Archives For Corporate reporting

By Martin Brassell, co-author of Banking on IP and Inngot CEO, on the new financial reporting standard and its implications for intangible assets

The new Financial Reporting Standard 102 (‘FRS 102’) comes into effect from the end of 2015 (where a company’s accounting year is the calendar year) and April 2016 (where it is the fiscal year). It changes the treatment of intangible assets for small and medium-sized enterprises (SMEs), who will now follow substantially the same rules as multinationals.

It’s therefore a good time to brush up on the identification and valuation of this category of assets, which is responsible for driving the majority of value in most companies. The main changes fall under two headings.

Buying or ‘merging’ companies

Currently, when two companies are combined, either merger accounting (adding the two existing balance-sheets together) or acquisition accounting (placing a fair value on all acquired company’s assets) might be permissible. FRS 102 states acquisition accounting must be used in nearly all cases (bar group reorganisations).

Also, acquisition accounting rules are being updated. Any excess paid over and above the fair value of the fixed assets and liabilities can no longer simply be characterised as ‘goodwill’. Instead, it needs to be broken down into goodwill and identifiable intangible assets, in a very similar manner to IFRS 3 (with some minor wording differences).

This means that the sources of intangible value that have never previously appeared on an acquired company’s balance-sheet will need to be identified and quantified.

The useful life of intangible assets and goodwill

FRS 102 preserves the option, previously available under SSAP 13 (which it replaces), of either amortising qualifying development costs of new products and services over a suitable period, or expensing these costs during the year in which they are incurred.

However, UK GAAP currently permits ‘goodwill’ to have an indefinite life, as long as the value is tested annually for impairment. Under FRS 102, the concept of an indefinite life falls away and a lifespan has to be specified for amortisation purposes.

If an asset’s lifespan cannot be determined reliably, a ‘default’ figure of five years must be used. This is much shorter than existing UK GAAP, under which it would have been customary to amortise some assets over a much longer period (up to 20 years).

Combine these changes with the reduced role of ‘hard’ assets, which are increasingly outstripped by spending on intangibles, and the number of businesses looking to reflect their real investment profile on their balance-sheet looks set to rise.

ACCA is currently running a UK pilot of the National Corporate Innovation Index methodology, which looks at the value created by intangible asset investment across a range of categories. ACCA members engaged with SMEs can participate and obtain a report for their client company by emailing Interest in participation needs to be expressed by 28 August 2015.


Paul Cooper (cropped)

By Paul Cooper, Corporate Reporting Manager, ACCA

At its recent quarterly meeting, ACCA’s Global Forum for Corporate Reporting discussed the likely impact of IFRIC 21 on levies, issued by the IASB in May 2013. This was an opportunity for an open discussion on a current reporting issue, and the Forum raised a number of practical concerns about the implementation of the new requirements from 1 January 2014.

In accordance with the IASB’s interpretation of IAS 37 covering provisions and contingencies, a levy will be recognised as a liability once a ‘triggering event’ occurs. An example of a ‘triggering event’ is where a levy due on 31 March 2014, but based on revenue for the year ending 31 December 2013, would be recognised in full on 31 March 2014. This is the point at which a levy legally becomes payable to government, and can be on a date which is in a different accounting period to that on which the levy is based.

It is not now possible (except in non-statutory management accounts) to anticipate the triggering event by making an accrual, or even (as ACCA has previously suggested to the IASB) by making a disclosure in interim financial statements. This treatment will feel at odds with supporters of the principles behind the matching concept.

The legislation imposing a levy does not, of course, have to follow the matching concept, or indeed any other accounting ‘logic’. This is evident in the case of banking levies in some jurisdictions. There may be a requirement to make interim estimated payments on account of a levy yet to be incurred in law, and consequently yet to be recognised under IFRIC 21. Furthermore, a levy can be imposed for a whole year on a bank, whether or not it has traded throughout the whole of that year. For a bank which ceases trading early in the year in question, the levy will inevitably appear disproportionate, but under IFRIC 21, it will not be recognised up to the date the trade ceases, if it is legally due after that date.

In addition, IFRIC 21 deals with the recognition of a liability, but leaves the entity to decide, in accordance with other Accounting Standards, the treatment of the corresponding debit entry. Intuitively, many entities will consider the debit to be entirely a charge against income, but this may not fully reflect economic reality. For example, an annual property tax, payable on a specified date, could be at least partly a recoverable asset, if the owner has the intention of selling the property. However, if this recovery is subject to negotiation with a purchaser, the asset is contingent on uncertain future events, raising questions about the timing of its recognition. Furthermore, it can be argued that IFRIC 21 does not prescribe the timing of the recognition of the debit for the levy, in contrast to the timing of the liability. These questions leave scope for diversity to arise in practice.

Another question is whether certain amounts payable to government are actually levies. Fines, and income taxes within the scope of IAS 12, are not within the definition of a levy, but other payments are included where no goods or services are received in exchange. It might not be straightforward to identify such liabilities: for example, part of a property tax may cover local services which directly benefit the entity.

