ACCA p2 (INT) corporate reporting study text 2017 18

Emile Woolf Publishing Limited are grateful to the IFRS Foundation for permission to reproduce extracts from The International Financial Reporting Standards including all International A

ACCA

(International)

Study Text

Valid for exams from

September 2017 to June 2018

P

Welcome to Emile Woolf‘s study text for

Paper P2 Corporate Reporting (INT) which is:

Tenth edition published by

Emile Woolf International Limited

Bracknell Enterprise & Innovation Hub

Ocean House, 12th Floor, The Ring

Bracknell, Berkshire, RG12 1AX United Kingdom

Email: info@ewiglobal.com

www.emilewoolf.com

© Emile Woolf International Limited, March 2017

All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, without the prior permission in writing of Emile Woolf International Limited, or as expressly permitted by law, or under the terms agreed with the appropriate reprographics rights organisation

You must not circulate this book in any other binding or cover and you must impose

the same condition on any acquirer

Notice

Emile Woolf International Limited has made every effort to ensure that at the time of

writing the contents of this study text are accurate, but neither Emile Woolf

International Limited nor its directors or employees shall be under any liability

whatsoever for any inaccurate or misleading information this work could contain

British Library Cataloguing in Publications Data

A catalogue record for this book is available from the British Library

Emile Woolf Publishing Limited are grateful to the IFRS Foundation for permission to

reproduce extracts from The International Financial Reporting Standards including all

International Accounting Standards, SIC and IFRIC Interpretations IFRS Standards together with their accompanying documents are issued by;

The International Accounting Standards Board (the “Board”)

30 Cannon Street, London, EC4M 6XH, United Kingdom

Tel: +44 (0)20 7246 6410 Fax: +44 (0)20 7246 6411

Email: info@ifrs.org Web: www.ifrs.org

Disclaimer: To the extent permitted by applicable law, the Board and the IFRS Foundation (Foundation) expressly disclaim all liability howsoever arising from this publication or any translation thereof whether in contract, tort or otherwise (including, but not limited to, liability for any negligent act or omission) to any person in respect of any claims or losses of any nature including direct, indirect, incidental or consequential loss, punitive damages, penalties or costs

Information contained in this publication does not constitute advice and should not be substituted for the services of an appropriately qualified professional

ISBN: 978-1-84843-664-0

Copyright © IFRS Foundation

All rights reserved Reproduction and use rights are strictly limited Contact the Foundation for further details

The authoritative text of IFRS Standards is that issued by the International Accounting Standards Board in the English language Copies may be obtained from the Foundation’s Publications Department Please address publication and copyright matters to:

IFRS Foundation Publications Department

30 Cannon Street, London, EC4M 6XH, United Kingdom

Tel: +44 (0)20 7332 2730 Fax: +44 (0)20 7332 2749

Email: publications@ifrs.org Web: www.ifrs.org

Chapter 1 The professional and ethical duty of the accountant 1

Chapter 3 The financial reporting framework 33 Chapter 4 Reporting financial performance 73

Chapter 6 Non-current and current assets 151

Chapter 10 IFRS 2: Share-based payments 335

Chapter 12 Provisions and events after the reporting period 379 Chapter 13 SMEs and specialised entities 401 Chapter 14 Group financial statements: Revision 419 Chapter 15 Joint arrangements, associates and joint ventures 469 Chapter 16 Group financial statements: complex groups 483 Chapter 17 Group financial statements: step acquisitions 509 Chapter 18 Group financial statements: disposals 523 Chapter 19 Group reorganisations and restructuring 545 Chapter 20 IFRS 13: Fair value measurement 559

Chapter 22 Statements of cash flows 601

Examinable documents

International Accounting Standards (IASs)/International Financial

Reporting Standards (IFRSs)

IAS 1 Presentation of Financial Statements 4

IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors 3

IAS 10 Events after the Reporting Period 12

IAS 16 Property, Plant and Equipment 6

IAS 20 Accounting for Government Grants and Disclosure of Government

IAS 21 The Effects of Changes in Foreign Exchange Rates 21

IAS 27 Separate Financial Statements 14

IAS 28 Investments in Associates and Joint Ventures 15

IAS 32 Financial Instruments: Presentation 7

IAS 37 Provisions, Contingent Liabilities and Contingent Assets 12

IFRS 1 First-time Adoption of International Financial Reporting Standards 25

IFRS 3 Business Combinations (revised) 14, 17

IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations 6, 18

IFRS 7 Financial Instruments: Disclosures 7

IFRS 10 Consolidated Financial Statements 3, 14

IFRS 12 Disclosure of Interests in Other Entities 3, 14

IFRS 15 Revenue from contracts with customers 5

IFRS for SMEs IFRS for small and medium sized entities 13

Chapter: Other Statements

The Conceptual Framework for Financial Reporting 3 Practice statement: Management Commentary 2

