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Issue 3 | March 2016
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At-A-Glance
The accelerating pace of business
activity requires an ever more deft set
of skills to assure success. A new
survey described in our first article
highlights the struggles and successes
companies are having in adapting their
decision making processes to the rapidly
changing dynamics.
Meanwhile, the International
Federation of Accountants (IFAC), in a
new report, expresses concern that the
effectiveness of global financial
reporting standards may be undermined by
the inconsistent and fragmentary
regulatory standards that characterize
the multitude of individual
jurisdictions. Our second article
summarizes IFAC’s call for action.
Finally, with effective dates
steadily approaching for major new
financial reporting standards, such as
revenue recognition and the newly
released standard on leases, Big Four
accounting firms are finding that many
of their clients have been slow to make
necessary preparations. Our third
article reviews the status.
BREAKING NEWS:
The Financial Accounting Standards Board
(FASB) on February 25, 2016, issued
Accounting Standards Update 2016-02,
Leases, increasing the pressure for the
preparations called for in our third
article. Also, see the December, 2015,
Audit & Accounting Alert for an overview
of both the FASB and International
Accounting Standards Board (IASB) lease
pronouncements.
Editor Gerald E. Herter, CPA |
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In This Issue
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New Era Decision Making Requires a More Robust
and Nimble Approach
Joint CIMA/AICPA Survey reveals struggles and
successes
In the December, 2015, Audit & Accounting
Alert, we described a vision for new
professional accounting services, as put forward
in an International Federation of Accountants
(IFAC) thought paper: Creating Value with
Integrated Thinking. Now a February, 2016
survey, jointly commissioned by the Chartered
Institute of Management Accountants (CIMA) and
the American Institute of Public Accountants
(AICPA), has confirmed that many companies are
struggling to adapt decision making processes to
a world “characterised by volatility,
uncertainty, complexity and ambiguity.” The
survey report, Joining the Dots: Decision Making
for a New Era, notes that the successful
minority are the ones that have embraced
integrated thinking.
Many companies are experiencing significant
difficulties in the following areas:
- Overcoming bureaucracy to achieve
agile decision making;
- Building greater levels of trust
and improving collaboration;
- Taking a long-term view and
defining the right metrics;
- Turning huge volumes of data into
strategic insight; and
- Building the decision-making
skills of senior leaders.
For the first three areas, at least 70% of
respondents indicated less than optimal results
in some aspect, while in the realm of turning
data into insight, “an overwhelming 80% of
respondents admit that their organisation used
flawed information to make a strategic decision
at least once in the last three years.”
The minority, called “integrated thinkers,”
demonstrated business performance that was
consistently above industry peers, made
decisions that were highly effective, had one or
fewer failures because of delays, and one or
fewer cases of flawed information.
The survey report attributes the success of
the integrated thinkers to their implementation
of the four Global Management Accounting
Principles, as promulgated by the aims of the
Chartered Global Management Accountant (CGMA):
- Influence – Communication provides
insight that is influential;
- Relevance – Information is
relevant;
- Trust – Stewardship builds trust;
- Analysis – Impact on value is
analyzed.
Integrated thinkers apply these
principles by working to break down silos and
bureaucracy within the company, making relevant
information available on a timely basis,
bringing transparency and accountability that
balances short term and long term objectives,
and relating company strategy to the business
model.
The report goes on to provide case studies
and examples to show specific ways companies are
succeeding in each of these areas. Two case
studies in the report illustrate the importance
of taking the long view and building trust
through collaboration.
The danger of short-term thinking, driven by
quarterly earnings reports, has been pointed out
in previous issues of the Audit & Accounting
Alert. The volatility in the energy industry
provides a good case in point. Royal Dutch Shell
has a separate business unit, Shell Scenarios,
that sets the agenda for the enterprise over the
short, medium and long term. As Royal Dutch
Shell CFO, Simon Henry, explains “We developed a
programme of scenario analysis to look at
alternative societal, political, economic and
business developments, and then to place the
energy industry in that context over a 30- to
40-year period looking forward.” Experts from
inside and outside the company, and from all
over the world, are brought together to
formulate two or three directions the world may
take. Then a plan for how Shell would respond to
each is devised. 10-15 year medium range plans,
detailed on a three year basis, address how to
best to compete within these scenarios.
