividend policies operate in practice and how these policies may be impacted by risks and capital management decisions facing the company.

This advice is relevant to all reporting entities everywhere and is worthwhile reading.
 
Tax Disclosures
 
The second FRC commentary is a study of the tax disclosures in the financial statements of a sample of FTSE 350 companies. The study shows that the FRC found evidence of improvements in the transparency of tax disclosures included in strategic reports and effective tax rate reconciliations, indicating the beneficial impact of the "pre-informing" approach. They considered that there was scope for companies to articulate better how they account for tax uncertainties. The anticipated introduction of new IFRS requirements in this area presents an opportunity for companies to consider their approach.
 
This study is a source of valuable guidance on the application of IFRS tax disclosures and it has practical application beyond the UK. All IFRS preparers and their advisers will find the study useful.
 
The Impact of Corporate Culture on Long-Term Success
 
The UK FRC has been taking an active interest in the relationship between corporate culture and long-term business success in the UK. The FRC has prepared a study that concludes that the corporate culture adds value to the business. Strong values, attitudes and behaviours all contribute to long-term success. The study is available here and contains messages that can help businesses in all countries.
 
The FRC followed the study with a conference Culture to Capital; Aligning Corporate Behaviour with Long-Term Performance. The transcript of the conference has been published and can be obtained here.
 
New Audit Reports
 
The implementation of the IAASB's new and revised standards on audit reports is now approaching, as the effective date in the standards means that they are applicable for 31 December 2016 year ends. Many countries will have adopted the effective date in the standards meaning that all audit reports will change.
National standard setters will have issued new audit report formats that reflect national requirements as well as the IAASB's standards. It is important that new national requirements are followed and that the correct form of report is used.
 
The most significant change concerns the reporting of Key Audit Matters (KAM) when reporting on listed companies. National standard setters will have defined what "listed" means in respect of a particular country. Extensive guidance has been issued about reporting KAM. The guidance includes a helpful one-page guide from IAASB to identifying Key Audit Matters.
 
Members of Boards and Audit Committees will be receiving briefings from their auditors about the changes to reporting. The planning presentations will be highlighting what are likely to be reported as KAM. We have prepared a recorded briefing for Board and Audit Committee members to introduce KAM.
 
Non-Compliance with Laws & Regulations
 
New standards have been issued about Non-Compliance with Laws & Regulations (known as NOCLAR).
 
After much deliberation the International Ethics Standards Board for Accountants (IESBA) has issued its new Standard on non-compliance with laws and regulations. This has implications for all professional accountants, not just for auditors. The NOCLAR standard sets out a framework to guide auditors and other professional accountants in what actions to take in the public interest when they become aware of a potential illegal act (NOCLAR), committed by a client or employer.
 
The standard applies to all categories of professional accountants (members of professional bodies that belong to IFAC), including auditors, other professional accountants in public practice, and professional accountants in organisations. It addresses breaches of laws and regulations that deal with matters such as fraud, corruption and bribery, money laundering, tax payments, financial products and services, environmental protection, and public health and safety.
 
Among other matters, the NOCLAR standard provides a clear pathway for auditors and other professional accountants to disclose potential non-compliance situations to appropriate public authorities in certain situations, without being constrained by the ethical duty of confidentiality. It also places renewed emphasis on the role of senior-level accountants in business in promoting a culture of compliance with laws and regulations and prevention of non-compliance within their organisations.
 
More about the NOCLAR standard can be found here.

This means that Ethical Standards have introduced "whistleblowing" obligations that apply to accountants that belong to professional organisations that belong to IFAC. Professional accountancy bodies should be preparing guidance for their members about the consequences of the NOCLAR requirements. Some bodies may be putting in place helplines to support their members. Crowe Horwath International member firms are available as a point of contact to discuss the NOCLAR requirements. 


 


Contact Us
David Chitty - Audit
London, United Kingdom
+44 20.7842.7292


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