Archives For Corporate reporting

Don’t ignore the draft

aksaroya —  22 May 2013 — 1 Comment

By Barry Cooper, ACCA president

Engaging in the IIRC’s consultation is vital in developing the integrated reporting framework.

Barry Cooper-0513

It has always been a source of pride to me that ACCA has been at the forefront of developments within the accountancy profession – the move to ensuring that our syllabus was based on International Financial Reporting Standards (IFRS) being just one.

Now ACCA is once again demonstrating its pioneering credentials by not only being one of the first adopters of integrated reporting (IR) – having produced our most recent annual report to IR principles – but also by calling for the business community, companies and investors alike to ensure they help shape the future of IR.

We have urged these groups to respond to the International Integrated Reporting Council (IIRC) consultation draft on the integrated reporting framework to help develop a new corporate reporting model. This will enable organisations to communicate their activities more effectively and provide clear information to stakeholders.

In my meetings with members, employers and tuition providers, many have commented favourably on our first annual report produced along IR lines – which enabled our stakeholders to see the bigger picture brought together in what is hopefully an easily digested document. Our next report will be another step along the IR route.

But this initiative is not only an opportunity to demonstrate leadership and innovation in the accountancy profession. It is also critical that those you advise play their part in helping to shape the future of integrated reporting, by looking at issues and challenges which can be addressed now and which ensure that the IIRC gets the full picture.

You have a critical role to play, and I urge you and your companies to engage in the consultation process.

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

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eu flags

By Richard Martin, head of corporate accounting, ACCA

UK and Irish company law in annual accounts are based on the EU’s fourth and seventh directives. These are currently being comprehensively rewritten for the first time since the 1970s, with the proposed changes being negotiated between the European Parliament, the European Commission and member states.

Last Tuesday (9 April) the European Parliament and the Council of Members reached an agreement to introduce new rules for company accounts (see p4).

The biggest impact will likely be on small company accounts, reducing further the quality of the financial information and potentially making the accounts misleading.

More companies will be classed as small – all those with turnover of up to €12 million. There will also be a new category of ‘micro’ company with a €700,000 turnover limit and fewer than 10 employees. Micro accounts may be severely reduced, with no more than half a dozen balance sheet totals and the same for the P&L, and virtually no notes. Users would be unable to distinguish, for example, how much current assets consisted of stock and how much cash. It would be obvious to users that these were not true and fair accounts as we know them.
And while for other small companies the new accounts would look very much the same as now – the same formats for P&L and balance sheet, accounting policies etc – significant disclosures might be missing as a result of the ‘maximum harmonisation’ approach. The UK and Ireland could not add to the EU disclosure requirements either by company law or by accounting standard, however essential to a true and fair view.
No directors’ report means no information about the business, so it might be hard to make such sense of the financial information. There would be less analysis of the P&L account and of key balance sheet items, such as the breakdown of related party transactions, so they may have been distorted to achieve a particular effect. The second highlights that users may be looking only at part of a bigger picture.
There would also be no obligation to show significant post-balance-sheet events. Users assume that the most recent accounts represent the best indication of present performance or position. They need to be alerted by these disclosures when that does not apply.
Some of the most significant omissions might be retained as a member state option, but this is still being negotiated and the ‘right’ option might not be chosen as part of a no ‘gold-plating’ policy.
ACCA has been working since the proposals were published in October 2011 to minimise the threatened degradation in the quality of financial information available to shareholders and creditors of small companies. This is probably a revision to European accounting which will not come round again for another 20 or 30 years.
This article first appeared in Accounting and Business magazine, UK edition, February 2013.

Fairytales vs fundamentals

aksaroya —  8 February 2013 — 1 Comment

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

Out on the cutting edge of the technology sector, the grand corporate ambitions and the eye-popping financial performance are not always built on a foundation of solid accounting stone.

 circuit board

 

The eyebrow-raising allegations of accounting improprieties levelled at Autonomy by its acquirer, Hewlett-Packard, had me reaching for my ‘spot the dog’ checklist. This refers not so much to signs of financial distress – it’s too late by then – as to the big gap between valuation and reality which sets a company up for a fall.

The trouble starts with good news. Too much of it puts management under pressure. Autonomy, the software founder whose co-founder was chief executive at the time of HP’s $11bn purchase, was a poster child for innovative technology and rapid growth. In early 2003, when the market bottomed after the dotcom bubble, its shares were trading at around £1.20. In late 2011 HP paid £25.50 per share in cash. Between 2006 and 2008, Autonomy’s sales (measured in dollars) had doubled to about $500m and its operating profit margin soared from 27% to 41%. More of the same was clearly expected: its p/e ration at the end of 2008 was about 50.

Fast forward to Autonomy’s 2010 annual report – the last before the takeover. The first thing to note is that it was still a relatively small company with sales of $870m. The second is its astonishingly high operating margin of 45%. Revenue growth had, however, slowed to 18% – and to 16% in the first half of 2011.

As with other software companies, some revenues come from customer support contracts entailing payments in advance. This raises the questions of whether certain sales have been recognised early and also flatters the cash position. The issue of ‘deferred revenue’ is set out in the annual report, audited by Deloitte, via both explanations and line items.

Critics have made much of the accounting for sales through intermediary companies, or resellers. The accounting policy section has a note on the evidence needed to recognise such a sale. It is clear that judgement is involved and collection may be complicated. As for profits, the word ‘adjusted’ should always attract questions. Autonomy is not unusual in excluding amortisation and restructuring costs. However, by the time it has counted out interest on convertible loan notes, the gap  between IFRS pretax profits and its adjusted ones of $379m is nearly $100m. This is racy, but agin the company’s approach is clear.

