The Future of Financial Reporting

Transcription

1 THE 32nd ANNUAL SEMINAR 17th -20th MAY 2016, SAROVA WHITESANDS - MOMBASA Theme: Accountability as a Driver for Economic Growth and Development The Future of Financial Reporting Friday, 20 May /05/2016 Uphold Public Interest

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3 IASB & IAASB Activity Update Recent changes in financial Reporting New/amended IFRSs New/amended ISAs Regulatory Changes New Companies Act CMA Code of Corporate Governance Practices 2015 Financial Services Authority Bill (Draft) Education Learning Outcome approach Competency requirements for audit professionals Ethics Public Sector Applicability of IPSAS IFAC Focus on SMPs Accountability Now 20/05/2016 Uphold Public Interest 3

4 IASB & IAASB Activity update 20/05/2016 Uphold Public Interest 4

5 Major IFRSs Q Q Q IFRS 4 (Phase II) Drafting on the new Insurance contract standard has commenced. Drafting IFRS Issue IFRS Conceptual framework This is being revisited to improve financial reporting by providing complete, clear and updated set of concepts. Analysis Issue Conceptual framework IFRS 2 amendments 3 amendments on the classification and measurement of share based payment transactions Drafting IFRS Issue IFRS IAS 1 amendment Classification of liabilities. Amend para 73 of IAS 1 on classification of non-current liability. Analysis Issue IFRS 20/05/2016 Uphold Public Interest 5

6 Major IFRSs Q Q Q IFRS 3 and 11 amendments Remeasurement of previously held interest where a party to a joint arrangement obtains control Drafting ED Publish ED Research Projects (IFRS 3) Following feedback from IFRS 3 post implementation review, the board is considering Whether changes should be made to existing impairment test for goodwill Subsequent accounting for goodwill Redeliberations Definition of a business Project aimed at resolving difficulties that arise when determining if a group of assets constitute a business or not Drafting ED Publish ED 20/05/2016 Uphold Public Interest 6

7 Major ISAs Q Q Q ISA 540 (Accounting Estimates) aimed at emphasising professional scepticism when auditing accounting estimates. One key concern is IFRS 9 ECL Deliberations Publish ED ISA 600 (Group Audits) consideration where audit EL is not located where majority of the work is done. Deliberations IAS 315 (Revised) Identification of risk through understanding the entity and its environment. Deliberations Integrated Reporting Working group established to respond to assurance demands for integrated reporting. Deliberations 20/05/2016 Uphold Public Interest 7

8 Recent changes in financial reporting 20/05/2016 Uphold Public Interest 8

9 New standards IFRS 9 IFRS 14 IFRS 15 IFRS 16 IFRS for SMEs Financial instruments 1 Jan 2018 Regulatory Deferral Accounts 1 Jan 2016 Revenue from contracts with customers 1 Jan 2018 Leases 1 Jan amendments 1 Jan /05/2016 Uphold Public Interest 9

10 Narrow-scope amendments Issue Effective Acquisition of an interest in a Joint Operation (amendments to IFRS 11) May Jan 2016 Clarification on accepted methods of depreciation and amortization (amendments to IAS 16 and IAS 38) May Jan 2016 Agriculture: Bearer Plants (amendment to IAS 16 and IAS 41) June Jan 2016 Equity method in separate financial statements Aug Jan 2016 Sale or contribution of assets between an investor and its Associate or Joint Venture (amendment to IAS 28 and IFRS 10) Sep 2014 Postponed indefinitely Investment entities applying the consolidation exception (amendment to IFRS 10, IFRS 12 and IAS 28) Dec Jan 2016 Disclosure initiative (IAS 1) Dec Jan 2016 Recognition of Deferred Tax for unrealized losses Jan Jan 2017 Disclosure initiative (amendment to IAS 7) Jan Jan 2017 Annual improvement (IFRS 5, IFRS 7, IAS 19, IAS 34) Sep Jan /05/2016 Uphold Public Interest 10

