• An agenda decision, giving reasons why the Committee has decided not to issue an Interpretation, drawing on the provisions of IAS and IFRS standards that have already been issued;
• A decision to refer a matter to the board as the issue requires amendment of existing standards 
• An Interpretation.

Because only a few interpretations actually get issued, the agenda decisions form an important body of guidance.  While they have no status as standards, they reflect the considered views of senior members of the profession as to how the standards as currently drafted should be applied.
But where do we find agenda decisions? They are published in the IFRIC Update newsletter as they occur and the IASB's subscription service and books annotate the standards where an agenda decision has been made that supplements a particular paragraph.  The IASPlus website is one free source that groups agenda decisions with the standards they support but does not give the text of the standards and interpretations themselves. 
 

Voluntary changes in accounting policies proposed amendment to IAS 8
The renewed focus on interpretive guidance and the work of the Interpretations Committee has given rise to proposals to amend IAS 8 (AASB 108) "Accounting Policies, Changes in Accounting Estimates and Errors" in respect of voluntary changes in accounting policy undertaken as a result of an Agenda Decision.  The IASB proposes to allow such changes to be done prospectively rather than retrospectively where the costs of retrospective application would outweigh the benefits.
 

Issues in implementing the new standards - Revenue
Because IAS 11 "Construction Contracts" has gone, together with its specific requirements applying the percentage of completion method to construction contracts, contracts that used to be accounted for under that standard now fall under IFRS 15, "Revenue from Contracts with Customers" and are posing implementation challenges what exactly are the performance obligations within the contract and should revenue be recognised at a point in time or over time? This is an issue that the Interpretations Committee addressed in considerable detail in March 2018 in the context of real estate developments to provide direction as to how the standard should be applied, focusing on the timing of the right to receive payment.  Such detailed treatments by the IFRIC are designed to assist with consistent application of the new standard.
A further issue that has arisen with the demise of IAS 11 is how to deal with contracts that have become onerous as the IAS 11 requirements relating to expected losses have now gone.  The relevant standard is now IAS 37 "Provisions, Contingent Liabilities and Contingent Assets" and the Board has decided to revise it to improve it in this context.  In July 2018 the board agreed to undertake a project to clarify the meaning of the term "unavoidable costs" in the IAS 37 definition of an onerous contract, as a result of a recommendation from the IFRIC.

Judgements and estimates
Judgements and estimates were the subject of a panel discussion involving a standard setter, a preparer, analyst, an auditor and a regulator.  Judgements and estimates remain within the top 3 audit weaknesses noted by regulators world wide, with auditors not challenging management sufficiently.  The point was made that the auditors remain responsible for the work of an external expert engaged by them and must be capable of evaluating that work.  It is not enough to rely on the expert's work without arriving at a critical understanding of it.  The auditors therefore need substantial up to date industry knowledge.
The analyst on the Panel also issued a plea for detailed disclosure of inputs and assumptions to enable users to understand the basis on which valuations have been made, enabling analysts to do their own sensitivity analysis.
 

The revised Conceptual Framework
The revised Conceptual Framework has been the subject of much discussion in Australia, because of its implications for the reporting entity concept and special purpose financial reports.  Other less well known aspects of the revision include
New material on measurement and selecting a measurement basis
The use of the profit and loss account and OCI (other comprehensive income) in principle OCI items are recycled as the profit and loss is the primary statement
 

Other developments
Other projects being actively pursued by the IASB at present include:

• The revised Conceptual Framework, applicable from 2020
• Support for IFRS 17 "Insuracne Contracts" which comes into force in 2021
• Work on the definition of a business (as opposed to an asset) in IFRS 3 "Business Combinations" and accounting for business combinations under common control
• Guidance on financial instruments with the characteristics of equity
• Development of templates for the primary financial statements, a project referred to as Better Communication in Financial Reporting, resulting from the 2017 consultation on Principles of Disclosure
• A definition of material, stemming from the Disclosure Initiative project and the problem of financial reports containing too little relevant information and too much irrelevant detail

The issue of the extent to which directors need to be financially literate first discussed in the Centro civil penalty case in 2011 was revisited in the recent decision in ASIC v Godfrey, summarised in ASIC's media release.