Levies payable to governments feature in the trading of many entities, and in an increasingly-regulated world, their number and types are only likely to increase. Overall, the above concerns raise a question of whether IFRIC 21 is sufficiently broadly-written to cover, at least, most types of levy.

What do you think? Do you share the Forum’s concerns? Are you having concerns of your own about your own sector or industry? If you don’t have any concerns, why? The Forum wants to hear from you!

By Ian Welch, head of policy, ACCA

Ian Welch

ACCA has consistently stated that the view of investors should be at the heart of standard-setting and financial policymaking. Too often their voice is not heard as rules are being made or proposals formulated.

But who exactly are the investors? How have their asset allocations and investment strategies changed since the Global Financial Crisis (GFC)? And, of most direct interest to accountants, what do they want from corporate reporting?
ACCA is undertaking a four-stage project examining the UK and Ireland investor landscape, post-GFC and the first two reports, based on interviews with key players and a survey of 300 investors carried out concurrently, reveal trends of far greater international application.

The increase in short-termism is one clear trend. The traditional domination of markets by pension funds and insurance companies has been eroded both by greater international ownership of companies, and by the emergence of other players such as hedge funds and private equity firms, with shorter-term investment horizons. And even the traditional players have switched much of their investment from equities to bonds, as a result of the GFC.

Added to this , the vastly increasing proportion (estimated by some to be 80%) of trades that takes place via computer in nano-seconds has left a question mark on who the owners of companies actually are – and how companies can meaningfully engage with investors who hold shares for a very short time. We have already seen international policymakers, such as the G20 and EU, responding with measures to enhance long-term finance and address the ‘ownership vacuum’. More is needed, it seems.

Low interest rates are another key trend. Central bank activism, leading to loose monetary policy, historically low interest rates and currency wars throughout Europe and the US has been a major response by the authorities to the GFC. This has had a clear effect on investors, making them search for yields in riskier investments.

Perhaps inevitably, the greater pressures on investors has seen a constant demand for more information and transparency -and the proliferation of new technologies such as mobile and social media has led to massively more corporate information being available, much of it on a real-time basis. But how much it is useful, and how do investors prevent themselves being overwhelmed?

Intriguingly our research revealed a dichotomy – and one which leaves policymakers with much to ponder. Three-quarters of investors say that, that the quarterly report remains a valuable input to their investment decision-making. Yet, at the same time, almost half of investors believe mandatory quarterly reporting should be abandoned, with almost two-thirds believing the increase in information has encouraged “hyper-investment” and taken up excessive amounts of management time.

This suggests a “tragedy of the commons” effect, whereby individual investors want to consume quarterly reporting for their own self-interest, despite recognizing that this focus on shortening time horizons is damaging for the overall market’s long-term interests.

Fully 45% said they had little use for the annual report – and worryingly, two-thirds said their faith in company reporting had declined since the GFC. Almost half that believe management has too much discretion in the financial numbers they report. While perhaps not surprising, these are nonetheless chastening findings for standard-setters and policy-makers to reflect on.

Is there any good news for the profession? Yes for auditors – much maligned of late – as external assurance of company figures seemed to be their main source of credibility. And investors claimed that they would be prepared to pay more to have additional information available contemporaneously as long as it was externally verified. This would put pressure on the audit profession – but it should consider it carefully as a way of regaining the initiative following recent critical political and regulatory inquiries on audit.

There is much here for many other parties to chew over, and ACCA will be following this up with a series of events designed to bring key players together to thrash it out, before releasing stages 3 and 4 in this research series, which will look at the ‘real-time’ issue in greater depth and investigate corporate reaction.

But for now, accounting standard-setters and regulators must consider the criticism of standards and the annual report. Policy- makers must wrestle with the quarterly reporting conundrum. And the investors themselves must consider how to get their voice more clearly heard when policy decisions that affect them are being made. If they really are prepared to pay more for a wider audit, then now would be a good time to let that be clearly known.

This post first featured in The Accountant, June 2013

By Ramona Dzinkowski, economist and business journalist.


On 2 April, the European Commission (EC) issued a consultation paper requesting comment on potential new disclosure rules regarding the use of conflict minerals in the manufacture of goods listed on European exchanges. This initiative follows the US Securities and Exchange Commission’s final 2012 rule on conflict minerals that requires companies listed in the US to disclose their use of conflict minerals manufactured in the Democratic Republic of Congo (DRC) and adjoining countries.

The US rule fulfills the requirements laid out in the Dodd-Frank Act 2008, which required companies using minerals from Africa’s Great Lakes region to publicise their due diligence practices to ensure the minerals they use in their products have not financed illegal armed groups engaged in the Congo’s war. These minerals include tin, tantalum, tungsten and gold, which are often used in the manufacture of a wide range of products. It is anticipated that the rule will affect approximately 6000 issuers in the US who will have to file their first minerals report in May 2014.

