Changes and developments in financial reporting

Question 1

SUSTAINABILITY

38.Colat

Answer 1

• Growing Importance of Sustainability in Investing:
  
  • Sustainability is increasingly recognized as impacting company financial performance.
  • Investors are integrating sustainability considerations into decision-making.
  • Understanding the broader social and environmental context builds trust and credibility with investors and reduces the risk of using inaccurate information.
• Investor Preferences and Appetite:
  
  • Investors prefer products that consider the relationship between investments and social/environmental conduct.
  • There is a demand for a comprehensive understanding of companies and incorporation of material sustainability factors into investment decisions.
• Sector-Specific Materiality:
  
  • Material sustainability factors vary across sectors and industries.
  • Sustainability analysis can differentiate between otherwise similar companies and influence investment decisions.
• Data Availability and Analysis:
  
  • Increasing data availability allows for rating, ranking, and trend analysis.
  • Quantitative application of sustainability data in investment analysis is becoming more common.
• Company Perspective:
  
  • Companies should understand investor needs and perspectives to make reporting more relevant and communicate the financial value of sustainability efforts effectively.

Question 2

SUSTAINABILITY

42. Ecoma

Answer 2

• Investor Interest in ESG Goals:
  
  • Investors want to understand how businesses are integrating environmental, social, and governance (ESG) goals into their overall corporate strategies.
  • Positioning ESGs within corporate strategies is considered crucial information for investment decisions, leading to capital allocation to responsible businesses.
• Relevance of Sustainability Practices:
  
  • Sustainability practices vary in relevance across companies.
  • Financial sustainability is often a prerequisite for attracting investment.
  • Institutional investors, bound by fiduciary duty, consider sustainability practices in their investment decisions.
• Financial Implications of Environmental and Social Events:
  
  • Environmental events can lead to costs for investors, such as insurance premiums and physical damages.
  • Social issues can affect future cash flows and financial returns due to unrest and instability.
• Integration of Sustainable Policies into Investment Decisions:
  
  • Investors screen companies based on sustainable policies and incorporate this information into valuation models.
  • Specific policy criteria, such as education and health initiatives, may influence investment decisions.
• Promotion of Sustainable Economies:
  
  • Investors advocate for sustainable economies and markets to enhance long-term financial performance.
  • Disclosure of sustainability information should align with widely-accepted recommendations like the Global Reporting Initiative (GRI) and the UN Global Compact.
• Director Perspective on Sustainability:
  
  • Investors seek to understand directors’ views on the relevance of sustainability to corporate strategy, including discussions on identified risks, opportunities, and changes in the business model.
• Investment Screening and Engagement:
  
  • Investors employ screening strategies, including elimination or ranking based on sustainability criteria.
  • Related disclosures help investors identify risks and opportunities for engagement with companies.
• Seeking Credible ESG Contributions:
  
  • Investors increasingly look for investment opportunities that contribute credibly to realizing ESG goals.

Question 3

DISCLOSURES AND CRYPTO

36.SYMBAL

Answer 3

• Clarity and Disclosure of Crypto Assets:
  
  • There’s a growing need for clarity in accounting and disclosures related to crypto assets, impacting both new and traditional investors.
  • Disclosure principles should be entity-specific, providing detailed information tailored to the company’s circumstances, including holdings of crypto assets and involvement in Initial Coin Offerings (ICO).
• Simplicity and Directness in Descriptions:
  
  • Involvement in ICOs or other crypto asset issues should be described simply and directly, avoiding unnecessary complexity while ensuring material information is conveyed.
• Organization and Emphasis of Disclosures:
  
  • Information should be organized to highlight important matters, presented in an appropriate order, and emphasized effectively.
  • Disclosures should include terms of ICOs to enable investors to understand associated rights.
• Integration and Linkage of Information:
  
  • Information about crypto assets should be linked to other parts of the financial statements or the annual report to highlight relationships and improve navigation.
• Compliance with Reporting Standards:
  
  • Holders of crypto assets classified as inventories or intangible assets need to comply with relevant reporting standards (IAS 2 for inventories and IAS 38 for intangible assets).
  • Disclosure requirements include carrying amount, fair value, changes in carrying amounts, and assessment of useful life for intangible assets.
• Optimizing Comparability and Usefulness:
  
  • Information about crypto assets should be provided to optimize comparability among entities and across reporting periods without compromising usefulness.
• Materiality Assessment:
  
  • Proper application of materiality is crucial for determining what information to disclose regarding crypto assets.
  • Challenges in exercising judgment around materiality may lead to either omission of useful information or disclosure overload.

Question 4

ICO.

36. SYMBAL

Answer 4

Development Costs:
- Recognition Criteria:
- Costs are recognized as intangible assets if it’s probable that future economic benefits attributable to the asset will flow to the entity and the cost can be measured reliably.
- Future economic benefits must be based on reasonable and supportable assumptions about conditions over the asset’s life.
- Evaluation for Recognition:
- Symbal Co evaluates if it can still control the trading platform after issuing tokens and if it expects future economic benefits from token holders beyond another token issuance.
- If costs ensure future economic benefits, they’re recognized as intangible assets and amortized. Otherwise, they’re expensed immediately.
- Promotional activity costs should be expensed when incurred, per IAS 38.
- Subsequent Assessment:
- If circumstances change in future reporting periods and future economic benefits are no longer expected, the value of the intangible asset is impaired and written down.

