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Adrian Henriques

By Adrian Henriques, ACCA Global Sustainability Forum member – www.henriques.info

There is no shortage of dreadful human rights abuses around the world – from displaced people, slavery in agriculture, human trafficking and more. I’m sure that all accountants would agree that human rights should be respected at all times. But it may not be obvious what this has to do with the business of accounting – even granted that the accounting profession has a remit to work in the public interest.

The first part of the answer to that is all about what human rights have to do with companies. That issue has been discussed at the United Nations for the last forty years and several unproductive attempts have been made to codify the responsibilities of companies as a result. In 2011, as a result of the widespread consultations of John Ruggie, the UN Human Rights Council unanimously endorsed the ‘Guiding Principles on Business and Human Rights‘. These achieved the remarkable result of securing a good consensus between governments, business and civil society as to the role of companies in relation to securing human rights. The key point was that while governments have a legal obligation to uphold human rights, companies have a duty to respect them.

The second part of the answer concerns how companies can, in practical terms, respect human rights. As set out in the Guiding Principles, the main point is about adopting a systematic approach to setting policies, reviewing risk, reporting and acting accordingly. That amounts to due diligence towards human rights issues. And of course, the rigour of due diligence is something with which accountants are familiar. There is therefore likely to be increasing demand for the services of accountants in this area.

One manifestation of this is the work of the accounting firm Mazars. Mazars is currently one of the main parties behind the development of a standard for reporting on human rights issues, based on the Guiding Principles. It is also developing a standard for auditing those reports. Another manifestation is the increasing attention to human rights being paid by ACCA. ACCA is currently working on a project to look at business responsibilities in relation to child rights.

So there is some human rights accounting to be done for businesses after all. It will address how businesses take responsibility for the human rights consequences of their activities. This forms part of the increasing prominence of non-financial aspects in corporate reporting. The accounting profession can therefore respond positively to the call in the Universal Declaration of Human Rights for every ‘organ of society’ to do its part in promoting human rights.

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HBarton

By Helena Barton, Partner – Sustainability, Deloitte Denmark
Member, ACCA Global Forum for Sustainability
Chair, GRI Stakeholder Council

The revised ISAE 3000 standard brings welcome guidance to assurance practitioners engaged to obtain assurance on sustainability reports.

A key feature is that the ISAE 3000 now ‘stands alone’, i.e. practitioners can use it without reference to other auditing standards. One of the other changes is the ‘opening up’ of the standard to use by non-accountants, who are not subject to the same independence and ethics codes as professional accountants. It was clear that a growing number of non-accountants were (and are) declaring that they “complied with” or performed the assurance engagement “in accordance with” ISAE 3000, without stating which independence requirements and ethical frameworks they had complied with to perform the engagement – or perhaps without even realising that some significant ethics requirements and quality control standards underpinned ISAE 3000.

So to encourage greater transparency and correct misapplication of the standard, the IAASB decided to make it explicit that non-professional accountants can use ISAE 3000 as a standard for performing assurance engagements provided that they comply with professional or legal requirements for independence and ethics which are at least as demanding as those in the IESBA Code of Ethics for professional accountants and that they identify such requirements in the assurance report.

However, this revision might present a hurdle for some assurance practitioners who have not yet put in place the comprehensive ethics frameworks and quality control programmes that enable compliance. We may therefore continue to see unsupported formulations of reports which reference ISAE 3000 – and they may go unchallenged, unless somebody takes it upon themselves to do so.

The revised ISAE 3000 clarifies the scope and work effort for limited assurance engagements through the inclusion of tables which allow practitioners to more clearly see how a limited assurance engagement differs from a reasonable assurance engagement in practice.

It also provides more guidance for limited assurance engagements, which includes a better understanding of risk and response. And it requires practitioners to provide more detail in the assurance report on the actual work performed. Particularly for a Limited Assurance engagement, a description of the “nature, timing and extent of procedures performed” helps the users to really understand the conclusion made in the assurance report.

All in all, these are good developments, which we welcome. Users are entitled to expect objectivity, quality and professional scepticism to underpin any independent assurance engagement, and increased transparency around the work effort and controls to ensure this.

carol_adams (2)

By Dr Carol A Adams FCCA, member of ACCA’s Global Forum on Sustainability

If you are confused about what integrated reporting is, rest assured you are not the only one.

A lot of people think it’s about putting together your financial and sustainability reports. Wrong. It is much more than that – and much less. It will not replace either a financial or sustainability report – both must be in place for integrated reporting. But starting to think about the connections between the financials, the relationships your organisation has with its key stakeholders and how it makes use of natural resources, for a start, is a step in the right direction.