EDs, Discussion Papers and Other Documents

ED 2014/04 Measuring quoted investments in subsidiaries, joint ventures at

ED 2015/01 Classification of liabilities – proposed amendments to IAS 1 4

ED 2015/03 Conceptual framework for financial reporting 3

ED 2015/08 Practice statement on materiality 3

On successful completion of this paper candidates should be able to:

A Discuss the professional and ethical duties of the accountant

B Evaluate the financial reporting framework

C Advise on and report the financial performance of entities

D Prepare the financial statements of groups of entities in accordance with

relevant accounting standards

E Explain reporting issues relating to specialised entities

F Discuss the implications of changes in accounting regulation on financial reporting

G Appraise the financial performance and position of entities

H Evaluate current developments

Rationale

The syllabus for Paper P2, Corporate Reporting, assumes knowledge acquired at the Fundamentals level including the core technical capabilities to prepare and analyse financial reports for single and combined entities

The Paper P2 syllabus takes the subject into greater depth and contextualises the role of the accountant as a professional steward and adviser/analyst by initially exploring the wider professional duties and responsibilities of the accountant to the stakeholders of an organisation

The syllabus examines the financial reporting framework within which the accountant operates and examines detailed financial reporting requirements for entities leading to the preparation of group financial reports in accordance with generally accepted accounting practice and relevant standards

The syllabus then deals with the nature of reporting for specialised entities including not-for-profit and small and medium-sized enterprises

The final sections of the syllabus explore – in more depth – the role of the accountant as financial analyst and adviser through the assessment of financial performance and position of entities, and the accountant’s role in assessing and advising on the implications of accounting regulation on corporate reporting

Finally, the syllabus covers the evaluation of current developments and their implications for financial reporting

A The professional and ethical duty of the accountant

1 Professional behaviour and compliance with accounting standards

2 Ethical requirements of corporate reporting and the consequences of unethical behaviour

3 Social responsibility

B The financial reporting framework

1 The applications, strengths and weaknesses of an accounting framework

2 Critical evaluation of principles and practices

C Reporting the financial performance of entities

D Financial statements of groups of entities

1 Group accounting including statements of cash flows

2 Continuing and discontinued interests

3 Changes in group structures

4 Foreign transactions and entities

E Specialised entities and specialised transactions

1 Financial reporting in specialised, not-for-profit and public sector entities

2 Entity reconstructions

F Implications of changes in accounting regulation on financial reporting

1 The effect of changes in accounting standards on accounting systems

2 Proposed changes to accounting standards

G The appraisal of financial performance and position of entities

1 The creation of suitable accounting policies

2 Analysis and interpretation of financial information and measurement

of performance

H Current developments

1 Environmental and social reporting

2 Convergence between national and international reporting standards

3 Current reporting issues

Approach to examining the syllabus

The syllabus is assessed by a three-hour examination available in both

computer-based and paper-computer-based formats.*

*For paper-based exams there is an extra 15 minutes to reflect the manual effort

required

It examines professional competences within the corporate reporting environment

Students will be examined on concepts, theories, and principles, and on their ability

to question and comment on proposed accounting treatments

Students should be capable of relating professional issues to relevant concepts and

practical situations The evaluation of alternative accounting practices and the

identification and prioritisation of issues will be a key element of the paper

Professional and ethical judgement will need to be exercised, together with the

integration of technical knowledge when addressing corporate reporting issues in a

business context

Global issues will be addressed via the current issues questions on the paper

Students will be required to adopt either a stakeholder or an external focus in

answering questions and to demonstrate personal skills such as problem solving,

dealing with information and decision making

The paper also deals with specific professional knowledge appropriate to the

preparation and presentation of consolidated and other financial statements from

accounting data, to conform with accounting standards

The paper will comprise two sections:

Section B 2 from 3 questions of 25 marks each 50 marks

──────

──────

Section A will consist of one scenario based question worth 50 marks It will deal

with the preparation of consolidated financial statements including group

statements of cash flows and with issues in financial reporting

Students will be required to answer two out of three questions in Section B, which

will normally comprise two questions which will be scenario or case-study based

and one essay question which may have some computational element Section B

could deal with any aspects of the syllabus New accounting standards will feature

prominently in this section on initial introduction

Study Guide

A THE PROFESSIONAL AND ETHICAL DUTIES OF THE ACCOUNTANT

1 Professional behaviour and compliance with accounting standards

a) Appraise and discuss the ethical and professional issues in advising on corporate reporting

b) Assess the relevance and importance of ethical and professional issues in complying with accounting standards

2 Ethical requirements of corporate reporting and the consequences

B THE FINANCIAL REPORTING FRAMEWORK

1 The applications, strengths and weaknesses of an accounting framework

a) Evaluate the valuation models adopted by standard setters

b) Discuss the use of an accounting framework in underpinning the production of accounting standards

c) Assess the success of such a framework in introducing rigorous and consistent accounting standards

2 Critical evaluation of principles and practices

a) Identify the relationship between accounting theory and practice b) Critically evaluate accounting principles and practices used in corporate reporting

