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Issue 10 | December 2015
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At-A-Glance
Over the past year, the Audit &
Accounting Alert has showcased various
technology developments that present
both challenges and opportunities for an
accounting profession striving to
maintain relevance in an increasingly
complex and diverse world. Our first
article highlights a new report by the
Institute of Chartered Accountants in
England and Wales (ICAEW) that
reinforces the call for accountants to
focus on the rapidly advancing
technology age.
Following the ICAEW’s lead, our
second article describes an emerging
service where the use of innovative
technology tools can position
accountants as a key advisor for
clients. Integrated thinking and
reporting expand a company’s reach far
beyond mere financial reporting, to
predict and measure other critical
factors that will impact future
potential and sustainability.
Finally, in our third article
we return to the familiar confines of
traditional accounting, as we anticipate
the long awaited new financial standards
for leases. Both the FASB and IASB are
putting the finishing touches on their
pronouncements. While they will differ
in some respects, they both call for the
placement of lease related assets and
liabilities on the balance sheet.
Editor Gerald E. Herter, CPA |
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In This Issue
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The Path to Future Relevance for Accountants
Wide ranging study sounds the alarm and points
the way
Over the past year, the Audit & Accounting
Alert has addressed various aspects of rapidly
changing technology and the need for accountants
to pay close attention to those changes, or risk
descending into irrelevance. The warnings
continue to come, while also offering avenues of
support for keeping pace.
The ICAEW (Institute of Chartered Accountants
in England and Wales) has now taken up the
challenge with a new report titled Providing
Leadership in a Digital World, published on
October 29, 2015. The report identifies
technology trends, their applicability to the
accounting profession, steps to be taken by
accountants, and specific ICAEW plans to lead
and engage the various stakeholders toward a
successful digital future.
The ICAEW has been serving its members since
1880, seven years before its American
counterpart, AICPA, was established. As such,
the ICAEW and AICPA have seen a number of
transformations in the accounting profession
down through the decades. As each advance in
industrialization and technology has taken
place, a common fear was that accountants would
be rendered obsolete by automation and
“labor-saving” devices. Thus far, accountants
have instead been freed up from mundane tasks
that are better done by machines. Their talents
have then redirected to the more complex aspects
of analysis and management guidance. Whether the
profession fares as well this time around
remains to be seen.
The report identifies technology trends with
regards to 1) data, such as artificial
intelligence, 2) interaction, such as mobile
access, and 3) financial technology, such as
Bitcoin and digital wallets. Then these trends
are applied to the accounting profession showing
how they provide drivers and barriers, impact
business processes, as well as the way
accountants operate.
From here the report describes skills and
services that will be needed to succeed in the
future, and the methods and changes required for
attaining the new expertise. Finally, the report
presents three approaches that ICAEW will put in
place to facilitate progression to the advanced
digital world.
The trends identified are summarized as
follows:
1. Data
- a. Big data and analytics;
- b.
Automation, including artificial intelligence;
- c. Cyber security;
- d. Data standards, including
XBRL;
2. Interaction
- a. Cloud computing;
- b.
Mobile;
- c. Online services;
- d. Social media;
3.
Financial technology
- a. Cryptocurrencies and
distributed ledger systems;
- b. Payment systems
and mobile money;
- c. Platforms;
- d.
Analytics-based financial services.
Many of the above trends have been covered by
the Audit & Accounting Alert over the past year.
For example, refer to the February, 2015 issue
for “Big Data is Transforming the Audit and
Accounting World,” the March, 2015 issue for “Is
Your Data Secure,” the April, 2015 issue for
“Bitcoin: A Fad or the Future for Business,” the
August, 2015 issue for “The Internet of Things,”
and the November, 2015 issue for “Cybersecurity
in a Mobile World.” These articles illustrate
ways in which business processes are changing
and in some cases how forward-looking
accountants are adapting.
Some of the drivers arising from the trends
are the demands from users for better and
quicker data, the expectations of emerging
staff, new regulatory requirements, and the
business benefits. Some of the barriers are old
systems, people issues, lagging standards, and
cost.
To position for the future, the report
encourages accountants to “deliver valuable
accounting tasks and services, build
differentiated skills, and encourage responsive
organisations,” The new valued services, for
example, could utilize new data sources, perform
predictive modeling, address assurance of
non-financial data, leverage the profession’s
strong ethics reputation to provide privacy and
data protection services, and gain access to new
markets internationally.