11 A deep dive on IFRS 9, IFRS 15 and IFRS 16 20/05/2016 Uphold Public Interest 11

12 Area Change Scope Classification Impairment Embedded Derivatives (ED s) Reclassification Presentation and disclosure Same as IAS 39 - Loan commitments now in scope for impairment Financial Assets Major change Financial Liabilities Same as IAS 39 Major changes from the Incurred Loss Model to the Expected Credit Loss Model Same as IAS 39 but embedded derivatives in financial assets in scope of IFRS 9 are no longer separated No reclassification of financial liabilities permitted New presentation and extensive disclosure requirements. 20/05/2016 Uphold Public Interest 12

13 Agent vs principal IAS 18 An entity is acting as a principal when it bears the significant risks and rewards associated with providing the goods or services. IFRS 15 An entity is acting as a principal when it obtains control of the goods or services prior to transfer to the customer. Different principle, but similar indicators. Sell-through approach IAS 18 Revenue is recognised when risks and rewards of ownership for a good or service have been transferred to the customer. IFRS 15 Revenue is recognised when control of a good or service is transferred to the customer. Allocation of consideration IAS 18 Little guidance existed with residual method and relative fair value being the most popular approaches. IFRS 15 Requires relative stand alone selling price method (similar to relative FV). Residual method generally not permitted. IFRS 15 Multiple-element arrangements IAS 18 Little guidance on how to determine the number of deliverables (or elements) within a contract. IFRS 15 Requires that a deliverable must be distinct in order to be separately accounted for. Cost capitalisation IAS 18 No cost capitalisation guidance so costs usually only deferred if they met the definition of an asset under IASs 2, 16, or 38. IFRS 15 More costs to obtain contracts will be capitalised as well as more costs incurred up front to the extent that they help the seller fulfil later deliverables. Consulting and service contracts IAS 18 Limited guidance for determining when revenue is recognised at a point in time or over time. IFRS 15 Detailed guidance on when to recognise revenue at a point in time or over time. Material rights IAS 18 No specific concept existed but most entities defer revenue. IFRS 15 Detailed guidance on what a material right is and requirement to defer revenue. Licences IAS 18 Little guidance existed other than the need to account for the substance. IFRS 15 Detailed guidance as to which licences transfer a right at a point in time and which grant access to IP over time. Variable consideration IAS 18 Revenue recognised to the extent it can be measured reliably, but little application guidance. IFRS 15 Where variable consideration exists the minimum amount highly probably not to lead to a significant reversal of revenue in future years must be included in the transaction price. 20/05/2016 Uphold Public Interest 13

14 Current Model IFRS 16 Lessee accounting Lessor accounting Lease term Variable lease payments Operating lease Finance lease Operating lease Finance lease Include renewal options that are "reasonably certain" of being exercised Contingent rentals are generally expensed as incurred Remeasurement not required All leases on balance sheet (except short term leases) Income statement: Financing approach (Type A) Straight line approach (Type B) Remains the same. Include renewal options where lessee has a significant economic incentive to exercise Usage or performance-based rents are not included Rents based on index/rate and insubstance fixed are included Remeasurement required 20/05/2016 Uphold Public Interest 14

15 New ISAs 20/05/2016 Uphold Public Interest 15

16 The International Auditing and Assurance Standards Board (IAASB) released new and revised auditor reporting standards that are designed to significantly enhance auditor's reports for investors and other users of financial statements. Most notable enhancement is a new requirement for auditors of listed entities' financial statements to communicate 'Key Audit Matters' that the auditor views as most significant, with an explanation of how they were addressed in the audit. The complete suite of new and revised standards consists of ISA 700 (Revised) Forming an Opinion and Reporting on Financial Statements ISA 701 Communicating Key Audit Matters in the Independent Auditor's Report ISA 570 (Revised) Going Concern ISA 705 (Revised) Modifications to the Opinion in the Independent Auditor's Report ISA 706 (Revised) Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor's Report ISA 720 (Revised) The Auditor s Responsibilities relating to Other Information ISA 260 (Revised) Communication with Those Charged with Governance and Conforming Amendments to ISAs 210, 220, 230, 510, 540, 580, 600, and 710 The new and revised auditor reporting standards will be effective for audits of financial statements for periods ending on or after 15 December /05/2016 Uphold Public Interest 16