ICO Arrangements:
- Pre-Sale Agreement (Year ended 31 March 20X7):
- Symbal Co has a financial obligation to deliver $1 million if ICO doesn’t occur by 30 April 20X7.
- Recognized as a financial liability at initial recognition per IAS 32.

• ICO Proceeds (Year ended 31 March 20X8):
  
  • Funds paid by token holders ($10 million) represent income, not financial liability or equity.
  • Recorded as income:
    
    • Dr Bank $10 million
    • Cr Other financial income $10 million
• Profit Sharing Commitment (Year ended 31 March 20X8):
  
  • Initially considered a contingent liability.
  • Recognized as a financial liability and expense if profits earned during the reporting period.

Tokens Granted to Directors (Year ended 31 March 20X7):
- Accounting Treatment:
- Tokens are not equity instruments as they don’t grant residual interest in assets.
- Not treated as share-based payments under IFRS 2.
- Treated as a short-term employee benefit under IAS 19.
- Recognition and Measurement:
- Liability and short-term employee benefit expense recognized at 31 March 20X7.
- Measurement based on fair value of tokens or estimated cost of goods/services to be delivered.
- Entry:
- Dr Employee costs $250,000
- Cr Short-term employee benefit liability $250,000

Question 5

32.Juan

Answer 5

• Materiality of Climate-Related Risks:
  
  • Climate-related risks, while often discussed in management commentary, are increasingly important to investor decision-making.
  • Materiality definition implies companies may need to consider such risks in financial statements, not just CSR reports.
  • Investors expect materiality judgments to include climate-related risks if they impact financial statements.
• IFRS Standards and Materiality:
  
  • Information is material if omitting, misstating, or obscuring it could influence decisions based on financial statements.
  • May lead to disclosing information not specifically required by IFRS but necessary for investors to understand the impact on financial position and performance.
• Additional Disclosures:
  
  • Companies should consider providing additional disclosures when specific IFRS requirements are insufficient to explain the impact of climate-related matters.
  • Disclosure of significant estimates or judgments related to climate-related risks may be necessary, even if not required by IAS 1.
  • Required disclosures even if current financial impact is minimal or if there’s no significant risk of material adjustments in the next financial year.

Question 6

Benefits of Integrated Reporting

40.Handfood

Answer 6

• Benefits of Integrated Reporting for SMEs:
  
  • Helps SMEs understand and communicate how they create value.
  • Provides a roadmap for considering multiple capitals involved in value creation.
  • Represents a more complete corporate report, aiding SMEs in understanding their business and fostering growth.
• Value Creation Factors for SMEs:
  
  • SMEs utilize various resources and relationships to create value.
  • Integrated reporting helps SMEs comprehend factors influencing their ability to create value over time.
• Integrated Thinking and Decision Making:
  
  • Facilitates deeper understanding of business mechanics through integrated thinking.
  • Enables SMEs to assess business model strengths and identify deficiencies, leading to forward-looking strategies.
• Challenges with Conventional Accounting:
  
  • Some SMEs lack tangible assets and operate in virtual environments, making conventional accounting insufficient.
  • Important capitals like employee expertise, customer loyalty, and intellectual property are not adequately accounted for in financial statements.
• Role of Integrated Reporting:
  
  • Integrates key financial information with significant non-financial measures and narrative information.
  • Addresses communication needs of financial capital and other stakeholders, optimizing reporting for SMEs.

Question 7

Standards suitable for SME’S

40.Handfood

Answer 7

• Principal Aim of SMEs Standard:
  
  • Aimed at generating relevant, reliable, and useful information.
  • Designed to provide a high-quality, understandable accounting standard suitable for SMEs.
• Structure of SMEs Standard:
  
  • Self-contained framework based on accounting principles from full IFRS standards.
  • Comprises a single standard with simplified sections for relevant IFRS standards.
  • Omitted certain IFRS standards like earnings per share and segmental reporting.
• Accounting Treatments under SMEs Standard:
  
  • Certain accounting treatments not allowable, e.g., no separate guidance for non-current assets held for sale.
  • Simplifications made to recognition, measurement, and disclosure requirements compared to full IFRS standards.
• Examples of Simplifications:
  
  • Intangible assets amortized over presumed useful life of 10 years if determinable life is not available.
  • Cost model used for measuring investments in associates; fair value model required if there’s a published price quotation.
• Reduced Disclosure Requirements:
  
  • Disclosure requirements substantially reduced compared to full IFRS standards.
  • Reductions made based on appropriateness for users’ needs and cost-benefit considerations.

Question 8

Information Asymetry & IFRS for SME

40.Handfood

Answer 8

• Effect of IFRS for SMEs on Information Asymmetry:
  
  • Decreases information asymmetry between firms and users.
  • Achieved through recognition, measurement, and disclosure requirements.
• Information Disclosure Disparities:
  
  • Certain facts and information not disclosed by companies to investors under any accounting standards.
  • SMEs have access to all relevant information, giving them an information advantage.
• Impact on Investor Decision-making:
  
  • Lack of relevant information adversely affects investor decision-making.
  • Investors may lack information on SME’s credit, project risk, and benefits.
• Consequences for Investors:
  
  • Investors, especially financial institutions, may increase lending rates to mitigate potential risk or refrain from investing altogether.
• Relationship to Investment Risk:
  
  • Incomplete and opaque information increases investment risk.
  • Higher risk leads to higher required returns for investors.
• Determinants of SME Investment Access:
  
  • Quality of financial statements, information asymmetry, and perceived risk influence access to investment by SMEs.
• Role of Quality Financial Statements:
  
  • Quality financial statements reduce information asymmetry and perceived risk.