C REPORTING THE FINANCIAL PERFORMANCE OF ENTITIES

2 Non-current assets

a) Apply and discuss the timing of the recognition of non-current assets and the determination of their carrying amounts including impairments and revaluations

b) Apply and discuss the treatment of non-current assets held for sale

c) Apply and discuss the accounting treatment of investment properties including classification, recognition and measurement issues

d) Apply and discuss the accounting treatment of intangible assets including the criteria for recognition and measurement subsequent

to acquisition and classification

d) Apply and discuss the reasons behind the separation of the components of a lease contract into lease and no lease elements e) Discuss the recognition exemptions under the current leasing standard

f) Account for and discuss sale and leaseback transactions

5 Segment Reporting

a) Determine the nature and extent of reportable segments

b) Specify and discuss the nature of segment information to be disclosed

6 Employee Benefits

a) Apply and discuss the accounting treatment of short term and long term employee benefits and defined contribution and defined benefit plans

b) Account for gains and losses on settlements and curtailments c) Account for the “Asset Ceiling” test and the reporting of actuarial gains and losses

8 Provisions, contingencies and events after the reporting date

a) Apply and discuss the recognition, de- recognition and measurement of provisions, contingent liabilities and contingent assets including environmental provisions and restructuring provisions

b) Apply and discuss the accounting for events after the reporting date

c) Determine and report going concern issues arising after the reporting date

9 Related parties

a) Determine the parties considered to be related to an entity

b) Identify the implications of related party relationships and the need for disclosure

10 Share based payment

a) Apply and discuss the recognition and measurement criteria for share-based payment transactions

b) Account for modifications, cancellations and settlements of share based payment transactions

11 Reporting requirements of small and medium- sized entities (SMEs)

a) Discuss the accounting treatments not allowable under the IFRS for SMEs including the revaluation model for certain assets

b) Discuss and apply the simplifications introduced by the IFRS for SMEs including accounting for goodwill and intangible assets, financial instruments, defined benefit schemes, exchange differences and associates and joint ventures

D FINANCIAL STATEMENTS OF GROUPS OF ENTITIES

1 Group accounting including statements of cash flows

a) Apply the method of accounting for business combinations including complex group structures

b) Apply the principles in determining the cost of a business combination

c) Apply the recognition and measurement criteria for identifiable acquired assets and liabilities and goodwill including step acquisitions

d) Apply and discuss the criteria used to identify a subsidiary and an associate

e) Determine and apply appropriate procedures to be used in preparing group financial statements

f) Identify and outline:

- the circumstances in which a group is required to prepare consolidated financial statements

- the circumstances when a group may claim and exemption from the preparation of consolidated financial statements

- why directors may not wish to consolidate a subsidiary and where this is permitted

g) Apply the equity method of accounting for associates

h) Outline and apply the key definitions and accounting methods which relate to interests in joint arrangements

i) Prepare and discuss group statements of cash flows

2 Continuing and discontinued interests

a) Prepare group financial statements where activities have been discontinued, or have been acquired or disposed of in the period b) Apply and discuss the treatment of a subsidiary which has been acquired exclusively with a view to subsequent disposal

3 Changes in group structures

a) Discuss the reasons behind a group reorganisation

b) Evaluate and assess the principal terms of a proposed group reorganisation

4 Foreign transactions and entities

a) Outline and apply the translation of foreign currency amounts and transactions into the functional currency and the presentational currency

b) Account for the consolidation of foreign operations and their disposal

E SPECIALISED ENTITIES AND SPECIALISED TRANSACTIONS

1 Financial reporting in specialised, not-for-profit and public sector entities

a) Apply knowledge from the syllabus to straightforward transactions and events arising in specialised, not-for-profit, and public sector entities

2 Entity reconstructions

a) Identify when an entity may no longer be viewed as a going concern or uncertainty exists surrounding the going concern status

b) Identify and outline the circumstances in which a reconstruction would be an appropriate alternative to a company liquidation c) Outline the appropriate accounting treatment required relating to reconstructions

F IMPLICATIONS OF CHANGES IN ACCOUNTING REGULATION ON FINANCIAL REPORTING

1 The effect of changes in accounting standards on accounting systems

a) Apply and discuss the accounting implications of the first time adoption of a body of new accounting standards

2 Proposed changes to accounting standards

a) Identify issues and deficiencies which have led to a proposed change to an accounting standard

G THE APPRAISAL OF FINANCIAL PERFORMANCE AND POSITION OF ENTITIES

1 The creation of suitable accounting policies

a) Develop accounting policies for an entity which meet the entity’s reporting requirements

b) Identify accounting treatments adopted in financial statements and assess their suitability and acceptability

2 Analysis and interpretation of financial information and measurement of performance

a) Select and calculate relevant indicators of financial and financial performance

non-b) Identify and evaluate significant features and issues in financial statements

c) Highlight inconsistencies in financial information through analysis and application of knowledge

d) Make inferences from the analysis of information taking into account the limitation of the information, the analytical methods used and the business environment in which the entity operates

1 Environmental and social reporting

a) Appraise the impact of environmental, social, and ethical factors

3 Current reporting issues

a) Discuss current issues in corporate reporting, including:

The professional and ethical

duty of the accountant

Professional behaviour and compliance with accounting standards

 Introduction

 Professional behaviour

 ACCA Code of Conduct

 Compliance with accounting standards

accounting standards

1.1 Introduction

Professional behaviour and business ethics have been in the foreground of media attention over the last few years due to the high profile nature of cases such as Enron, Worldcom, Parmalat and others

Ethics can be difficult to define, but it is principally concerned with human character and conduct Ethical behaviour goes beyond obeying laws, rules and regulations It is about doing ‘the right thing’

The accountancy profession as a whole has accepted the commitment to act ethically and in the public interest Professional accountants may find themselves in situations where values are in conflict with one another, due to responsibilities to employers, clients, and the public Professional accountancy bodies have their own codes of conduct which accountants are expected to follow and also provide guidance to members in situations where ethical issues arise

1.2 Professional behaviour

Accounting information is important for investors to make business decisions If information is inadequate then there is the potential for investors to lose money and confidence in the accountancy profession is undermined

Accountants in practice

Professional ethics is applicable to accountants in practice and in business Auditors have a duty to ensure that financial information has been prepared in accordance with the relevant accounting standards and that it shows a true and fair view It is important for auditors to remain independent and ensure that they are not pressured into accepting an accounting treatment they do not agree with

Some commentators believe that auditors cannot be independent as they are performing a service, which the client pays for This debate has been raging for years with no suitable outcome Another issue is that auditors take on non-audit work such as taxation advice, management consultancy and due diligence for acquisitions This work is often very lucrative and worth more than the value of the

audit This is seen to be an inhibitor to independence in the audit; the firm may be persuaded to accept a dubious accounting treatment so as not to lose other valuable work

Accountants in business

Accountants in business need to ensure that they do not prepare financial information in a way that is misleading and does not show a true and fair view of the entity’s operations

Codes of conduct

The professional accountancy bodies want their members to act ethically and so produce ethical codes of conduct which members are required to adhere to These are equally relevant for accountants in practice and accountants in business

1.3 ACCA Code of conduct

The ACCA has published a Code of Conduct which members are expected to comply with It sets out five fundamental principles which should be complied with These are discussed below:

Professional competence and due care

Professional competence requires members to ensure they maintain professional knowledge and skill at the level required to ensure clients or employers receive competent service They must also act diligently in accordance with technical and professional standards when providing professional services

This principle is of key importance as accountants must ensure they are capable and have the ability to deal with a situation If not, then the information that is produced will be of inferior quality and reflects badly not only on the accountant preparing the information but on the profession as a whole

There are two elements to professional competence: (1) achieving competence and then (2) maintaining that competence This is why there is a requirement for continuing professional development (CPD) after qualification

Confidentiality

The principle of confidentiality requires members to refrain from disclosing any confidential information acquired in a business or professional setting without the authorisation to do so, unless there is a legal or professional right or duty to disclose

Additionally, members should not use confidential information acquired through business or professional relationships to make personal gain or gain for third parties

Confidentially does not end at the end of the relationship with the client Members should use their prior experience but not use the confidential information

Professional behaviour

The principle of professional behaviour requires members to comply with relevant laws and regulations and not do anything that could bring discredit to the profession Members should also behave with courtesy and consideration to those they come into contact with in a professional capacity

1.4 Compliance with accounting standards

Compliance with accounting standards is important if the financial statements are to fairly represent the activities of the entity If accounting standards are not complied with, then it may be that the financial statements are misleading Investors then stand to lose money if they have made decisions based on misleading financial information

It is also important that employers have a code of ethics so that employees in a situation where they feel they may have to act unethically have somewhere to go for help Some companies have codes of business ethics so that guidance is there for employees to know how they are expected to act and ask for assistance in an ethical dilemma

Accountants who are responsible for the preparation of financial information must ensure that the information they prepare is technically correct, reports the substance

of the transaction and is adequately disclosed The danger is that they are put under influence from senior managers to present figures that inflate profit or assets or understate liabilities This puts the accountant in a difficult position On one hand, they wish to prepare proper information and on the other hand, there is a possibility they might lose their job if they do not comply with their managers wishes

In this case, ethics starts with the individual preparing the information They have a difficult decision to make; whether to keep quiet or take the matter further If they keep quiet, they will certainly be aware that they are not complying with the ethics

of the accounting body they belong to If they speak out, they may be bullied at

work into changing the information or sacked Many accounting bodies have ethical

‘help lines’ where an individual can ring for advice

A well publicised example of acting about unethical practices occurred in Enron where Sherron Watkins wrote to the Enron chairman and the company’s auditors to alert them of unethical practices in the business Her action caused a chain of events that would see the company go bankrupt and the auditors cease business Enron were hiding losses and liabilities in partnerships that were not consolidated into the group accounts The group had been reporting profits rather than losses for several years The auditors initially ignored the practices; which was to prove to be a fatal error as once the public found out about Andersen’s involvement, the firm lost all of its clients