17 All International Standards on Auditing (ISA) audit reports, not just those for listed entities, will look different compared to current audit reports, for example: Opinion first; Affirmative statement about the auditor s independence and fulfillment of relevant ethical responsibilities; Enhanced description of the responsibilities of the auditor and key features of an audit; Enhanced description of the respective responsibilities of management and the auditor regarding going concern; Material going concern uncertainty reported in a separate section in the audit report; and Revised reporting requirements relating to other information included in an entity s annual report In addition, audit reports on listed entity financial statements will include key audit matters (KAMs) a significant change 20/05/2016 Uphold Public Interest 17

18 The new ISA 701 observes that professional judgement will be needed to determine which, and how many, key audit matters to include in the audit report. Key audit matters are selected from those matters involving significant auditor attention in the audit. The concept of significant auditor attention, the ISA says, recognizes that an audit is risk-based, and areas of significant auditor attention often relate to areas of complexity and significant management judgement in the financial statements. These are, therefore, the areas that, often involve difficult or complex auditor judgements. What descriptions of key audit matters will include: 1. Why the matter is considered to be of the most significance 2. How the mater was addressed in the audit 3. Reference to related disclosure(s) if any 4. May describe the most relevant aspects of the response, brief overview of the procedures performed 5. May also include an indication of the outcome of the procedures or any key observations 20/05/2016 Uphold Public Interest 18

19 Those matters that, in the auditor s professional judgment, were of most significance in the audit of the financial statements for the current period. KAMs are selected from matters communicated with those charged with governance. Key Audit Matters Management Letter Issues 20/05/2016 Uphold Public Interest 19

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21 Acquisition and disposals of operating activities Goodwill impairment Inventory valuation Property valuation and impairment Management override of controls Revenue recognition Taxation (deferred and current) IT environment and control deficiencies Claims & litigation 20/05/2016 Uphold Public Interest 21

22 Stakeholders have requested earlier warning of potential issues that may exist with respect of an entity s ability to continue as a going concern The auditor s work effort on going concern has been enhanced as follows in the revised auditing standard on going concern: New guidance was added to support the auditor s evaluation of disclosures when a material uncertainty exists; A new requirement has been added for the auditor to evaluate the adequacy of disclosures in close-call situations When a material uncertainty related to going concern exists, and the auditor determines that the disclosures in the financial statements are adequate, the auditor s report will highlight this in a separate section in the auditor s report under the heading Material Uncertainty Related to Going Concern (for listed entities: if this is determined to be a KAM, the KAM section of the audit report will cross refer to this section of the audit report) All auditor s reports will include descriptions of the responsibilities of the auditor and management in relation to going concern to provide an additional focus on going concern 20/05/2016 Uphold Public Interest 22

23 At its March 2015 meeting, the IAASB approved changes to ten International Standards on Auditing (ISAs) to address the audit implications of disclosures in the audit of financial statements with related conforming amendments. The changes clarify the concept of disclosures as an integral part of the financial statements and emphasize the need for auditor consideration of disclosures earlier in the audit process. Strengthened requirements and new guidance focuses on requiring the auditor to understand relevant aspects of the information system relating to information disclosed in the financial statements, identifying and assessing the risks of material misstatements in quantitative and qualitative disclosures, obtaining sufficient appropriate audit evidence relating to disclosures, and evaluating the overall presentation of the financial statements, including their relevance and understandability. The changes are effective for audits of financial statements for periods ending on or after December 15, The amended ISAs are: ISA 200, ISA 210, ISA 240, ISA 260, ISA 300, ISA 315, ISA 320, ISA 330, ISA 450, ISA /05/2016 Uphold Public Interest 23

24 The IAASB approved ISA 800 (Revised) and ISA 805 (Revised) at its September 2015 meeting. The revised standards include limited amendments to provide clarity about how the new and revised Auditor Reporting standards apply in the context of special purpose financial statements. These amendments are not intended to substantively change the underlying premise of these engagements in accordance with the extant ISAs. ISA 800 (Revised) and ISA 805 (Revised) are effective for audits of financial statements for periods ending on or after December 15, /05/2016 Uphold Public Interest 24