Godfrey was the managing director of Banksia Securities, a mortgage lender based in rural Victoria, which failed in 2012.  As the director responsible for recommending the appropriate impairment provision for bad and doubtful debts to the Board, the court found that he did not have a sufficient understanding of the requirements of the relevant accounting standard, AASB 139 Financial Instruments: Recognition and Measurement (AASB 139) as it applied to the the recognition and assessment of the impairment of mortgage investments made by Banksia.

Banksia's financial reports for the financial years ending 30 June 2011 and 30 June 2012, and its half-year financial report for the half year ending 31 December 2011 did not give a true and fair view because they did not comply with the relevant accounting standards, in that the provision was inadequate.  Godfrey, as director responsible for making recommendations to the Board in respect of the impairment of loans and as a signatory to the accounts in 2012, had failed to take all reasonable steps to secure compliance by Banksia with AASB 139.

The court accepted that there was no dishonesty on his part, but the breach came about because he did not realise that Banksia's provisioning policy was inadequate and did not comply with AASB 139.  Because of his role in ensuring that the company complied with the financial reporting provisions of Part 2M of the Corporations Act, especially in respect of the assessment of impaired loans, he needed to have a greater understanding of AASB 139 in order to discharge his duty as a director.  The message seems to be that directors must take responsibility for the duties they have assumed and cannot necessarily rely on others such as management or the external auditors in discharging those responsibilities.

The full text of the judgement can be found here.

Non-compliance with Laws and Regulations (NOCLAR) is coming into force in Australia from 1 January 2018, by way of amendments to APES 110, the Code of Ethics for Professional Accountants.  These changes mean that confidentiality is no longer a barrier to disclosing non-compliance to the appropriate authority and affect all accountants, both in practice and in commerce. 

The AUASB has also picked up these changes to the Code of Ethics and reflected them in amended auditing and assurance standards, issued in early June as a revised ASA 250 Consideration of Laws and Regulations in an Audit of a Financial Report and consequential amendments to a number of other standards* in ASA 2017-2 Amendments to Australian Auditing Standards.

The AUASB and APESB have made available their joint presentation on responding to NOCLAR via their websites and CAANZ has also published resources to assist members in coming to terms with the new requirements.

*ASQC 1, ASA 210, ASA 220, ASA 240, ASA 260, ASA 450 and ASA 500

CAANZ* have decided not to produce a 2018 edition of the Auditing Assurance and Ethics Handbook, but users can still access and download the standards and guidance individually via the AUASB's website for audit and assurance materials and the APESB's website for ethical materials.

*  Chartered Accountants Australia and New Zealand

For the lawyers who have asked us how they can get hold of copies of these books, the 2017 edition of the Auditing Assurance and Ethics Handbook for Australia, edited by Stephanie Kemp, is available from John Wiley and the Co-op Bookshop, together with its companion volume the Financial Reporting Handbook.

The Auditing, Assurance and Ethics Handbook contains all the AUASB and APESB's standards and guidance statements on issue at 1 December 2016.

Notes from a Conference - a forensic accountant on the prowl in Washington DC

Attending the International Bar Association's Conference in Washington was fascinating. Washington itself provided a wealth of cultural, artistic and historic sights and provided a real insight into a self-confident land of opportunity, the America that was able to create such monuments. Watching the first Clinton/Trump debate in a bar in New York just after the conference unfortunately showed a very different picture.

Travel around DC on the Metro between conference venues and networking events was effective; cabs were less so, as various dignitaries, including our very own PM, were in town.

But there is far more to an IBA conference than the networking and the social whirl. As a non-lawyer (albeit with an antedeluvian law degree before becoming a chartered accountant) and so with no particular legal specialism there was a plethora of interesting sounding sessions I could have dipped into. With some regret I eschewed sessions dealing with social justice and the rule of law and focussed on more corporate topics where I was most likely meet useful contacts and pursue the networking opportunities that were a significant part of the reason for being there.

I found the Dispute Resolution show case "Effective advocacy for all modes of dispute resolution" particularly interesting. This used a case study to compare the difference in the approaches taken in litigation, arbitration and mediation.  As an experienced expert witness now also studying to be an arbitrator, I was able to listen to debate about areas with which I had some familiarity from a different stand point.

