ADAA IFRS Compendium 2017

Topic Issue Publication Page

IASB Practice Statement 2

The law of unintended consequences. PS 2 requires information to be left out even if required in a standard if not material.

October 19

RPG3 Traditional reporting no longer meets the needs of business July 12

Public Contracts need to be public to be transparent July 12

Ethics How can business and society at large trust financial statements February 4

Where governance is strong. May 10

IFRS technical The European enforcer ESMA issues its enforcement decisions January 2

Deloitte IFRS e-learning modules available for free February 4

G’day sport! Australia’s IFRS journey April 8

Non GAAP measures

Rose tinted spectacles March 6

Bitcoin The rise March 6

Confidence When confidence is high money flows in. When confidence is low, it drains out March 6

Disclosure Deloitte IDFR in focus April 8

Principles of disclosure August 14

IAS 7 Amendment April 8

IAS 8 Three pages of dynamite. IOSCO requires disclosure of impact of new standards January 2

IAS 12, 23, 28 Changes February 4

IAS 36 Goodwill and impairment in the IASB spotlight April 8

IFRS 8 Who or what is the Chief Operating Decision Maker May 10

IFRS 9, 15, 16 & IAS 32

PWC News April 8

IFRS 9 IFRS 9 and 15 one year to go January 2

IFRS 9 may change again February 4

KPMG the bank statement. Even if you’re not a bank you should read this April 8

Hans and Sue hold a podcast February 4

Clarifying IFRS 9 August 14

IFRS 13 Fair value measurement August 14

IFRS 15 IFRS 9 and 15 one year to go January 2

PWC IFRS News February 4

KPMG Revenue supplement disclosure requirements November 21

IFRS16 IFRS 16 two years to go January 2

Leases one year on – putting IFRS 16 into practice February 4

EY IFRS leasing for oil & gas, and Engineering, and Construction sectors February 4

When is a lease not a lease – when it is a service contract March 6

KPMG lease definition. The new/off balance sheet test. May 10

Audit Reasons to be skeptical I, II, III January 2

The importance of standing back. The IAASB raises the bar May 10

Extended Auditor’s Reports. The FRC report. July 12

Going concern March 6

Toward enhanced professional skepticism September 16

ISA 315 Quality control. Identifying and assessing the risks of material misstatement May 10

Internal control implementation tool for auditors from CPA Canada December 23

Back page A recap on 2016: Revenue, leasing, common control transactions, disclosure January 3

PAIB response to ‘Enhancing audit quality in the Public Interest February 5

IFIAR Annual Inspection Findings Survey March 7

Escaping or embracing IFRS 16 April 9

The new audit report – Key Audit Matters May 10

Materiality Matters July 13

Auditing Estimates August 15

Testing the effectiveness of internal controls September 17-18

A flash in the pan – it’s all about ethics. October 20

Identifying cash generating units November 22

The first of the famous five, Control Environment December 24-25

IFRS news, updates from ADAA, IASB and the Accounting Profession January 2017

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WHAT’S NEW FROM THE IASB?

Three pages of dynamite. IOSCO erupts! Possibly a slightly melodramatic overstatement.

IFRS 9, IFRS 15 – one year to go. Why does the ‘have it all now, click and collect’ internet generation have to wait?

The European enforcer ESMA issues its enforcement decisions. Two catch our eye.

IFRS 16 two years to go. We make no apology for being a broken record on the three new standards.

Reasons to be skeptical I, II, III. IFAC’s research insights conclude.

And on the back page with A recap on 2016 – ADAA’s Mahmoud Shahin looks back on the back page articles from last year.

Three pages of dynamite. IOSCO erupts! Possibly a slightly melodramatic overstatement. Though it is interesting to see the global securities commissions’ board publish a statement concerning implementation of the IASB’s new standards on Revenue, Financial Instruments and Leases. It seems they too are fed up with auditors allowing IFRS preparers to say ‘we don’t know what the impact will be.’ Don’t forget it was IOSCO together with the IASC (the forerunner to the IASB) that initiated IFRS in the first place. If they are fed up the Accounting profession needs to take notice. More here.