25 The IAASB approved ISA 810 (Revised) at its December 2015 meeting. The limited amendments to ISA 810 (Revised) leverage the additional transparency in the auditor s report on the audited financial statements resulting from the IAASBs new and revised auditor reporting standards issued in January 2015, in particular ISA 700 (Revised), Forming an Opinion and Reporting on Financial Statements, and new ISA 701, Communicating Key Audit Matters in the Independent Auditor s Report. ISA 810 (Revised) will become effective at the same time as the auditor reporting standards addressing general purpose financial statements for engagements to report on summary financial statements for periods ending on or after December 15, /05/2016 Uphold Public Interest 25

26 Regulatory changes 20/05/2016 Uphold Public Interest 26

27 Overview 42 parts 1026 sections 1022 pages Over 70 pages of regulation Gazetted on 18 Sept 2015 Modelled after UK Companies Act 1985 &2006 Foreign Companies This section is currently being amended and will not be effective until after the amendment. Types of Companies Private Unlimited Limited by shares Public Limited by shares Limited by guarantee Alteration of share capital Division, subdivision or consolidation Allotment of new shares Reducing its share capital requirements Company formation A limited company can now have one shareholder Existing companies can reduce its shareholding to one member Other Company objectives now universal except constrained by company constitution Disclosure of director s emoluments in FS Unlimited company cannot become limited only vice versa 20/05/2016 Uphold Public Interest 27

28 The new code is based on an apply or explain principle, recognising that no single set of rules can be applicable to all types of companies. The core principles are as follows: Board operation and control Related party transactions Director term Chairman / CEO Formal & transparent procedures in board appointments. Board to put in place policy on related party transactions. The term for independent board member shall not exceed 9 years. Functions cannot be done by the same person. Board diversity Board age limit Rights of shareholders External auditor rotation Board to put in place policy on related party transactions. Recommends an age limit of seventy years. The board shall recognize, respect and protect rights of shareholders. The board shall rotate independent auditors every 6 to 9 years Ethics and social responsibility Accountability, risk management Internal control Transparency and disclosure Board ensure ethical issues are managed effectively. Structure to independently verify the integrity of the FS. The board shall put in place an effective system of internal control. Board shall promote timely and balanced disclosures. 20/05/2016 Uphold Public Interest 28

29 The new code is based on an apply or explain principle, recognising that no single set of rules can be applicable to all types of companies. The core principles are as follows: Board operation and control Related party transactions Director term Chairman / CEO Formal & transparent procedures in board appointments. Board to put in place policy on related party transactions. The term for independent board member shall not exceed 9 years. Functions cannot be done by the same person. Board diversity Board age limit Rights of shareholders External auditor rotation Board to put in place policy on related party transactions. Recommends an age limit of seventy years. The board shall recognize, respect and protect rights of shareholders. The board shall rotate independent auditors every 6 to 9 years Ethics and social responsibility Accountability, risk management Internal control Transparency and disclosure Board ensure ethical issues are managed effectively. Structure to independently verify the integrity of the FS. The board shall put in place an effective system of internal control. Board shall promote timely and balanced disclosures. 20/05/2016 Uphold Public Interest 29

30 Following the recommendations of the Presidential task Force on Parastatal Reforms 2013, the government committed to create the Financial Services Authority (FSA), to merge and takeover the functions of the CMA, IRA, RBA and SASRA The objectives of the bill are to: Enhance the support and efficiency and integrity of financial markets; and Protect financial customers by promoting fair treatment of financial customers by financial institutions. To achieve this objective the main tools proposed by the FSA are: 1. Market intelligence and analysis 2. Licensing 3. Conduct rules and guidance 4. Supervision for market integrity 5. Supervision for customer protection 6. Enforcement 7. Dispute resolution 8. Customer education As shown in the schematic, the FSA regulates all financial institutions (FIs) on the left-hand side of the middle row for conduct purposes. As shown in the lower row, the FSA also regulates a sub-set of these financial institutions for prudence under the sectoral laws (the Capital Markets Act, Central Depositories Act, the Insurance Act, the Retirement Benefits Act, and the Sacco Societies Act). 20/05/2016 Uphold Public Interest 30

