IFRS Convergence:
Converged, What’s Next?
Ng Kean Kok
Need for accounting convergence
• Accounting and reporting practices fall short of
meeting information needs of the capital markets
• Need for improved reporting model built on
principle-based standards that can be applied in
a cost-effective manner
• Matter of decisive strategic importance o the
future global capital markets
• High quality information essential to high
quality markets
What do stakeholders want from annual reports?
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Financial performance
Treatment of staff
Customer service
Quality of management
Image and reputation
Quality of products
Social responsibility
Corporate strategy
Market share
Accessibility / openness to enquiry
Communication – information provided
What do stakeholders want from annual reports?
(continued)
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Honesty / integrity
Long established
Valuation
Cash flow
Sector / industry in which they operate
Environmental responsibility
(Source: tomorrowscompany.com)
Survey on Financial Reporting Chain – by IFAC
2007 – Financial Reporting Process
Survey on Financial Reporting Chain – by IFAC
2007 – Financial Reporting Process
Survey on Financial Reporting Chain – by IFAC
2007 – Financial Reporting Process
Survey on Financial Reporting Chain – by IFAC
2007 – Usefulness of Financial Reports
Survey on Financial Reporting Chain – by IFAC
2007 – Usefulness of Financial Reports
Survey on Financial Reporting Chain – by IFAC
2007 – Usefulness of Financial Reports
Integrating the Business Reporting Supply Chain
– by IFAC
2011 – Improving Financial Reporting
• Financial reporting must become more relevant and
understandable to the various users. Organizations
should provide simple building blocks of business information,
grouped around topics of value to stakeholders. Consideration
should also be given to the education of retail investors.
• Use of a direct cash flow statement should be
encouraged to allow the investor community to more clearly see
the operating performance of the business and the investment
decisions being made, as well as how the business is being
financed.
Integrating the Business Reporting Supply Chain
– by IFAC
2011 – Improving Financial Reporting (continued)
• Financial reporting standard setters should simplify
their standards so stakeholders can understand
them and implement them properly. To increase the
diversity of standard-setting boards, non-accountants should be
encouraged to participate on them.
• The financial reporting burden on smaller and nonlisted entities should be limited. Standard setters and
regulators should consider how they can reduce the burden of
financial reporting for smaller and non-listed entities.
Integrating the Business Reporting Supply Chain
– by IFAC
2011 – Improving Financial Reporting (continued)
• The use of fair value in financial reporting should be
supported. Standard setters should better distinguish between
the changes to the bottom line that result from changes in fair value,
versus those changes that result from the day-to-day running of the
business => enable stakeholders to better distinguish the true
underlying performance of an organization.
• Application of financial reporting standards should
be more principles based in order to capture the
economic substance of a transaction. Professional
judgment is needed in applying principles-based standards.
Financial reporting standard setters should provide sufficient room
for professional judgment in their standards and regulators should
establish a fair enforcement process.
Integrating the Business Reporting Supply Chain
– by IFAC
2011 – Improving Financial Reporting (continued)
• Global capital markets would be best served by one
set of principles-based, high-quality financial
reporting standards. The increasingly globalized supply of
capital necessitates one global set of high-quality financial reporting
standards. Education should be provided to promote a swift global
transition to International Financial Reporting Standards.
• Professional behaviour and a minimum level of
qualification should be required for preparers of
financial statements. In addition, organizations should apply a
rigorous recruitment and training approach for their finance and
accounting staff.
Integrating the Business Reporting Supply Chain
– by IFAC
2011 – Improving Governance in Organisations
• Good governance starts with tone at the top – Boards
• Principles-based, stakeholder-driven governance codes “apply or explain” principle
• Further international convergence is desirable.
• More independence should be required of boards of directors
(e.g. requiring over half of a board’s members to be
independent NEDs; separating the positions of CEO and
chairman).
• Directors should competently fulfill their duties – capacity to
approve the organization’s strategy, including risk
management, and to evaluate the way strategy is executed
and reported upon.
Integrating the Business Reporting Supply Chain
– by IFAC
2011 – Improving Governance in Organisations (continued)
• Risk and liability for directors should be addressed.
• Primary responsibility of directors is performance — not
compliance.
• Expand from a shareholder to a wider stakeholder
perspective. Organizations have an ever-growing
environmental, social, and economic impact on societies and
should, therefore, take into account not only the interests of
their investors, but also those of their clients, employees,
suppliers, neighbours, governments, regulators, financial
markets, and societies as a whole.
Integrating the Business Reporting Supply Chain
– by IFAC
2011 – Improving Governance in Organisations (continued)
• Organizations should take social and environmental, as
well as economic, performance into account. Sustainable
performance is the combination of these three factors, which
should be aligned with an organization’s strategies,
operations, and stakeholder communications. Successful
organizations demonstrate that sustainability is also good
business.
• Executive remuneration should be aligned with the
organization’s sustainable performance relative to its
competitors.
Integrating the Business Reporting Supply Chain
– by IFAC
2011 – Improving Governance in Organisations (continued)
• Ongoing risk management and control should be a
key part of board oversight. Risk management and
control systems should become a key part of integrated
management at every level of an organization and
across all operations.