IFRS 9 and IFRS 15 – one year to go. It is a decade since the global financial crisis broke IAS 39. The IASB acted swiftly issuing some updates in IFRS 9 in 2009. However, it took five years to 2014 to complete the standard and it is effective 1 January 2018-one year from now. So ten years later will we now see what the true position of the banks should be?

IFRS 15 is not a short story either a decade of effort, 1,500+ comment letters, extensive deliberations, numerous round tables and discussion forums. It’s not a short standard either: 87 pages long plus 175 pages of Basis of Conclusions and 82 pages of Illustrative Examples.

IFRS 16 two years to go. We make no apology for being a broken record on the three new standards and neither it seems does IOSCO and the IASB. Many accountants thought IFRS 2 ground breaking when issued in 2004, it was. Directors receiving stock options were in disarray because their remuneration was suddenly visible to shareholders, and rightly so. The leasing industry now finds itself in the quagmire and whilst change may be uncomfortable for some, we don’t feel that here. Stroll down the Corniche and compare today to seventeen years ago. There is a lot changed.

Unlike with IFRS 9 and IFRS 15, the IASB has made implementing IFRS 16 easy for you. You don’t need to do a big reassessment program. You don’t need to revisit your lease documentation. You don’t need to get in the lawyers and structuring specialists. You can save a huge amount of time and cost. You can simply take advantage of the practical expedient in Appendix C3 and apply IFRS 16 to contracts that previously identified as leases applying IAS 17. So there is no need to reassess whether a contract is a lease, or contains a lease.

Of course, you may not like the answer, but then as they say stuff happens for a reason. Back in the day you didn’t like IAS 19 but we don’t see any complaints now.

IASB’s educational and implementation material has all the tools and resources to get you started access it here: IFRS 9 IFRS 15 IFRS 16.

The European enforcer ESMA issues its enforcement decisions. Two catch our eye:

1. Depreciation of vessels in the oil and gas industry. An asset with a limited useful life is depreciated in a way that reflects the consumption of the asset’s service potential. Just because it is not being used does not mean you do not depreciate it.

2. Identification of CGU’s involves judgement, and is the result of a bottom up process. Unlike for conventional reservoirs, the different parts of the reservoir rock in a shale play do not communicate with each other, as the resources are trapped in the source rock itself. Even over short distances there will be little or no interdependencies for the productivity between individual wells drilled into the same impervious rock.

For the detailed decisions click here.

Reasons to be skeptical I, II, III. IFAC’s research insights conclude.

Your boss’s evaluation of your professional skepticism may depend more on the outcome than the process. If you find something wrong your application of skepticism is rewarded, if you don’t it is (wrongly) penalized.

Skepticism increases with the potential of an inspection, unless excessive documentation to appease the inspector becomes the auditor’s overriding concern.

Time pressure, especially at year end, can impair skepticism.

Auditors thinking more intuitively, rather than analytically are more skeptical.

The characteristics and actions of management may impact skepticism. Be nice and your auditor is more skeptical. Don’t be nice and your auditor will avoid you.

The ability to detect personality driven fraudulent tendencies is a soft skill, not learnt from computers.

Access the three papers here.

ADAA’s

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located in

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WHAT’S NEW FROM THE ACCOUNTING PROFESSION?