As a result of corporate accounting scandals in the US, the Sarbanes-Oxley Act was introduced in 2002 It aimed to take a legislative approach to corporate accountability The CEO and CFO are personally responsible for the accuracy of their company’s financial information All companies listed on US stock exchanges must provide a signed certificate to the Securities and Exchange Commission (SEC) confirming the accuracy of their financial accounts

Consequences of unethical behaviour

 The consequences of unethical behaviour

 Exam focus

2.1 The consequences of unethical behaviour

There are many consequences of unethical behaviour and most of them are very serious

 Accountants are expected to be competent, objective and reliable If they are not, then action is likely to be taken, leading to loss of reputation An accountant’s reputation is a very important asset

 Other penalties include prison sentences, fines, and prohibition of holding a director’s position in the future

For example, in the Enron case, many senior managers were given prison sentences and some were ordered to repay money they had gained from the fraud

Another fraud at the US company, Worldcom resulted in prison sentences for senior executives and a 25 year sentence for the CEO

For accountancy firms, there is the prospect of the partners being sentenced to prison sentences and a serious loss of professional reputation After news of the Enron fraud, Arthur Anderson lost its clients which eventually resulted in the winding up of the partnership

The accounting fraud at the Italian dairy company, Parmalat resulted in two audit partners being banned from practising for two years as well as having to make huge compensation payments to Parmalat

2.2 Exam focus

The Examiner has said that ethical and social issues will be dealt with in question 1

of the paper This is a 50 mark question, which is mainly computational and may ask you to consider the ethical implication of a particular situation You will need to think about the right way to act and talk about the ethical principles discussed above

Example

The Finance Director has set up a company, River, through which Zambeze conducts its investment activities Zambeze has paid $400 million to River during the year and this has been included in dividends paid The money was invested in a specified portfolio of investments

Ninety five per cent of the profits and one hundred per cent of the losses in the

specified portfolio of investments are transferred to Zambeze An investment

manager has charge of the company’s investments and owns all of the share capital

of River An agreement between the investment manager and Zambeze sets out the

operating guidelines and prohibits the investment manager from obtaining access to

the investments for the manager’s benefit An annual transfer of the profit/loss will

occur on 30th June annually and the capital will be returned in four years time The

transfer of $400 million cash occurred on 1st January 2012 but no transfer of

profit/loss has yet occurred The statement of financial position of River at 30th

June 2012 is as follows:

River – Statement of financial position at 30th June 2012

$m Investment at fair value through profit or loss 390

Discuss briefly the importance of ethical behaviour in the preparation of financial

statements and whether the creation of River could constitute unethical practice by

the finance director of Zambeze (6 marks)

Answer

Ethics in accounting is of utmost importance to accounting professionals and those

who rely on their services Accounting professionals know that people who use their

services, especially decision makers using financial statements, expect them to be

highly competent, reliable, and objective Those who work in the field of accounting

must not only be well qualified but must also possess a high degree of professional

integrity A professional’s good reputation is one of his or her most important assets

There is a very fine line between acceptable accounting practice and management’s

deliberate misrepresentation in the financial statements The financial statements

must meet the following criteria:

(i) Technical compliance: A transaction must be recorded in accordance with

generally accepted accounting principles (GAAP)

(ii) Economic substance: The resulting financial statements must represent the

economic substance of the event that has occurred

(iii) Full disclosure and transparency: Sufficient disclosure must be made so that

the effects of transactions are transparent to the reader of the financial statements

In the case of River it could be argued that the first criterion may be met because the transaction is apparently recorded in technical compliance with IFRS, but technical compliance alone is not sufficient The second criterion is not met because the transaction as recorded does not reflect the economic substance of the event that has occurred

Accounting plays a critical function in society Accounting numbers affect human behaviour especially when it affects compensation, and to deliberately mask the nature of accounting transactions could be deemed to be unethical behaviour River was set up with the express purpose of keeping its activities off the balance sheet The Finance Director has an ethical responsibility to the shareholders of Zambeze and society not to mask the true nature of the transactions with this entity

Further, if the transaction has been authorised by the Finance Director without the authority or knowledge of the Board of Directors, then a further ethical issue arises Showing the transfer of funds as a dividend paid is unethical and possibly illegal in the jurisdiction The transfer should not be hidden and River should be consolidated

Corporate social responsibility

 Introduction

 Corporate social responsibility explained

 Reporting requirements

 Voluntary CSR reporting

 Consequences of poor track record on CSR issues

1.1 Introduction

Historically, companies have considered themselves responsible to their shareholders by generating dividends and capital growth on their investment More recently, companies have been criticised for striving to maximise profits at the expense of social and environmental concerns, for example, by such means as underpaying their workforce or by abusing their power over their smaller suppliers

to negotiate prices and terms

There is now a widely-accepted view that companies should be answerable to a wider range of ‘stakeholders’ who are taking an increasing interest in their activities They are interested in the good and bad aspects of a company’s operations – its products and services, its impact on the environment and local communities and how it treats and develops its workforce