• Collaborative effort is required to address systemic
risk. Securities regulators, central banks, and other
financial regulators across the globe should collaborate
to form an empowered, supra-national oversight body to
identify systemic risks in the markets and ensure a solid
international financial infrastructure.
Integrating the Business Reporting Supply Chain
– by IFAC
2011 – Steps towards integrated business reporting
• Improving business reporting should start with
broadening the stakeholder perspective – should be
more receptive to the information needs of various
stakeholders and adjust approach to reporting accordingly.
• Business leaders should present a cohesive
explanation of their organization to help
stakeholders assess its overall performance, which
includes how their actions impact the environment.
The current practice of reporting should, therefore, be
expanded to a more connected way of business reporting,
integrating the various social, environmental, and economic
aspects of an organization into one cohesive explanation of
the business.
Integrating the Business Reporting Supply Chain
– by IFAC
2011 – Steps towards integrated business reporting (cont’d)
• Management commentary should put the numbers into
context. To provide better insights into what drives the
business, management commentary should be more open,
transparent, and forward looking. To foster more open
narrative reporting, stakeholders should change their
approach and culture in regard to litigation.
• A new, integrated business reporting model should be
developed to present a cohesive explanation of the
business so stakeholders can better assess the overall
performance of the organization. A high-level, multistakeholder integrated report could be connected via
information and communication technologies to more detail.
Integrating the Business Reporting Supply Chain
– by IFAC
2011 – Steps towards integrated business reporting (cont’d)
• More continuous business reporting should be
encouraged – encourage greater frequency and timeliness
of business reporting => reduce the information vacuum in
which stakeholders have to operate. Faster and more
frequent reporting also motivates organizations to improve
their internal information systems.
• To remain relevant, auditors should expand the scope of
their audits and provide assurance beyond the financial
statements. A redefined, broadened, and more transparent
reporting framework will effectively expand the need for
assurance, creating new business opportunities for auditors.
• Integrated
Reporting
being
developed by
IIRC
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Source: www.iirc.org
Integrated Reporting
• Meet the needs of the 21st century
• Builds on the foundations of financial,
management commentary, governance
and remuneration, and sustainability
reporting in a way that reflects their
interdependence
Integrated Reporting
Criticisms:
• Firms focus on short-term profits and rewards at the expense of the
firms’ long-term prospects and sustainability
• Should demonstrate the extent to which firms’ capital market affecting
decisions reflect long-term considerations, disclosing the governance
systems and process that are in place and how risks are managed in
firms.
• Corporate reporting disclosures must adequately highlight systematic
risks that affect the businesses of firms.
• Today, there are many non-financial information reports relating to
sustainability, such as corporate social responsibility (CSR),
environmental, social and governance (ESG), corporate responsibility
(CR) and environmental, health and safety (EHS) reports.
• The key questions are: how does one link all these reports, financial
and non-financial? What framework exists that allows for the
integration of non-financial, operational and financial metrics? How
are all these information linked with the firms’ business strategy and
model?
• The answer lies in IR
Integrated Reporting
Benefits of IR:
Makes visible a firm’s use of and dependence on different resources
and relationships or “capitals” (financial, manufactured, human,
intellectual, natural and social), and the organization’s access to and
impact on them. Reporting this information is critical to:
• a meaningful assessment of the long-term viability of the
organization’s business model and strategy;
• meeting the information needs of investors and other stakeholders;
and
• ultimately, the effective allocation of scarce resources
Entities should be providing
• a more holistic picture of a company’s performance including
both financial and non-financial measures
• A view over the shorter and longer term about their strategy
and prospects for continuing to generate value given likely
constraints
• Clearer and more concise reporting by including only the most
material issues
Integrated Reporting
How is integrated reporting different?
Momentum building up internationally
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International convergence of accounting standards –
IASB and FASB
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Work of:
The Prince’s Accounting for Sustainability Project,
Global Reporting Initiative
World Business Council for Sustainable Development,
World Resources Institute
World Intellectual Capital Initiative
Carbon Disclosure Project
Climate Disclosure Standards Board etc
Momentum building up internationally
(cont’d)
Some publications thus far
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The IFRS Practice Statement, “Management Commentary”, an
international framework for narrative reporting to provide a context
for interpreting an organization’s financial position, financial
performance and cash flows;
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The Integrated Reporting Committee of South Africa’s Discussion
Paper, “Framework for Integrated Reporting and the
Integrated Report”;
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The Global Reporting Initiative’s “G3.1” Sustainability
Reporting Guidelines, and
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the International Auditing and Assurance Standards Board’s
Discussion Paper, “The Evolving Nature of Financial
Reporting: Disclosure and Its Audit Implications”.
Momentum building up internationally
(cont’d)
IAASB’S proposals:
• Additional paragraph stating auditor’s responsibility
- Management disclosure & analysis
- Operating and financial review statements
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Auditors to provide additional assurance (separate report) on:
Enterprise wide risk management
Business model
Internal Controls
Key performance indicators
Corporate governance arrangements