WHAT’S NEW THIS MONTH

And finally

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IFRS news, updates from ADAA, IASB and the Accounting Profession January 2017

Why ethics are important

A new year, a new dawn, we started with ethics. Pushing the envelope. Financial engineering. Transaction structuring. Creative accounting. Rainy day provisions. Are these activities ethical we asked? When does ethical become unethical? Back in the day building provisions was acceptable. Being aggressive on revenue recognition was a bit racey not harmful as it is seen now. The IESBA Code of Ethics states: “A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest.” The public cannot protect themselves from those not scrupulous over their financial numbers so the Accounting profession must do it be they Preparers, Auditors, or Regulators. Lease accounting

IFRS 16 eliminates the IAS 17 discredited classifications (for lessees) between operating or finance leases and, introduces a single accounting model. Applying that model, a lessee is required to recognize:

(a) assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value; and

(b) depreciate the lease assets and record interest on the lease liabilities. On the Regulator’s agenda

An audit is classified as deficient if it fails to document sufficient, relevant, reliable evidence to support the audit opinion provided. It doesn’t necessarily follow that the financial statements are deficient. Although they could be. It may only be a question of audit work not done, or it may not. Audit deficiencies appear in a number of ways. Revenue. Leasing. Financial Instruments.

The last back page article from an avid contributor. This was the first of two times we looked at these standards last year. In this article we delved into when we should be seeing information provided on the standards with a particular focus on IAS 8. They say good things come to those that wait. But must we wait? Is such an analogue answer technologically acceptable in a digital age?

• IFRS 15 “Revenue from Contracts with Customers” issued May 2015 replaces IAS 18 and is effective for accounting periods beginning on or after 1 Jan 2018.

• IFRS 9 “Financial Instruments” issued July 2014 replaces IAS 39 and is effective for accounting periods beginning on or after 1 Jan 2018.

• IFRS 16 “leases” issued January 2016 replaces IAS 17 and is effective for annual reporting periods beginning on or after 1 January 2019.

The application of new accounting standards that will impact revenue, profits, assets, liabilities and leverage are clearly significant risks and would undoubtedly be included in an MD&A and be audited. Common control transactions

Kicked into the long grass by the IASB. No surprise really it is not going to be easy to solve. At present, there is an accounting policy choice of fair value or predecessor carrying amount. We don’t really mind which because there are pros and cons for both. But we do think you must be consistent.

Earnings management

In September we visited the dark art of earnings management. Some legitimate earnings management is fine all businesses do it. Aggressive earnings management is not because it breaches transparency and comparability principles and has a detrimental effect on economic decisions. What was deemed acceptable is fast becoming not acceptable. Last week UK house building firm Bovis announced the departure of their CEO when it was discovered Bovis offered house buyers thousands of pounds to move into unfinished homes in a bid to hit sales targets. Certainly not creative accounting, and certainly not illegal, but not disclosing the matter that is wrong. Transparency is the problem with earnings management. Revenue and Lease Accounting

With IFRS 15 and 16 we don’t just gain two new standards and lose two old ones. We also lose IAS 11, IFRIC 4, 13, 15 and SIC 15 and 27. IAS 11 dates back to 1979, the year of Roger Moore as 007 in Moonraker. As with 007, IAS 11 is the accounting standard that delivers, delivers what the CEO wants. IAS 11 legitimized smoothing of profits, revenues and costs over and between accounting periods. Enabling provisions to be booked in good times, to release, when times were bad. What could possibly be wrong with that? IFRS 15 scopes out transactions in scope of IFRS 16 because sometimes a sale is not a sale, it is a lease. These are both control standards and easy to implement unless you have bundled transactions.

Professional judgement

November was professional judgement time. History tells us a key failure in coming to a wrong conclusion is a failure to understand the business. Lehman Brothers failed when it ran out of cash, so maybe window dressing the balance sheet was not such a good idea. The Scots with Sir David Tweedie at the ICAS helm gave us their publication ‘A professional judgement framework for financial reporting.’ It describes the process underpinning ‘management judgement’s, and reminds us its not just management, it’s the finance team, audit committee and auditor too.

Deciphering the mystery of perfect disclosure.

The disclosure conundrum

It was no mistake we published two articles on disclosure requirements.