Integrated reporting requires thinking about ‘value’ beyond financial terms – a long overdue development given that around 80% of the value of company is typically in intangible assets.

Building strong relationships with stakeholders, building a loyal customer base, developing intellectual capital and managing environmental risks, etc, tend to fall off the radar when corporate execs think short-term. But they are critical to long-term success. Integrated reporting keeps the focus on long-term strategy and integrated reports are forward-looking documents covering strategy, the context in which it will be delivered and how the company has, and will, create value for providers of capital and others in the short, medium and long-term. The International <IR> Framework recognises that long-term success depends, amongst other things, on sound management, relationships, a satisfied workforce and the availability of natural resources.

Much of the information companies are providing to investors is not in their annual review or financial statements – further evidence of the need for change. An integrated report fills some of the gap and allows an organisation to tell providers of capital, and others, how it creates value for them.

If you asked your colleagues how they would describe your business model would they have the same view as you? Probably not. Many corporate execs think about their business model in narrow financial terms or from the perspective about the bit of the business they are responsible for. But if the senior exec work together in conceptualising the business model and start to think about inputs and outcomes in broader terms, a different picture about what needs to be managed and what adds value emerges.

The six capitals concept is intended to facilitate this broader thinking about value and the business model. ACCA has been at the forefront of its development coordinating the work of the IIRC’s Technical Collaboration Group on the capitals and funding my involvement.

Some companies are taking a first step towards integrated reporting by getting their financial and sustainability people working together. This is advantageous in that accountants could better understand social and environmental risks and their impact on reputation and the bottom line whilst sustainability teams need to develop skills in making a business case for their work. But the integrated thinking that goes behind integrated reporting needs to involve all the senior execs. And the Board.

If you would like to know more about integrated reporting, see some examples of good reporting practice and speak with some peers about the challenges and benefits, register for the Master Class in London on 14 March hosted by ACCA. You will hear from Eileen Rae, Director-Finance, ACCA and Jonathan Labrey, Communications Director at the International Integrated Reporting Council (IIRC). Eileen will discuss the preparation of ACCA’s second integrated report. A copy of
of my book Understanding Integrated Reporting: the concise guide to integrated thinking and the future of corporate reporting will also be given.

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!

integrated

By Paul Cooper, corporate reporting manager, ACCA
Along with ACCA’s UK and Ireland-based members of its Global Forum for Corporate Reporting, I have been involved with our response to the Financial Reporting Council’s (FRC) consultation on its latest proposals on financial reporting by residential management companies (RMCs).

The FRC wants to clarify how RMCs account for expenditure from the service charge monies they hold for maintenance and other matters, such as repairs and gardening. Reflecting the legal position, a RMC’s financial statements would recognise this as service charge expenditure. At the same time, an equivalent amount of income would be recognised, representing drawings from the service charge monies received (i.e., a balancing figure). This means that to match the expenses it gives a net effect of nil, and shows the expenses are funded from the service charge receipts. These monies are held by the RMC in trust for the leaseholders, and cannot therefore be shown as an asset on the RMC’s balance sheet. The FRC proposes that the balance of the monies held is disclosed for information, along with the fact of its trust status.

While acknowledging that these proposals represent some progress by the FRC, ACCA is concerned that much more is needed to deliver authoritative guidance which fully meets the needs of leaseholders. The reporting envisaged by the FRC also has some, but not complete, common ground with the Summary of Costs, something that leaseholders can require under the Landlord and Tenant Act 1985. In consequence, there is potential for creating confusion.

Where, as is frequently the case, the leaseholders are the members of the RMC, their information needs are presently often satisfied by including all transactions and balances in the financial statements of the RMC. This methodology goes far beyond the FRC proposals by also recognising, for example, accrued expenses, service charge debtors and the balance of the sinking fund (reserves). As it satisfies the information needs of leaseholders, it is unlikely that a statutory Summary of Costs will also be required. However, this method of accounting is incorrect, particularly as the RMC is recognising assets and liabilities which are not its own.

A working group, which was devised by ACCA and other professional bodies, produced best practice guidance to encourage financial reporting by RMCs which is both appropriate, and attempts to meet the information needs of leaseholders. However, the guidance is not binding, tends not to be favoured by the leaseholders, and RMCs usually have no external stakeholder which could require them to adopt the correct method of financial reporting.

ACCA believes that the solution would be for the FRC to use its greater authority and endorse similar comprehensive guidance, rather than the partial solution which it currently proposes. A consultation process for such guidance would also enable the advisers of RMCs to provide their views, in order to accommodate the preferences of leaseholders as far as is possible. Legal and accounting terms need to be looked at together on this issue.

ACCA’s response can be read in full here