Since advanced artificial intelligence
techniques, such as machine learning algorithms
(MLA) and natural language processing (NLP), are
moving automation to sophisticated levels not
seen before, accountants need to “concentrate on
areas which remain difficult to automate, such
as where human judgement or a deep understanding
of the business environment is required, or
where tasks depend on the knowledge and
application of highly complex rules.” In
addition to the current level of business
familiarity, the new focus will require stronger
technical and statistical skills, which in the
past may have been delegated to technology
experts. In turn, firms will need to respond by
offering the resources and support for staff to
attain the requisite skill levels.
Working with their membership and the
profession, the ICAEW will take a leadership
role as: 1. A trusted information source –
employing the organization’s longstanding IT
Faculty to support individuals; 2. An
institutional partner – interacting with
governmental, professional and regulatory
bodies; and 3. A hub for innovative thinking –
through initiatives like Tomorrow’s Practice,
which “focuses on the evolution of accountancy
practices, based on input from different
stakeholders.”
For further information, see
Providing Leadership in a Digital World.
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Creating Value With Integrated Thinking
New report lays out the role of professional
accountants
The preceding article asserts that for
accountants to remain relevant in the future,
consideration should be given to services
requiring “a deep understanding of the business
environment.” Integrated thinking is one area
where this capability can be employed for the
long term benefit of companies and clients. On
November 3, 2015, the International Federation
of Accountants issued a thought paper,
Creating Value with Integrated Thinking: The
Role of Professional Accountants,
to guide accountants in public and private
practice.
Two years have passed since the release
of the International Integrated Reporting
Framework. As we noted in our update article in
January, 2015, “the primary purpose of an
integrated report is to explain to providers of
financial capital how an organization creates
value over time. An integrated report benefits
all stakeholders interested in an organization’s
ability to create value over time, including
employees, customers, suppliers, business
partners, local communities, legislators,
regulators and policy-makers.”
Furthermore, as Alta Prinsloo, IFAC’s
Executive Director, Strategy and Chief Operating
Officer, stated at that time: “Integrated
thinking means that integrated reporting is
inextricably connected to the organization’s
management processes concerning resources,
relationships, risks, and opportunities—in both
strategy and daily management.” (Alta Prinsloo,
IFAC, 11/25/14).
As our world becomes progressively more
complex and interdependent in multiple ways,
financial reporting has been found lacking in
the breadth and depth of information needed to
assure success in creating value for the long
term. In recent months, notable accounting
Professors Paul Miller and Paul Bahnson have
been going back and forth with former IASB
member Paul Pacter, over the future success of
International Financial Reporting Standards
(IFRS) in promoting global capital market
efficiency. The professors were quoted as
stating "International accounting standards are
both undesirable and infeasible for many
reasons." Pacter counters pointing out the
already widespread worldwide acceptance and
consistency of IFRS.
Though IFRS may indeed have achieved broad
recognition, the financial reporting focus may
prove to be a limitation on the standards’
usefulness, ultimately. Unless companies and
their accountants expand their focus beyond
financial reporting to the other critical areas
that directly impact the prospects for success,
their future survival and relevance will be put
at risk.
The integrated thinking model encompasses six
types of capital that need to be considered:
- Financial;
- Manufactured
- Intellectual
- Social and relationship
- Human
- Natural.
Financial and manufactured capital are the
easiest for companies and accountants to measure
and report on, since they lend themselves
readily to quantification and measurement. These
are the capitals traditionally reflected and
compared in annual reports. Intellectual, social
and relationship and human capital relate to
various physical and non-physical aspects of
knowledge contribution, interaction, and
individual conditions in the wider reach of
society as, well as the workplace. Some of these
factors can be more difficult to measure using
conventional measures, and therefore call for
more innovative approaches. Natural capital
refers to materials drawn from the environment,
which may or may not be depleting, causing a
separate set of challenges.
Since these other capitals need to be
addressed, the accounting discipline is well
suited to assist with devising methodologies
that produce useful, consistent and credible
reporting mechanisms. As the report states,
“professional accountants can facilitate an
understanding of value creation through their
information collection, analysis, and
decision-support activities, which ultimately
help move toward integrated reporting…By
directly contributing to an organization’s
efforts to sustain and create value in a broader
perspective than traditional finance and
accounting measures, professional accountants
can be perceived as more fully meeting the needs
of their employers and of society.”