The gist of the US rules upon which the EC has framed its proposed disclosure requirements is that companies must determine whether or not they manufacture or contract to manufacture products that contain conflict minerals, whether these minerals originated from the specified conflict region or were obtained in scrap or recycled sources, and whether or not the conflict minerals benefited armed groups in the region.

While many have lauded the initiative, others see it as a prohibitively tall order and are concerned about the costs of the disclosure and the implications for using the reporting system in this way. Similar issues are unlikely to unnoticed by affected parties in Europe.

In response to the proposed ruling, the US-based National Association of Manufacturers pointed out that, among other things, the SEC has ignored the complexity of manufacturing supply chains. More specifically they say there are three major challenges for downstream users attempting to establish a chain of custody from the mine to the product:

1. identifying which mines are conflict mines – that is mines whose output is controlled by or taxed by warring factions;

2. tracing ores from the mine to the smelter; and

3. tracing conflict minerals from smelter through complicated supply chains to the finished product.

Implementation of the legislative language, must therefore, take into account these on the ground realities.

Some CFOs are questioning why the financial reporting system is being used to resolve political conflicts in the first place. For instance, how would CFOs be able to answer the question of which are conflict mines, and tracking down the sort of information required is not a traditional finance function. There’s also the level-playing-field argument that suggests that North American and European companies will now be at a competitive disadvantage against companies originating from countries that have no such disclosure requirement like China, Brazil, Indonesia and Canada.

In Europe, the EC is requesting all interested parties to comment on whether they should craft similar rules. Comments are due by 26 June 2013.

This article first appeared in Accounting and Business magazine, May edition, 2013.


aksaroya —  29 May 2013 — Leave a comment

By Jane Fuller, former financial editor of the Financial Times and co-director of the Centre for the Study of Financial Innovation think-tank

The proposal that the same asset should be measured at amortised cost in the P&L but at fair value in the OCI is inconsistent at best, and raises fundamental issues about performance reporting.


When I see the words ‘limited amendments’ on a proposal from the International Accounting Standards Board (IASB), my gut reaction is relief that there will be no need to respond. Voluntary representatives of users of accounts, like myself at CFA Society of the UK, welcome invitations to drop things from the priority list.

But the dismissive description of ED/2012/4, which proposes a new category for financial assets, is misleading. This is not just because of the revived emphasis on convergence with US GAAP, but, crucially, because it raises fundamental issues about performance reporting and expands the use of the other comprehensive income (OCI) statement.

This timing is unfortunate since a debate on the purpose of OCI is part of the IASB’s revisiting of the conceptual framework. Many users hope this will provide a back-door route into tackling our biggest concern about International Financial Reporting Standards (IFRS): financial statement presentation.

The IASB’s ‘limited’ proposal is to create a new category of financial asset that is measured at amortised cost (complete with impairment testing) in the profit and loss account, but at fair value on the balance sheet. The difference between the two would run through the OCI, hence the FVOCI label. This waters down the plan for IFRS 9 on financial instruments, which was to replace the four asset categories of IAS 39 with just two – a welcome simplification. One of those scheduled for the dustbin was ‘available for sale’ which this proposal revives but with a new P&L treatment.

Questions raised by the draft include:

– if the difficulty lies in the definition of ‘hold to collect’ (for amortised cost accounting) because even a ‘simple’ debt instrument might be sold, then why was that not a key point in the consultation?

– If insurers complain of an ‘accounting mismatch’ because assets are put in a different section to linked liabilities, why is the OCI the best place to marry these things up?

– Why is the OCI being expanded when users of accounts suspect it gives preparers an opportunity to smooth ‘P&L’ earnings, and describe it as a ‘dumping ground’?

The logical inconsistency in measuring an asset one way in the P&L and another in the balance sheet is criticised by IASB board members Steve Cooper and Jan Engstrom in their alternative view, which says: ‘Where amortised cost is judged to be the most appropriate basis for reporting, this should be applied consistently throughout the financial statements.’ In that case, changes in fair value would be disclosed in the notes.

An underlying cause of unease is the sensitivity of the debate about ‘fair value’ accounting. The FVOCI proposal ducks the issue. It tries to satisfy both those who think performance reporting should be balance sheet driven and those more interested in inflows and outflows in the P&L.

In non-financial sectors the balance-sheet may be a poor reflection of assets because internally generated goodwill is ignored, but for banks and insurers this matters deeply – the balance-sheet is where it’s at for valuation and risk assessment purposes.

This is just the beginning of the debate on what to do about the OCI, including whether to abolish it. Could it be replaced with a single income statement with different sections, or columns, that distinguish between different types of income/expense and balance-sheet gains/losses? On the timing issue, the long-established tools of accrual accounting and cashflow reporting also come into it.

The proposed ‘limited amendments’ looks like a fait accompli. But the IASB must not let this FVOCI patch predetermine the outcome of a wider debate on performance reporting.

This post first appeared in Accounting and Business magazine, May 2013