In May we asked after completing your financial statements did you take the opportunity to truly read your disclosures? Did you like what you read? As a professional accountant did they make you feel proud? Or did you cut and paste from the accounting standards and simply roll forward last year’s? Our focus was on the disclosures you should make, and those not required but made anyway. The key test for disclosure is - does inclusion improve the usefulness of the financial information in making decisions about providing resources to the entity, or not? To be useful, the disclosure needs to be true and fair, and bias neutral, no gilding the lily please, but also it needs to be comparable. From one period to the next and from one entity to the next.

In December we focused on significant accounting judgements and estimates. It is possible to have too many and too often the sensitivities, expected resolution and range of possible outcomes is not provided. We also focused on the IAS 8.30 requirement to disclose what the impact of the new standards might be. Sounds familiar.

We believe in going the extra mile and delivering beyond the current standards.

A recap on 2016– an insight from ADAA’s Mahmoud Shahin

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IFRS news, updates from ADAA, IASB and the Accounting Profession February 2017

WHAT’S NEW FROM THE IASB?

Vice Chair of IOSCO appointed Chair of Monitoring Board

Changes to IAS 12, 23 and 28

IFRS 9 may change again

PWC IFRS News

The ACCA’s Culture Governance tool

Hans and Sue hold a podcast.

How can business and society at large trust financial statements?

Leases one year on – putting IFRS 16 into practice

IFRS 2017 Red Book in Arabic

KPMG IFRS newsletter The Bank Statement

EY IFRS Publications

Deloitte IFRS e-learning modules available for free!

And on the back page A nugget of gold from the PAIB - An insight from ADAA’s Hasina Al Adawi.

Vice Chair of IOSCO appointed Chair of Monitoring Board. This may not seem important but don’t forget it was IOSCO that agreed with the IASC it would promote IFRS to constituents of their capital markets. The Board monitors the activities of the IFRS Foundation Trustees, who monitor the IASB. Thus, IOSCO is separate from influencing the IASB but has a transparent view and can hold the IASB accountable for their actions. link. Changes to IAS 12, 23 and 28. The proposed amendments:

IAS 12 - the tax consequences of dividends accounted for in the same way, regardless how the tax arises.

IAS 23 – clarifies the borrowing costs capitalized as part of the cost of an asset.

IAS 28 - an entity applies IFRS 9 to long-term interests in associates or JVs for which it does not equity account. link.

IFRS 9 may change again. A decade long story is not over yet. The IASB is considering to allow financial assets with symmetric make-whole prepayment options to be measured at amortized cost or FVOCI depending on the business model. Currently only a debt instrument with contractual cash flows that are solely payments of principal and interest are eligible. This proposed change may be issued before IFRS 9 is effective see January 2017 IASB Update. Read agenda paper 12F here.

Hans and Sue hold a podcast. Chair and Vice Chair of the IASB discuss IFRS 9 and 13 with a focus on disclosure requirements of the Fair Value standard. Because applying market reliable evidence is key. link. How can business and society at large trust financial statements if finance professionals do not act in line with accounting standards? IFAC promotes IEFAA’s report Accounting and Ethics Pressure Experienced by the Professional Accountant. Accountants are under increasing pressure to have financial results conform with expectations of stakeholders. 32% of accountants when pushed agreed to an accounting treatment they deemed wrong. This included postponing expenses, incorrect valuation of inventories, and changing the nature of items for accounting purposes. Of the 32% virtually all subsequently left the organisation they were employed by. Read the full report here. IFRS 2017 Red Book in Arabic. Visit the IASB’s translation page.

Leases one year on – putting IFRS 16 into practice. The transition requirements of IFRS 16 range from simple least cost don’t restate don’t use historical data and accept a higher depreciation charge, to potentially costly full restatement. So what does the shareholder want? For long life assets the most difficult assessment for the lessee is determining the residual value ascribed by the lessor. More here.

PWC IFRS News. In this issue:

Lose weight, get out of debt, learn something new, spend more time with family and friends, commit. 5 New Year resolutions every company should take on board.

Demystifying IFRS 9.

The IFRS 15 mole deals with accounting for free gifts, and

The Lease lab considers what is substantive about substitution rights. PWC IFRS News.