31 The Proceed of Crime and Anti Money Laundering Act (POCAMLA) 2009, established the Financial Reporting Centre ( FRC ) - the competent authority for supervising financial institutions and designated non-financial businesses and professions. Casinos, real estate agencies, dealers in precious stones and metals and accountants are designated as Designated Non-Financial Businesses or Professions ( DNFBP ) under POCAMLA, for compliance with AML obligations. The FRC became operational in April The Act provides that reporting obligations shall apply to accountants when preparing or carrying out transactions for their clients in the following situations (section 48) Professional accountants in public practice are therefore reminded to read the act and its regulations and consult the Institute and the FRC to ensure compliance. These provision including reporting to the FRC, designation Money Laundering Reporting Officers (MLRO) etc. The Institute s practice monitoring program has also been reviewed to monitor compliance with the act. 20/05/2016 Uphold Public Interest 31

32 Accounting Education and Development 20/05/2016 Uphold Public Interest 32

33 Pre-Qualification Post-Qualification Entry Requirements for Professional Accounting Education Program(IES 1) Content of Professional Accounting Education (IESs 2,3,4) Continuing Professional Development (IES 7) Specialization (IES 8) Practical Experience (IES 5) Assessment (IES 6)

34 Learning outcomes approach is aimed at enhancing the development of professional competence needed to perform a role as a professional accountant. A learning outcomes approach integrates learning outcomes, program design, assessment activities, and governance in a process of continuous improvement An effective program is critical to the development of competent professional accountants, strengthening the quality of services they provide. 20/05/2016 Uphold Public Interest 34

35 The benefits of a learning outcomes approach for stakeholders include: Increasing the credibility of the accountancy profession; Increasing the quality of services provided by the individual; Enhancing professional growth for the individual; Increasing confidence of the individual; Providing a higher degree of accountability for the program provider and the individual; Potentially improving less effective portions of a learning and development program, increasing the time available for more critical areas; and Reducing the reputational risk, or improving the reputation, of the program provider. The Institute is working on ensuring that the CPD programs focuses on the learning outcome. 20/05/2016 Uphold Public Interest 35

36 Learning Outcomes Cognitive (Demonstrate: Knowledge, Comprehension, Application, Analysis, Synthesis, Evaluation) Affective (Integration of beliefs, ideas and attitudes) Psychomotor (Acquisition of physical skills) Teaching and Learning Activities Lectures Tutorials Discussions Laboratory work Clinical work Group work Seminar Peer group presentation etc. Assessment End of module exam. Multiple choice tests. Essays. Reports on research project. Practical assessment. Fieldwork. Portfolio. Performance. Project work. Production of artefact etc. 36

37 IPD IES 7: It is the responsibility of the professional accountant to develop and maintain professional competence by undertaking relevant CPD activities CPD PROGRAM FOR PROMOTION CPD PROGRAM FOR NEW ROLE CPD PROGRAM FOR NEW JOB CPD PROGRAM FOR ENTRY POSITION CPD IES 7: IFAC member bodies required to: a. Promote CPD b. Facilitate access to CPD opportunities and resources MAINTAIN & FURTHER DEVELOP COMPETENCE c. Require accountants undertake appropriate CPD d. Measure, Monitor and Enforce

38 Learning & Development CPD ACTIVITIES Education Training Practical Experience Coaching Networking Observation, Feedback, & Reflection Self-directed & unstructured gaining of knowledge VITAL CPD AREAS Public Interest Area #1 Public Interest Area #2 MONITOR & ENFORCE CPD PROVIDERS: 1. Accept All Relevant Activities 2. Require CPD that is Relevant 3. Require CPD in Areas that are Vital to the Public Interest PROFESSIONAL ACCOUNTANTS: Employ a CPD Process to Identify Relevant CPD Activities & Areas Self-appraise 2. Plan 3. Act 4. Document 5. Evaluate 1. Compliance with Program 2. Effectiveness of Program MEASUREMENT OF CPD ACTIVITIES Output Combination Input

39 Learning & Development CPD ACITIVITIES Education Training Practical Experience Coaching Networking Observation, Feedback, & Reflection Self-directed & unstructured gaining of knowledge VITAL CPD AREAS Professional Values, Ethics and Attitudes? Digital Acumen? CPD PROVIDERS: 1. Accept relevant activities 2. Require CPD that is relevant 3. Require CPD in areas vital to the public interest 5 MONITOR & ENFORCE PROFESSIONAL ACCOUNTANTS: Employ a process to identify relevant CPD activities and areas Self-appraise 2. Plan 3. Act 4. Document 5. Evaluate 1. Compliance with Program 2. Effectiveness of Program MEASUREMENT OF CPD ACTIVITIES Output Combination Input