As an accountant and sometimes director, my experience of corporate governance issues was different from that of the lawyers.  In my experience, in practice, a board and management will often take action in response to a matter before all the legal safeguards can be put in place.  There is a necessary first step of ascertaining the matter and its nature and maintaining confidentiality. In doing so boards and management need to be very alert to a range of responsibilities from ensuring that staff's rights are met to ensuring that there is prompt market disclosure when it is needed. Only once those very preliminary steps are taken will it be possible to know whether in house counsel can carry the matter or independence and skill sets requires the appointment of external lawyers. This may cause some loss of privilege but often speed of disclosure is essential and if external counsel are being used some preliminary facts are essential to that briefing.

Increasing trust in business dealings

At the International Bar Association conference in Washington DC, we heard Christine Lagarde, Managing Director of the International Monetary Fund (IMF), give the Opening Ceremony address.  She made observations on the need for trust and integrity in government and business that are just as relevant to accountants and auditors as they are to lawyers, if not more so.  This week's parliamentary enquiry into the Big 4 banks reinforces the relevance of her words.  Auditors and accountants have a window into public and private sector business dealings which brings with it certain responsibilities.

Overall the impact of globalisation has been to increase the wealth of developing countries and the people living in them.  However while inequality between countries has fallen in recent times, inequality within countries has risen, with the rich becoming richer and the poor becoming poorer.  Middle income earners in developed economies in particular have seen their share of total income shrink and are losing trust in the institutions that are in charge.  This lack of trust in governments and financial institutions is leading to populist politics (think Pauline Hanson) of the sort that in the UK led to Brexit.

A key factor fuelling this lack of trust is corrupt or unethical behaviour in these institutions, whether actual or perceived.  Regardless of whether it is well founded, the perception of corruption is corrosive to society and fuels populist politics.  It is therefore an area that the IMF is focussing on.  Its target areas are corruption in the public sector and unethical behaviour in the private sector.

Corruption in the public sector has a detrimental effect on society in many ways and disproportionately on the poor. 

• It weakens fiscal capacity.  If the mega-rich appear not to need to pay tax, the rest of the population is less inclined to pay their share as well.  There is therefore less tax revenue to pay for publicly funded programs.
• It discourages investment.  It perpetuates inefficiency and uncertainty and acts as an additional, but unpredictable, tax on investment.
• It entrenches poverty and inequality as there is less money for welfare and social services.  Mme Lagarde quotes child mortality statistics: "By some estimates, child mortality rates are one third higher in countries with high corruption, and infant mortality rates are almost twice as high".

The IMF is seeking to address these issues by strengthening the rule of law and encouraging fiscal transparency and effective anti-money-laundering practices.
Unethical behaviour in the private sector is as harmful as corruption in the public sector.  For every public sector official who takes a bribe, there is a private sector operative who pays it.  Less obviously, but just as corrosively, the high risk behaviour engaged in by financial institutions prior to the 2007 financial crisis, in pursuit of profit and personal gain, destabilised whole economies and led to widespread suffering after the collapse.

The IMF is addressing these issues by supporting better regulation and encouraging better education of professionals.  They want to see a culture of values rather than compliance.  Ethical behaviour means "professionals who take pride in doing the right thing, even when no-one is watching."

Crucial to this is leadership from those at the top and good role models.  A shift in the definition of success from being a big $ bonus to behaving with professionalism and adding value to society is not easy to achieve, but interestingly the Dutch financial industry has this year introduced an Ethics Oath, similar to the Hippocratic Oath taken by doctors.

The issues that Mme Lagarde tackles in her speech resonate with recent consultations in our profession on how to ensure audit quality and the application of integrity and scepticism, but when she takes the argument to its social conclusions in terms of poverty and child mortality, ethical behaviour can be seen as a life or death issue.

I shall quote from her conclusion directly: "The task before us is clear. Enhancing integrity in public and private sector governance is critical in mending the trust divide we see in societies today. Only then can we have enough confidence in the very institutions that are essential for sustained and inclusive growth. Let me close by appealing to the wisdom of a founding father of modern day economics Adam Smith.

"To many of us, Adam Smith is perhaps best known for terms such as "self-interest", "laissez-faire" and the famous "invisible hand." Yet for Smith, the classical discipline of economics was always a branch of moral philosophy. Indeed, for him, the market would only work effectively if it was underpinned by trust: the baker that is featured in the Wealth of Nations would only be able to sell his goods if he or she was trusted".