The ACCA’s Culture Governance tool. Identifies behaviors that support or impede the achievement of organizational objectives. The challenge is how to nurture a culture that promotes behaviors consistent with organisational objectives. More from the ACCA here.

KPMG IFRS newsletter The Bank Statement. In this issue:

Spotlight on IFRS 9

Demystifying adjustments for the cost of regulatory capital.

How do you compare? Fair Value disclosures.

Regulatory treatment of accounting provisions. KPMG The Bank Statement.

EY IFRS Publications. Leasing for the Oil & Gas, and Engineering & Construction sectors. A closer look at the new revenue recognition standard. Just some of the publications from EY see more here. Deloitte IFRS e-learning modules available for free! Feeling a bit rusty, want to learn more on the new standards, go on line with Deloitte at www.iasplus.com

WHAT’S NEW THIS MONTH

ADAA’s hot

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The IASB is

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Street,

London

WHAT’S NEW FROM THE ACCOUNTING PROFESSION?

Please turn

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IFRS news, updates from ADAA, IASB and the Accounting Profession February 2017

Most people probably have not heard of the PAIB

PAIB is the acronym for the International Federation of Accountants (IFAC) Professional Accountants in Business Committee (PAIB). You are probably thinking ‘this is going to be boring’ I do not blame you, but trust me boring this will be not.

We often see the viewpoints of the Accounting Profession from the perspective of the Audit Firms. Our publications draws significantly from our research of the publications of the Audit Firms and the IASB. There is however another view, the view from the CFO.

The PAIB Committee Chairman is Charles Tilley and he has a very distinguished and interesting bio. The PAIB’s publications and outputs you will find on their IFAC web page Professional Accountants in Business. We have selected just one document from a number of excellent ones. The PAIB response to Invitation to Comment, Enhancing Audit Quality in the Public Interest: A Focus on Professional Skepticism, Quality Control and Group Audits (ITC) In the covering letter Charles writes: “At its recent meetings, the PAIB Committee discussed enhancing audit quality, in particular the preparer’s role (preparer includes those charged with governance and/or management and finance leaders in their finance and accounting functions). We recognize that since the financial crisis, serious questions are being asked of the audit profession, which is to be expected given the public interest dimension of audit quality. However, in making improvements to audit and assurance related standards and regulations, the IAASB should recognize that many of the issues that drove organizational failure or wrongdoing were not necessarily due to poor audit quality.

Instead, the failures and resulting impacts on financial statements were primarily the responsibility of those charged with governance, and executive management.

Consequently, we recommend that further development of audit and assurance related regulations and standards prioritize driving the right behavior among auditors, in particular their relationship and engagement with the organizations they audit (referred to as the audit client in the ITC).

The basis for changing standards should be the result of an empirical vetting of actual audit failures.

Changes should not be made to the audit because of governance and management failures. Doing so is, at best, simply an effort to appear to take action on a particular matter. At worst, it is a misdirected effort to influence governance and management practices indirectly through audit standards rather than directly through other means.”

The PAIB’S observations are refreshing. We paraphrase in the next column some of their views on Enhancing Audit Quality.

Recognising Enhancing Audit Quality is a shared responsibility

It is not solely the responsibility of the auditor. Awareness needs to be raised of the need for high quality audits critical in enhancing trust in business and financial markets to combat the commoditization of audit. Pressure on audit fees and the implications for how audits are carried out merits further investigation. Audit Expectation Gap Continues

There is difference what auditors believe their role is and what others believe. Many do not believe or agree an audit has limits. Focus on Process Rather than Outcomes

Over regulation and standards focused on process and procedures rather than outcomes, can make auditors more compliance focused. Reducing Inefficiency and Duplication

Management feel onerous documentation falls to them and poor alignment between auditor, audit committee and internal auditor increases costs and inefficiency. Audit Quality Depends on Understanding the Business

It is odd that the audit client considers understanding its business model fundamental to the audit and the whole of ISA 315 is devoted to it, and some audits lacked a suitably experienced engagement partner. Effect of New Audit Report to be considered

Although redesigned primarily for investors the new audit report will improve communication between auditors and those charged with governance meaning ISA 260 is better implemented.