Benchmarks measure the plans annually to keep
them on track.
The importance of building unquestioned trust
is a key quality that those of us who have
served in the military know well. However, trust
is not built in isolation. As Patrick Conway,
Chief Knowledge Officer at US Army Training and
Doctrine Command, stated in the report, “There
are some organisations that will gather a lot of
information, and then a select few individuals
will make ‘boardroom-like’ decisions. While
sometimes that’s necessary, it’s really more
about decentralising the decision-making process
down to lower levels, enabled with tools such as
collaboration platforms and scalable dashboards,
that allows each level of the organisation to
view itself and see how it is progressing.”
After communicating the overall goals and
direction of the company, empowering individuals
at all levels to fulfill their specific aspect
of the mission builds ownership and enhances
trust.
For further information, see
Joining the Dots: Decision Making for a
New Era
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From Crisis to Confidence: A Call for
Consistent, High-Quality Global Regulation
New IFAC report contends that more is not
necessarily better in the world of regulation
The results of a December, 2015 roundtable of
participants, drawn from regulatory authorities,
financial markets, academia, listed companies,
investment funds, and the accounting profession,
led to the February, 2016, IFAC-sponsored
report: From Crisis to Confidence: A
Call for Consistent, High-Quality Global
Regulation.
As if anticipating the call, the United
Kingdom’s Financial Reporting Council (FRC)
chief executive, Stephen Hadrill, stated to his
constituents “it was important to ensure changes
introduced to the body's codes and standards
functioned correctly before any further change
takes place.” (Accountancy Age, February 11,
2016). Considering the magnitude of recent
changes, a shift in emphasis to evaluating
compliance makes sense for the time being.
In recent years, much discussion has taken
place weighing the successes and challenges the
International Accounting Standards Board’s
(IASB) has faced in the push to attain
universally accepted International Financial
Reporting Standards (IFRS). The IASB has made a
point of stressing that differences in
implementation of IFRS between jurisdictions
have resulted in few localized variations, and
that these are diminishing over time.
Even so, talk about regulatory enforcement of
the standards has typically focused on
individual countries, rather than on a global
perspective. Success of global IFRS will depend
as much on how well the standards are enforced
in the various jurisdictions.
Addressing this concern is the objective of a
new academic study published February 5, 2016,
by Gary Kleinman, Beixin Betsy Lin and Rebecca
Bloch, titled: Accounting Standards
Enforcement in an International Setting: Testing
the Impact of Cultural, Religious, Political and
Legal Environment on National Regulatory Efforts.
As the summary abstract states, the study was
“seeking to understand whether the often
advocated widespread adoption of any set of
international standards can provide the link in
comparability across nations that proponents
have been calling for. Rather than focusing on
the standards themselves, this study focuses on
the hypothesized determinants of variation in
enforcement efforts across nations. The results
indicate that there are systematic differences
in enforcement based on underlying cultural,
religious, political and legal environment
differences.” Thus, the study confirms the
IFAC’s concern that the current “patchwork [of]
regulation poses issues for growth and risk.”
The IFAC report sees the solution in “a
series of principles for financial regulation
that foster growth, derived from a broad review
of existing pronouncements on regulation that
have been made by international organizations.”
Here are the ten principles for high quality
financial regulation that IFAC is calling on all
national regulatory bodies to adopt:
- Clear Objectives in the Public Interest
– that all agree on;
- Proportionate and Balanced
Approach – with regulations that apply to
all types of organizations and that are
scalable;
- Evidence-Based Assessments – of
new regulations for effectiveness, as well
as for financial and time costs;
- Appropriate Resourcing – in
proportion to the complexity and scale of
global oversight;
- Collaborative Action – promoted
through new incentives;
- Consistent and Coherent – across
multiple jurisdictions;
- Transparent and Open Consultation
– between all parties during the development
process;
- Active Oversight – that is also
independent;
- Systematic Review – that
facilitates evaluation and streamlines
changes as needed;
- Deliberate Enforcement – that is
fair and visible.