Two examples from the report describe
strategies employed by Nestlé and The UK Crown
Estates. Nestlé’s is called “Creating Shared
Value.” Nestlé takes the position that for
long-term success, the company must create value
for society while creating value for
shareholders. To fulfil that strategy, the
company has laid out 38 commitments focused on
nutrition, rural development, water,
environmental sustainability and our people,
human rights and compliance. There are plenty of
opportunities in these commitments for
accountants to employ their skills in devising
effective reporting tools.
The UK Crown Estate’s strategy is called
“Total Contribution.” The environmental, social,
and economic impact of its operations are
measured and reported. This information
demonstrates both how the components are managed
by the organization and how they create value
both for the business and society.
Following these examples, companies will
first need to accept and determine which of the
capitals will have a bearing on their continued
well-being, and then devise an integrated plan
that puts them in the forefront of their
strategies for the future.
The report lists a variety of resources for a
more in depth look at Integrated Thinking. Also,
IFAC will be launching an <IR> Accountancy Body
Network later this year in conjunction with the
IIRC. The Network will focus on exchanging
ideas, knowledge, experiences, and resources
between accountancy bodies on matters related to
Integrated Reporting.
For further information, see
IFAC Releases New Thought Paper Setting Out a
Vision for Integrated Thinking.
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New Lease Standard to be Issued Soon
FASB and IASB are finalizing separate standards
with similar concepts but differing approaches
More than a year had passed since the
accounting for leases was covered in the
September 2014 Audit & Accounting Alert. But at
last the new standard is expected anytime now by
the IASB and in early 2016 by the FASB.
Considering that the boards have been wrestling
with the lease issue since 2005, when the SEC
asked for better guidance, the imminent release
of a final standard is a major milestone.
While both boards have agreed to the overall
concept of reporting leases on the balance sheet
as assets with corresponding liabilities, the
boards differ as to the model for accomplishing
that goal. The FASB will retain the two model
approach for lessees that was described in the
2013 exposure draft. Under this approach, Type A
leases, which current accounting considers
capital or purchase leases, will have the
right-of-use portion of the balance sheet asset
amortized as an expense using a straight line
basis. The financing portion of the balance
sheet liability will produce a separately
reported interest expense. Type B leases,
currently considered operating leases, will have
the periodic lease costs amortized as a single
expense using a straight-line method.
The IASB approach will consider all leases
the same, using a one model approach. The lease
costs will all be reported in a similar fashion
as FASB Type A leases, with both amortization
and interest expenses reported on the income
statement.
Lessor lease accounting under both boards
will be similar to the current standards, which
already use an approach that corresponds to the
Type A and Type B model above. Also, leases with
terms of a year or less will be exempt from the
standard, and groups of leases with comparable
characteristics can be reported collectively as
a portfolio.
Paving the way for the new standard, the IASB
in October 2015 released an update titled
Definition of a Lease. The definition, which
will be reflected in the standard, states that
“a lease is defined as a contract, or part of a
contract, that conveys to the customer the right
to use an asset for a period of time in exchange
for consideration.” With regards to identifying
a lease, the update indicates that “a lease
exists when the customer controls the use of the
identified asset throughout the period of use.
This is when the customer has the right to: 1)
Obtain substantially all of the economic
benefits from use of the identified asset
throughout the period of use, and 2) Direct the
use of the identified asset throughout that
period.”
In addition to expanding on the definition
and identification of a lease, the update
provides useful illustrative examples for
applying the criteria to various types of assets
and their uses, such as rail cars, concession
space, fiber-optic cable, retail units, trucks,
ships, aircraft, contracts for shirts, contracts
for energy, and contracts for network services.
The effective date for the new standard is
expected generally to be 2019. The standard is
anticipated to apply to non-public companies as
well as public entities, with no significant
differences.
For further information, see
FASB Votes to Proceed with Final Standard on
Leases and
Definition of a Lease.
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Audit & Accounting Alert
is a publication of Integra International intended
to highlight emerging issues in the profession.
The goal is to give Integra members an awareness
of developments impacting the practice of Audit &
Accounting, enabling them to stay on the forefront
of industry trends.
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Editor Gerald E. Herter •
HMWC CPAs & Business Advisors, 17501 E. 17th
Street, Suite 100, Tustin, CA 92780-7924
• Tel: 1 714 505-9000 • Fax: 1 714 505-9200 •
Email:
[email protected]
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