Many large companies now accept (possibly for commercial reasons) that their responsibilities extend beyond their shareholders to other stakeholders – their employees, the government, the local community and society in general Initiatives include sourcing goods from deprived countries at fair prices, campaigns to promote re-cycling of materials, job-sharing and flexi-time working to improve working opportunities and conditions for employees

In some aspects of reporting and disclosures, many large quoted companies publish

an annual corporate social responsibility report This may be given a different name, such as a social and environmental report or a sustainability report, and is usually published as a separate document from the annual report and accounts, but at the same time

1.2 Corporate social responsibility explained

Corporate social responsibility (CSR) is a term for the responsibility that a company should have towards society and the environment in which it operates

CSR has been defined in various ways:

 It is ‘a concept whereby companies integrate social and environmental concerns

in their business operations and their interaction with their stakeholders on a voluntary basis.’

 ‘While there is no single, commonly-accepted definition of corporate social responsibility … it generally refers to business decision-making linked to ethical values, compliance with legal requirements, and respect for people, communities and the environment’ (Business for Social Responsibility)

An important element of CSR is that it goes beyond compliance with legal and regulatory obligations, and involves voluntary initiatives and investment in people and the environment, and better relations with all stakeholders, not just shareholders and other investors

The practice of CSR increases the transparency and accountability of an organisation Transparency is important as stakeholders want to know about an organisation’s activities (They want to ‘see into’ an entity, to understand what it is doing and which strategic directions it is taking.) For example, if a local community believe that a company is dumping waste in the local area, then it will be important

to understand what is actually happening

Likewise, the company needs to accept that it is accountable for its actions Stakeholders believe that they have a right to know whether a company is acting in the best interests of society and the environment and wish to understand what the company is doing to remedy any faults

With the exception of the disclosures in the business review, described above, UK companies are under no obligation to report on the corporate social responsibility policies or initiatives However, many listed companies now publish voluntary annual reports on CSR They may be called social and environmental reports or CSR reports, and are usually published each year at the same time as the annual report and accounts but in a separate document or booklet These reports set out their ethical values and commitment to CSR principles, and describe what they have done in this area during the financial year

A CSR report might be largely descriptive, providing narrative descriptions of how the company has contributed to reductions in waste or pollution, promoting sustainable business or engaging in charitable activities and community development activities

There is now growing recognition of the need to provide social and environmental information as quantified performance measurements, so that actual achievements can be assessed better against targets or benchmarks Sustainability reports provide quantified measurements of performance in three areas of achievement: financial performance, social performance and environmental performance Since these reports provide quantified performance measurements or results, sustainability reports are also described as triple bottom line reporting

Scope of CSR

CSR covers the following areas:

 ethical behaviour by a company and its employees (business ethics)

 the treatment of employees by the entity (employer)

 the treatment of human beings generally (for example, respect for human rights, refusing to use suppliers who employ slave labour or child labour, and so on)

 the entity’s relationship with society at large, and the communities in which it

 environmental issues, such as the responsibility of companies to protect and sustain the natural environment

Possible approaches

CSR issues are not the same for each company, because companies operate in different environments However, for most companies there are some CSR issues, which they might deal with in any of the following ways:

 they might ignore the issues, regardless of the effect of any bad publicity on their reputation and public image

 they might comply with legislation and regulations on CSR issues, but do very little of a voluntary nature

 they might seek to promote active CSR initiatives, which will probably involve communicating information about these initiatives both to shareholders and the general public

European Union

Denmark and the Netherlands require mandatory environmental reporting and other countries such as Sweden and France require environmental information to be published alongside the financial information in the annual report

In the European Union, quoted companies are now required to present certain information in the annual directors’ report, as a narrative business review This review should contain information about the main trends and factors likely to affect the future development, performance and position of the company’s business, and information about:

 environmental matters (including the impact of the company’s business on its environment)

 the company’s employees

 social and community issues

The review should also include:

 analysis using financial key performance indicators, and

 where appropriate, analysis using other key performance indicators, including information relating to environmental matters and employee matters

In the UK, for example, the government has issued guidance on key environmental performance indicators, including 22 quantifiable performance measures relating to emissions into the air, emissions into the water, emissions into the earth and the use

of non-renewable resources

Since the business review is a part of the annual directors’ report, the external auditors are required to give an opinion on whether the information in the report is consistent with the financial statements

However, this requirement for a business review applies only in the EU, not internationally

1.4 Voluntary CSR reporting

Because of the potential importance of CSR issues for their reputation and public image, many large companies voluntarily publish an annual CSR report This is often called an Environmental Report, or a Social and Environmental Report The intended users of social and environmental reports, or environmental, social and governance (ESG) reports, include other stakeholders in addition to shareholders The IASB is happy for companies to present such information, but does not prescribe the content or the format of reports As a result, the length and style of such reports differs significantly between companies, and the content can vary substantially for companies in different industries

Some companies include their report on social and environmental issues as part of their financial statements (normally in the directors’ report), whereas other companies publish a report as a separate document Preparing the information as a separate document helps to distinguish between the readers; the annual report is designed for the shareholders, whereas the corporate social responsibility report is prepared for the other stakeholders in addition to the shareholders