The International Organization of Securities
Commissions (IOSCO) is one organization that can
influence regulators around the world in
progressing toward these goals. One example of
the work IOSCO is doing in this regard is
covered in the final report of the IOSCO Task
Force on Cross-Border Regulation, published in
September, 2015. While acknowledging
accomplishments already attained, the report
“presents a series of concrete next steps aimed
at supporting cross-border regulation and
embedding the consideration of cross-border
issues more effectively into IOSCO´s work.”
For further information, see
From Crisis to Confidence: A Call for
Consistent, High-Quality Global Regulation.
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The World Braces for Impact of New Accounting
Standards
Implementation of monumental financial reporting
changes looms on the horizon
Though global acceptance of the need for
consistent, standardized financial reporting
standards is further along than the regulatory
process covered in the preceding article, the
significance the impending reporting changes
will have on the financial world has only
started to sink in. With operative dates
approaching, preparers and users of financial
reports cannot delay the needed preparations
much longer.
Some of the biggest revisions to the
standards involve revenue recognition and
leases. The IASB and the Financial Accounting
Standards Board (FASB) are pretty much in
agreement on the revenue accounting standard
issued in 2014, which generally goes into effect
for public companies in 2018 and for others in
2019. The lease standard, issued recently by the
IASB and just last week by the FASB, becomes
effective a year later. Though putting leases on
the balance sheet was agreed to by both boards,
income statement treatment will differ.
A survey conducted at KPMG’s 25th Annual
Accounting & Financial Reporting Symposium in
January, 2016, found that “less than 29 percent
of corporate financial preparers say their
companies have a clear plan to implement the new
revenue recognition standard, with less than 13
percent of the respondents saying they have
completed an assessment of the effects of the
new standard and are planning implementation…
Regarding the newly released leasing standard,
less than 13 percent say they have a clear plan
for implementation.”
Feedback from participants of Deloitte’s
revenue accounting seminars in the last few
months of 2015 indicated that while companies
acknowledge that significant changes are likely
needed for systems, processes and controls,
almost 50% have not started implementation and
87% have not established a budget for
implementation.
The broad base of changes promulgated by the
revenue accounting standard has generated plenty
of work for the Transition Resource Group,
resulting in several clarifying amendments.
Also, since industry specific guidance is not
included in the standards, the AICPA continues
to address specific issues for sixteen diverse
industries, which will be published as an
Accounting Guide on Revenue Recognition. Working
Drafts have thus far been released for Aerospace
and Defense entities as well as Investment Asset
Management entities.
The new lease accounting standards will also
be felt far and wide, though to a different
extent depending on industry and region. When
releasing IFRS 16 Leases in January 2016, the
IASB estimated that public companies have $3.3
trillion of lease commitments, of which 85% are
off balance sheet. The industries most heavily
hit appear to be airlines, retail,
communication, travel/leisure, and the companies
that lease to them. Also, a large proportion of
smaller companies lease property and equipment.
For larger companies, analysts and bankers
have for a long time taken into account the
effects of off balance sheet leases, using
information from footnote disclosures. Less
sophisticated investors may be less adept at
evaluating the changes. In many cases, loan
agreements, covenants, incentive compensation
plans, and other contractual documents will need
to be reassessed for unexpected or unintended
consequences arising from the new accounting.
Even though 2018 is the first year for public
companies to apply the new revenue accounting
standard, for those companies adopting the full
retrospective transition method, the first year
of application has already begun with 2016. For
the lease standard, though 2019 may seem like a
long way off, some companies issuing comparative
financial statements may need to implement that
new standard as early as 2017.
Additional complexity is added to the
financial reporting mix in the area of financial
instruments. Originally a joint project of the
IASB and FASB, the Boards went their separate
ways after implications of the 2008 financial
crisis led to disagreements. The IASB completed
the final aspects of the comprehensive financial
instruments standard, IFRS 9, in 2014, while the
FASB ultimately settled on three separate
pronouncements: recognition and measurement,
impairment, and hedging. The first was issued in
January, 2016, with second expected in coming
months, and the third at the exposure draft
stage. Repercussions from these standards could
be considerable, especially for some elements of
the financial services industry.
For further information, see
KPMG Poll of Corporate Financial Executives.
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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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