We do recommend you read the comment letter in full and if you have an audit committee role suggest you consider its contents for an audit committee agenda.

We particularly consider the observation on page 6 regarding improving professional skepticism to be revealing:

“We recognize the Public Interest Oversight Board noted in its discussions that: “professional skepticism, as a state of the mind and attitude, should govern the performance of auditors, and inspire the attitude of other accountants, e.g. accountants in business. When accountants (practitioners, non-practitioners, accountants in business) do not display proper professional skepticism it is recognized as a barrier to effective performance.”

However, this perspective does not recognize that it is necessary to distinguish between those accountants in business who are members of the profession and adhere to common ethical standards and those accountants in business who do not follow a specific code of ethics and/or are not members of an IFAC member organization.”

IFAC’s international standards are written for professional accountants. A professional accountant is a member of a National Accounting Institute that is a member of IFAC. Accountants that are not professional will not apply such standards with the required rigor.

A nugget of gold from the PAIB – an insight from ADAA’s Hasina Al Adawi

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IFRS news, updates from ADAA, IASB and the Accounting Profession March 2017

WHAT’S NEW FROM THE IASB?

Non-GAAP measures. Rose tinted spectacles, or valuable insight. Non-GAAP measures are on the IASB’s radar. The rise of bitcoin. A cryptocurrency is a virtual currency.

Going concern. Management go first. The US Auditing Standards Board (ASB) issues a new standard.

When confidence is high, money flows in. When confidence is low, it drains out. Hans Hoogervorst tells Saudi Arabia. IFRS 16 leases - oil and gas industries. When is a lease not a lease - when it is a service contract. And on the back page IFIAR Annual Inspection Findings survey – an insight from ADAA’s Mahmoud Shahin.

Non-GAAP measures. Rose tinted spectacles, or valuable insight. Non-GAAP measures are on the IASB’s radar in a project titled Primary Financial Statements. Used and sometimes abused, IASB member Gary Kabureck drills into the topic: “Properly used, non-GAAP measures are extremely valuable. For example, they can enhance financial analysis by isolating the effects of items that do not promote an understanding of historical or future trends of earnings or cash flows. At the other extreme, unfortunately sometimes non-GAAP reporting is used to ignore inconvenient charges or to perfume the pig, thereby giving non-GAAP reporting a bad name”. There are significant problems to overcome:

EBIT is not used by Banks because to them the cost of finance is an operating expense. An industry solution won’t work because some banking entities also do other things.

Underlying earnings requires removal of non-recurring items. Big companies incur litigation costs. Usually these are small. What if a big case comes along, size matters but not in accounting. Property companies split rentals from valuation movements to differentiate between capital and profit.

Core/non-core another problematic area. Activities with associates and JVs can very easily be both. More here.

When confidence is high, money flows in. When confidence is low, it drains out. Hans Hoogervorst tells Saudi Arabia. Hans visited KSA to attend the inaugural Accounting and Auditing conference celebrating 25 years of Saudi regulator SOCPA. In his speech Trust, accountants and the economy Hans says:

IFRS brings transparency by enhancing international comparability enabling informed economic decisions.

IFRS strengthens accountability by reducing the information gap between entities and those who have entrusted their money to them. “They help those on the outside hold those on the inside to account.”

IFRS contributes to economic efficiency by helping investors to better identify opportunity and risks, in a specific country and across the world.

IFRS lowers cost of capital. “This goes back to trust and confidence.”

The silver anniversary of SOCPA coincides with companies now reporting using IFRS sends a clear signal to the world Saudi Arabia welcomes foreign direct investment.