Contents of an environmental report

Typically, an environmental report will include an outline of:

 the entity’s policies towards environmental issues

 any improvements since previous years

 an assessment of the key risks faced and how the company intends to respond

 government legislation on environmental matters and how the entity ensures compliance with the legislation

 significant initiatives taken by the company to improve environmental issues

 key environmental performance indicators: targets of the industry and the relative performance of the entity

 financial information relating to environmental costs, including the entity’s accounting policy

Contents of a social report

A social report (which may be combined with the environmental report) may refer to:

 employee numbers and employee involvement;

 employee sick leave, health and safety issues, accidents at work, recruitment of ethnic minorities and the disabled;

 involvement with local charities and local communities;

 working groups to communicate with stakeholders;

Voluntary guidelines for the content of social and environmental reports

The information provided does not have to be audited, but most organisations will request some kind of audit on the information before it is published to enhance its credibility

Even so, since the content of these voluntary reports is not regulated and not audited, companies can include whatever they choose (the ‘good news’) and omit whatever they do not want in the report (the bad news) For this reason, voluntary environmental reports have been treated with some caution by readers

Although there are no international standards on CSR reporting, there is a strong trend towards the provision of more information, on a statutory or a voluntary basis, and this trend in corporate reporting can be expected to continue in the future

UN Global Compact

There has been a significant increase in the demand by major institutional investors for companies in which they invest to pursue social and environmental policies One such initiative was launched by the United Nations, with the support of 32 major international institutional investors

The UN Global Compact issued the Principles for Responsible Investment The ten

principles are intended to encourage institutional investors to give attention to environmental, social and corporate governance issues when making their investment decisions

The UN Global Compact states that companies should be encouraged by their shareholders to provide disclosures on environmental, social and corporate governance issues – in other words, to report on these issues

The ten principles are that businesses should:

 support and respect the protection of international proclaimed human rights within their sphere of influence;

 make sure that they are not compliant in human rights abuses;

 uphold the freedom of association and the effective recognition to the right of collective bargaining;

 uphold the elimination of all forms of forced and compulsory labour;

 uphold the effective abolition of child labour;

 eliminate discrimination in respect of employment and occupation;

 support a precautionary approach to environmental challenges;

 undertake initiatives to promote greater environmental responsibility;

 encourage the development and diffusion of environmentally-friendly technologies;

 work against all forms of corruption, including extortion and bribery

1.5 Consequences of poor track record on CSR issues

It is important to understand how a company might suffer financially from a poor track record on CSR issues:

 Bad publicity about social and environmental issues could damage the public image of the company and its brands (‘brand reputation risk’)

 Companies may be affected by preferences of stakeholders, for companies with positive policy objectives on social and environmental issues There are some investment organisations that focus on these issues More significantly, perhaps, high-quality employees may prefer to work for ‘ethical’ companies

Companies also need to understand the growing significance of CSR for many institutional investors For example, the UNEP Finance Initiative (UNEP is the United Nations Environment Programme) has over 200 members from the financial services sector, such as banks and investment institutions The aim of this initiative

is to promote a set of principles that define best practice for responsible investment

by institutional investors that have the full support of the UN and also of leading institutional investors worldwide

A view underlying the initiative is that institutional investors should make sustainable development an issue when making decisions on investment in companies The UN Global Compact, which launched the UNEP Financial Initiative, has stated: ‘Institutional investors with clear information on company behaviour can take action, via proxy voting and other means, to pressure companies not to focus

on short-term gains at the expense of long-term performance particularly in developing and developed nations.’

In the UK, the Association of British Insurers updated its guidelines and issued

‘Responsible Investment Disclosure Guidelines’ These are directed at listed companies, and specify information about environmental, social and governance issues that they should be expected (as a minimum) to disclose

Sustainability reporting

 Introduction

 Sustainability

 Sustainability reporting

 Global Reporting Initiative

 The Sustainability Accounting Standards Board (SASB)

 Other bodies

2.1 Introduction

CSR is also associated with the concept of sustainable business development, which

is the view that businesses should seek to develop in a way that can be sustained into the future, without depleting the earth’s natural resources or causing irrecoverable environmental damage

Companies that are seen to cause damage to the environment may suffer from a loss

of reputation among customers, suppliers and government This can have implications for fines and other penalties, civil legal action, lost contracts, clean-up costs and possibly falling sales

The impact on oil group BP of the explosion at a drilling rig in the Gulf of Mexico in

2010, and the subsequent environmental damage it caused, is a clear example of the potential risks and the need for companies to consider social and environmental issues, particularly in industries such as oil extraction, mining and energy production

Interest in sustainable development has come from several sources:

 governments, concerned about the implications for society of environmental damage and loss of natural resources;

 investors, many of whom now consider the ethical, social and environmental implications of the investments they make (‘socially responsible investment’ or SRI);

 companies themselves, who may identify business opportunities – developing new products or reducing costs – in environmentally-friendly initiatives