Auditors and accountants also have a crucial role to play in maintaining and building trust in institutions, both public and private sector.  That role may require standing up for principles and saying No to a client.  Can we rise to the challenge?

The full text of the speech can be found at http://www.ibanet.org/Conferences/washington-oc-christinelagarde.aspx.

The IFRS Foundation Conference in Zurich reaffirmed the role of financial reporting as communication as well as compliance, a theme first articulated by IASB Chairman Hans Hoogervorst in his introductory remarks on the future of financial reporting.  The IASB's emphasis over the next five years will be on the presentation and grouping of information to make the financial report more effective as a means of communication.

This reassessment of focus is reflected first and foremost in the disclosure initiative project which seeks to reduce the amount of unnecessary detail in financial reports.  The disclosure initiative project encourages preparers to make bold decisions and reduce the amount of "boilerplate" material.  For example, now that IFRS have been in wide use for a decade and 83% of jurisdictions are using them, it is no longer necessary to restate the requirements of the accounting standards in an accounting policy; rather the focus should be on what is special about the accounting policies in a particular entity.  The draft guidance on materiality is a key part of the disclosure initiative as it helps preparers to understand the concept of materiality and apply it to the preparation of financial reports.  The IASB representatives stressed that materiality operates in the context of the financial report as a whole and not just in the context of the information disclosed under a particular accounting standards.  They are redrafting the disclosure sections of the standards to reflect this and make it clear that disclosures are only required where they are material to the accounts as a whole.

• Financial Instruments with the Characteristics of Equity (also called FICE) and the distinction between debt and equity
• Digital reporting, such as XBRL
• The provision of non financial information and the use of non GAAP financial measurements
• Strengthening implementation and post implementation support so that preparers are given as much help as possible to start off on the right foot.

There was general acknowledgement that financial reporting embraces more than the requirements of the accounting standards, with input from the Integrated Reporting Council as well as regulators. XBRL is about to become very important in Europe as the European securities regulators have announced that from 2020 all EU listed companies must file their financial information in the European equivalent of XBRL.  The IASB has realised that if they want to influence the quality of electronic as well as paper-based financial information, it is vital to enhance its IFRS XBRL Taxonomy and the IASB's Trustees have committed funding for this work.  On a survey of the conference, the general level of awareness of XBRL was surprisingly low, and the IASB and regulators have some work ahead of them over the next four years.

Non GAAP measurements were the subject of some debate in the context of financial reporting as communication, with preparers eager to tell their story in the way that suited their business model but regulators cynically suggesting that most of the adjustments seemed to reduce expenses rather than revenue.  There was also a need expressed for agreed definitions of some common measures used in borrowing covenants, such as EBITDA.  It seems likely that the IASB will allow some additional disclosure while maintaining key line items in the primary financial statements.

There were detailed sessions on a number of new standards and current projects, including the new IFRS 15 on Revenue and IFRS 16 on Leases and the work being done following the post implementation review of IFRS 3 Business Combinations on goodwill and impairment.

• whether there are separable contracts when an entity delivers product and supplementary services; and
• the identification of whether an intermediary is acting as a principal or agent.

The examples used were derived from two multinational companies where the core transactions (selling products with ancillary or support services through intermediaries) were the subject of different forms of contract in different jurisdictions. Not only were there complexities in the interpretation of the local contracts but there was the consequential issue of what level of accounting uniformity should be achieved in the group accounts where transactions were through different legal arrangements.

Most members of the audience were going to be late adopters but both speakers recommended that the analysis of the facts to determine the accounting should be undertaken soon in part because both speakers found that the act of doing the analysis provided them with interesting commercial insights.

IFRS 16 Leases, as expected, brings all leases onto the balance sheet apart from short term (<12 months) and low value leases.  The IASB is experimenting with a new approach to implementation, publishing guidance at an early stage, rather than waiting for differences in practice in different jurisdictions to emerge down the track.

The post implementation review of IFRS 3 has led to calls for the reintroduction of goodwill amortization due to perceived weaknesses in the impairment test approach.  There is strong resistance from investor community to amortization as it makes no sense in the P&L and they always reverse it out.  A variety of approaches to goodwill is being looked at including one that tries to quarantine the impairment test to the acquisition, by retaining the preacquisition "headroom" in the CGU when testing for impairment.  It remains to be seen how this will play out.