Want to know more about what’s on at the IASB IASB-Work-Plan

The Rise of Bitcoin. A cryptocurrency is a virtual currency used to pay for goods and service that exists in a digital form, a common example known as ‘bitcoin.’ Recent debates on disclosing and explaining the accounting and measurement basis of cryptocurrency, with possible suggestions such as an intangible asset measured at fair value. Further reading PWC. Going concern. Management go first. The US Auditing Standards Board (ASB) issues a new standard (SAS). SAS were not aligned with International Standards on Auditing (ISA) because the FASB was developing an accounting standard on going concern, which it now has and auditing standards now align too. Crucial is management must conclude first. Evidence must be obtained and if financial support is required from a third party it must be obtained from management written evidence or confirmed directly. More here.

IFRS 16 leases - oil and gas industries. When is a lease not a lease - when it is a service contract. IFRS 16 contains a practical expedient to continue to account for leases under IFRS 16 agreements that were determined to be leases under IAS 17. The problem is entities who had structured agreements to achieve operating lease accounting do not like the answer. It gears up the balance sheet and back loads profit recognition.

In order to keep the operating lease accounting the agreement needs to be a service contract.

There is very little economic difference in substance between a service contract and an operating lease. Neither is executory, both require the use of assets the service provider owns (or leases) and can freely substitute at their behest.

If operating leases do become service contracts the legal profession will have defeated the objective of the IASB with the new standard and contrived a disclosure position worse than under IAS 17. EY publication here. ADAA technical briefing paper here.

WHAT’S NEW THIS MONTH

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WHAT’S NEW FROM THE ACCOUNTING PROFESSION?

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IFRS news, updates from ADAA, IASB and the Accounting Profession March 2017

About IFIAR

International Forum of Independent Audit Regulators (IFIAR) comprises audit regulators: ADAA, PCAOB, UK FRC etc. from fifty-two jurisdictions in Africa, Americas, Asia-Pacific, Europe, and the Middle East. IFIAR’s official observers are the Basel Committee on Banking Supervision, the European Commission, the Financial Stability Board, the International Association of Insurance Supervisors, the International Organization of Securities Commissions, the Public Interest Oversight Board and the World Bank. So there are some serious regulators and finance providers interested in what we do. More information here www.ifiar.org.

Report on 2016 Survey of Inspection Findings March 3, 2017

“IFIAR’s annual Inspection Findings Survey shows a general decline in inspection finding rates; however, the high rates of findings continue to be of concern to IFIAR. The Survey notes similarities in the nature and extent of findings compared to the previous year. Overall, the results continue to show a lack of consistency in the execution of high quality audits and point to the continued need to address firm-wide systems of quality control, including in the critical area of auditor independence. IFIAR will continue its dialogue with the six largest network firms and its consideration of standard setting in the area of firm quality controls.”

All IFIAR Members are asked to respond to IFIAR’s Surveys of inspection findings. The Surveys solicit data on Members’ findings from inspections of:

1. Audits of listed public interest entities (PIEs)

2. Audits of systemically important financial institutions (SIFIs) including global systemically important banks G-SIFIs; and

3. Audit firms’ quality control systems.

Audits of listed PIEs

Inspection Theme 2016 2015 2014 2013 2012

Internal controls testing 278 173 178 156 117

Accounting estimates, including fair value measurement

258 * * * *

Fair value measurement * 158 205 217 169

Audit of allowance for loan losses and loan impairments

* 45 46 55 43

Audit sampling 109 ** ** ** **

Revenue Recognition 105 116 114 104 86

Substantive analytical procedures 65 50 79 55 75

Adequacy of financial statement presentation and disclosure

53 85 101 120 109

Group Audits 53 70 75 89 75

Risk Assessment 51 131 49 59 **

Inventory Procedures 43 86 69 76 57

Fraud Procedures 35 46 54 65 **

Use of Experts and Supervision 27 35 54 42 41

Adequacy of review and supervision

22 49 55 58 115

Engagement Quality Control review 20 39 53 78 116

Audit Report 18 15 ** ** **

Related Party Transactions 12 17 40 28 44

Going Concern 12 5 24 24 25

Audit Committee Communications 10 10 14 34 **

Total 1,171 1,130 1,210 1,260 1,072

* During 2012-2015, IFIAR collected data separately for findings related to "Audit of Allowance for Loan Losses and Loan Impairments" and "Fair Value Measurement". Data collected and reported in previous Survey reports for these two themes is included in this table. Beginning in 2016, IFIAR combined these themes as "Accounting Estimates, including Fair Value Measurement".