For example in 2009, Mars announced a strategy for producing its entire cocoa supply in a sustainable manner by 2010

Pharmaceuticals group GlaxoSmithKline announced targets to cut waste in medicine production at its factories by two-thirds by 2015

2.2 Sustainability

The concept of sustainability is that organisations and individuals should meet their own needs today without compromising the needs of future generations It requires organisations and individuals to preserve the environment and better serve society

at large

More and more companies are recognising the need to make their operations more sustainable Over the past twenty years or so the number of organisations that have made sustainability a key strategic focus has increased significantly

This increase is due to a number of factors, including:

 a broader understanding and acceptance of the links between economic activity and global sustainability issues;

 a recognition of the risk-management and economic benefits that organisations can gain from integrating sustainability into their strategies; and

 a growing demand from stakeholders, including investors, customers, employees and NGOs, for organisations to manage their operations in a more sustainable manner

Also some governments and regulators have required companies to report on their environmental and social impacts

Companies can enhance their value by developing an understanding about the connections between sustainability and business and communicating this to their stakeholders This also allows companies to drive improvement and innovation

Greater transparency on sustainability and the consequent attention to sustainability issues is of benefit to both companies and their stakeholders

Experience has shown that the process of sustainability reporting can add value in a number of ways, including:

 increased efficiency;

 higher levels of employee retention; and

 lower cost of capital

A number of organisations have produced codes of practice and guidelines for companies to follow, but to date these are non-mandatory This can lead to problems in comparability of the content of these reports, although having the information in the annual report is better than not disclosing at all

Two such organisations are The Global Reporting Initiative and The Sustainability Accounting Standards Board

2.4 Global Reporting Initiative

The Global Reporting Initiative (GRI) promotes the use of sustainability reporting as

a way for companies and organisations to become more sustainable and contribute

to a sustainable global economy

GRI is an international not-for-profit organization whose mission is to make sustainability reporting standard practice

GRI publish one of the most influential set of guidelines , the Sustainability Reporting

Guidelines

These guidelines were originally published in 1999 have been revised to become the G4 (fourth generation) guidelines Many large international companies have registered to use these guidelines and links to their reports can be found on the GRI website (www.globalreporting.org) G4 is designed to be universally applicable to all businesses of all types, across the world

G4 states that “A sustainability report conveys disclosures on an organization’s most critical impacts on the environment, society and the economy By using the Guidelines, reporting organizations can generate reliable, relevant and standardized information with which to assess opportunities and risks, and enable more informed decision-making – both within the business and among its stakeholders” G4 is a consolidated framework for reporting performance against different codes and norms for sustainability and includes references to other global frameworks including:

 OECD Guidelines for Multinational Enterprises;

 the UN Global Compact Principles; and

 the UN Guiding Principles on Business and Human Rights

G4 is issued in two parts The first of these sets out the reporting guidelines and the second provides implementation guidance In order to adopt the guidelines an organisation must:

 identify its material aspects, based on impacts and the expectations of stakeholders;

 indicate clearly where impacts occur (boundaries)

 decide between one of two “in accordance” levels;

 describe its approach to managing each of its material aspects;

 report indicators for each material aspect according to the chosen “in accordance” option

Each of these will be dealt with in turn

Aspects and boundaries

The preparation of a G4 report starts with the process of defining material aspects

and boundaries

Subjects covered by the guidelines are called “aspects” Aspects are described across

the following categories:

 economic;

 environmental;

 social – sub-divided into:

 labour practices and decent work;

Environmental Labour practices etc Human rights

Materials Health and safety Non-discrimination Energy training and education Child labour

Water diversity and equal

opportunity Forced labour Emissions Equal pay for men and

and decisions of its stakeholders

Once an organisation has identified its material aspects, it must assess whether the

impact of each one lies inside or outside the organization This is the “boundary”

 this option contains the essential elements of a sustainability report and

provides the background against which an organisation communicates its economic, environmental, social, and governance performance and impacts

 Reporting on the management approach related to its material aspects is an

essential requirement

 An organization must report at least one Indicator for all identified material aspects

 comprehensive

 This requires the core disclosures with additional disclosures about strategy, governance, ethics and integrity

 All Indicators for all identified material aspects must be reported

This choice is based on which best meets their reporting needs and those of their stakeholders

The options reflect the degree to which the guidelines are applied

Disclosures

There are two kinds of disclosures in G4:

 General standard disclosures:

 these set the overall context for the report, providing a description of the organisation and its reporting process

 There are seven types of general standard disclosures, including

 the organization’s strategic perspective on addressing sustainability issues;

 how it involves stakeholders in this process; and

 how it approaches key issues such as governance and ethics and integrity

 Specific standard disclosures which are divided into two areas:

 The disclosures on management approach (DMA) explain how material aspects (economic, environmental or social impacts) are managed, thus providing an overview of its approach to sustainability issues The DMA focus on three things:

 describing why an aspect is material,

 how its impacts are being managed; and

 how the approach to managing this aspect is being evaluated

 Indicators which allow companies to provide comparable information on their economic, environmental and social impacts and performance