The most puzzling thing is the issue of the those loan notes in March 2010, raising about $760m. The main aim was a war-chest for acquisitions. But the company had net cash and appeared profitable enough to support net debt of several hundred million dollars. So why raise it at all?

Also, Autonomy’s main source of growth was supposed to be organic. As it happens it had made significant purchases every other year since 2005, leading to nearly $1.4bn of goodwill on its balance sheet. Once again the reality did not match the spin, but this was not difficult to detect.

The same can be said of Autonomy’s corporate governance. Apparently, it was classic  chief executive and FD balanced by five non-executives. But one of the latter was co-founder Richard Gaunt (not claimed as an independent) and another had been around since 1998 and should not have been regarded as independent. That left three relative newcomers to challenge the incumbents if necessary.

Maybe the investigations prompted by HPs $8.8bn write down of the acquisition price will turn up something. It did, however, pay a premium of over 70% to a price already inflated by unrealistic expectations of sales growth, apparently naive acceptance of ‘adjusted’ profit margins, and oblivious to cashflow and balance sheet issues. The technology sector is littered with such dogs and it is not difficult to spot them.  

This post first appeared in Accounting and Business UK, January 2013.

Truly international standards

aksaroya —  23 January 2013 — 2 Comments

By Barry Cooper, ACCA President

The growth of Islamic finance brings a need for harmonising its standards with those of IFRS.

Barry Cooper-0513Towards the end of last year, I was delighted to take part in ACCA’s International Assembly. We heard from some outstanding speakers and looked at a number of key issues, including the progress being made on globalisation of standards and the increasing role played by emerging economies in the standard setting process.

These discussions chimed with a report, Global alignment, produced by ACCA and KPMG which called for consistency and harmonisation in the way in which Islamic financial institutions report, and for the International Accounting Standards Board (IASB) and the Islamic finance industry to work together to develop guidance and standards, and to educate the investor community on key issues.

It also suggested the IASB consider issuing guidance on the application of International Financial Reporting Standards (IFRS) when accounting for certain Islamic financial products; that it review the needs of the report users with leading Islamic finance standard setters and regulators; and that Islamic financial institutions should form an expert advisory group to help develop standards.

There have already been signs of progress. IASB chairman Hans Hoogervorst told the International Assembly that the IASB was considering establishing an Islamic finance advisory committee. This is an excellent start but, given the growing importance of Islamic finance, everyone involved in the sector needs to work to ensure that the sector operates to consistent and harmonised standards.

This post first appeared in Accounting and Business International, January 2013

tall building, modern CFOBy Jeffrey C. Thomson, CMA; President and CEO, IMA

According to The Changing Role of the CFO, a new report co-published by ACCA and IMA®, CFOs will face many challenges in the future, including global economic uncertainty and volatility, fluctuating energy prices, and turbulent currency markets, along with a shift in economic power. The report identifies emerging priorities that will impact the future role of the CFO and cites nine future key issues that will shape the finance function’s top job, including regulation, globalisation, technology, risk management, transforming finance, stakeholder engagement, strategy, integrated reporting, and talent.

Of course, these emerging priorities could well vary by global region depending on regulation, socio-economic factors, environmental conditions, culture, and more. But as a former U.S.-based CFO, I wonder if we in the U.S. face a couple of unique challenges associated with regulatory uncertainty and litigation. These issues exacerbate the ‘day-to-day’ challenges – and opportunities – of today’s CFO team.

First, let me tee up the uncertainty associated with regulation. Usually, when we discuss the CFO team’s lead role in dealing with uncertainty and disruption, it is in connection with consumers and competition, not regulation since that tends to be a ‘known’ quantity with exposure drafts, comments letters, discussion roundtables etc. before a regulation associated with financial reporting even goes into effect. Specifically, I am focusing on the uncertainty associated with adoption of IFRS in the U.S. Will the U.S. adopt IFRS? If not in full, what would an ‘incorporation’ model look like? The larger questions are around the degree to which U.S.-based CFO teams should begin the training process and technology changes necessary to affect a massive shift from the decades-old US GAAP. This is not the resource allocation challenge that CFOs deal with every day in trading off returns on various investments; it is a long-term decision to invest in training and technology without clarity as to ‘if, how and when.’

Smart CFOs will need to do two things: (1) Hire and nurture good technical talent, so adopting to any deviation to pure-play GAAP will be that much easier; and, (2) Stay close to the regulatory scene and be a proactive advocate for the best solution (e.g., SEC, FASB, IASB, IFRS Foundation, etc.)

The second, arguably unique challenge for U.S.-based CFOs is with integrated reporting, or, the evolution of external corporate reporting. At least in the U.S., the external disclosures are voluminous and yet do not adequately inform stakeholders as to long-term sustainable value generation and growth because they are too financially focused, too complicated, and yet not comprehensive enough. But the unique challenge in the U.S. is not so much about selecting more non-financial measures, or measures more of a leading indicator variety, or even how to source and report measures such as employee learning and growth, process improvements, sustainability, carbon footprint, societal contributions, or governance factors. It is the litigious nature of society and an often ‘unforgiving’ regulatory environment in the U.S. If this challenge is approached as ‘let’s report everything – and thus subject it to internal controls and audit – because it may be useful to some stakeholder in the future,’ then much like in the early days of Sarbanes-Oxley, integrated reporting will be viewed as a ‘social tax’ with little societal good and expensive shackles placed on corporate entities. There are no easy answers here, but leading CFOs need to be at the table to find the right balance, rather than waiting for the steam-roll effect of transforming external corporate reporting ‘to just happen.’

What do you think?