40 International Education Standard (IES) 8 Professional Competence for Engagement Partners Responsible for Audit of Financial Statements (Revised) Prescribes the professional competence that professional accountants are required to develop and maintain when performing the role of an Engagement Partner responsible for audits of financial statements. IES 8 (Revised) is written for those professional accountants who are already performing the role of engagement partner, and becomes effective on July 1, IES 8 (Revised) focuses on the engagement partner, which is a role common to every audit engagement. 20/05/2016 Uphold Public Interest 40

41 It provides that it is the responsibility of the professional accountant performing the role of an engagement partner to by undertaking relevant CPD activities, which include practical experience to develop and maintain professional competence. The Institute is currently reviewing the impact on IES 8 (Revised) in its audit regulatory regime and will provide further guidance on the standard in due course. 20/05/2016 Uphold Public Interest 41

42 Issued under consideration include:- Does the current framework support the need for enhance competency for audit professionals (specifically engagement partners)? How should learning outcome approach be embedded in professional accountants in public practice CPD requirements? Should Audit be considered as a post CPA qualification? Should ICPAK initiate a mandatory certification for one to be issued with an audit license? 20/05/2016 Uphold Public Interest 42

43 Major IESs/Developments Q Q Q IES 7 Continuous Professional Development (CPD) Deliberations Publish ED Guidance on IES 1 Deliberations Concluded for publication New IESs on specialisation that is public sector, banking and extractive industry professional Strategic work plan review Deliberations Deliberations 20/05/2016 Uphold Public Interest 43

44 Public Sector 20/05/2016 Uphold Public Interest 44

45 In April 2016, the IPSASB published a revised Preface to International Public Sector Accounting Standards (Preface) titled Applicability of IPSAS, which change how the IPSASB communicates the type of public sector entities that it considers when developing an IPSAS or RPG. The amendments include: - Provisions on the characteristics of public sector entities for which IPSAS are designed in the revised Preface; Replacement of the term Government Based Entities (GBEs) with the term commercial public sector entities; Deletion of the definition of a GBE in IPSAS 1, Presentation of Financial Statements; and Amendments on the scope section of each IPSAS and RPG by removing the paragraph that states that these pronouncements do not apply to GBEs. These amendments were brought about by different interpretations of the definition of GBE and the IPSASB believe that the principles-based approach communicates more transparently the types of public sector entities, while also enhancing consistency and understandability of the IPSASB s literature. The changes also acknowledge the role that regulators have in determining which accounting standards should be applied by different entities in their jurisdictions and ICPAK will work closely with PSASB (Kenya) in categorising public sector entities for which IFRS is applicable. 20/05/2016 Uphold Public Interest 45

46 Current IPSASB projects : Social benefits; Revenues; Non-exchange expenses; Heritage assets; Infrastructure assets; Public sector measurement; and Leases. Additionally, issues outside of the IPSASB work plan were also discussed: IPSAS lite (IPSAS for small and medium-sized entities); Tax expenditures; Natural resources accounting; Consolidation; Financial performance measures; Service performance reporting; and Implementation issues. 20/05/2016 Uphold Public Interest 46

47 Successful adoption of IPSAS in Kenya for public sector Automation of reporting templates IPPF for internal audit in the public sector Views of constituents on the work of PSASB (K) 20/05/2016 Uphold Public Interest 47

48 Unethical business practices harm organizations and economies. Large-scale business failures such as Enron as well as the more recent failures related to the global financial crisis highlight the consequences of unethical business practices and amoral management. Professional accountants, as stewards of transparency and trust, and subject to a professional code of ethics, have a key role to play not only in upholding but in encouraging and influencing ethical behaviour and decision making within their organisations. IFAC, /05/2016 Uphold Public Interest 48

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50 CPA Michael Mugasa Partner, Pwc & Chair, Professional Standards Committee (PSC) ICPAK CPA Edwin Makori Chief Manager, Professional Services Division ICPAK 20/05/2016 Uphold Public Interest 50