** Data for this theme was not collected during the Survey year. Prior to 2016, Members generally reported Audit Sampling findings under other themes (e.g., Revenue Recognition or Inventory).

Audits of SIFIs

Inspection Theme 2016 2015 2014 2013 2012

Internal controls testing 10 37 36 39 33

Use of Experts and Specialists 6 22 9 8 **

Audit Methodology, including Programs and Tools

5 7 11 1 9

Audit of allowance for loan losses and loan impairments

3 31 21 42 15

Valuation of investment and securities 3 22 42 26 32

Insufficient Challenge and Testing of Management's Judgments and Assessments

3 20 13 21 12

Testing of customer deposits and loans 3 7 6 3 10

Substantive analytical procedures 3 2 6 12 **

Fraud Procedures 3 2 5 7 **

Adequacy of Financial Statement Presentation and Disclosure

2 6 7 9 4

Audit report 2 0 ** ** **

Audit of Insurance Contract Liabilities 2 ** ** ** **

Group Audit 1 6 4 8 2

Risk Assessment 0 22 4 10 **

Audit Committee Communications 0 1 2 2 **

Total 46 185 166 188 117

**Data for this theme was not collected during the Survey year.

Audits of Firms’ Quality Control

Inspection Theme 2016 2015 2014 2013 2012

Engagement Performance 202 222 377 380 261

Monitoring 81 63 74 93 77

Human Resources 76 77 111 146 166

Independence and ethical requirements 72 73 109 104 130

Client risk assessment acceptance and continuance

48 52 53 78 100

Leadership responsibilities for quality within the firm

18 21 45 43 33

Total 497 508 769 844 767

Let us call a spade a spade and not a manual dirt extraction tool. A finding is a failure. It is no accident failure in firm’s quality control procedures result in failure in firm’s audit procedures and the outcome is accounting errors are not found.

Regulators report a 60% increase in failures in the audit of managements system of internal control. Specifically manual controls.

People operate manual controls. This means the people management entrust to ensure management information is correct, that underpins the management judgements they take, has not been subject to a thorough and rigorous audit. Which is what all audit proposals promise. Not only did the auditor not do, they also did not deliver.

Management apply manual controls to accounting estimates, and discounted cash flows to support fair value measurement and loan loss assessments and in going concern judgements.

Unsurprisingly the biggest failure in accounting estimates and fair value measurement is in the auditor’s failure to assess the reasonableness of assumptions including contrary and inconsistent evidence where applicable.

Perhaps things will be different in 2017. We will see. What is true is if you do the same thing you get the same outcome.

2017 is time for change. IFIAR’s Summary Report accessible here

IFIAR Annual Inspection Findings Survey – an insight from ADAA’s Mahmoud Shahin

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IFRS news, updates from ADAA, IASB and the Accounting Profession April 2017

WHAT’S NEW FROM THE IASB?

G’day sport! Ten years on from the demise of Aussie GAAP we learn from Australia’s IFRS journey.

IFRIC Update. It’s technical, its detailed and mostly not on the agenda.

Right here, Right now IAS 7 Amendment.

EY IFRS Update. All the standards and interpretations in issue at 31 March 2017.

PWC IFRS news. IFRS 9, 15, 16 and IAS 32.

IASB Update. Goodwill and impairment in the IASB spotlight.

Its one thing to know something is wrong. It’s another thing to act upon it.

UAE & VAT. Have you done your homework?

Deloitte IFRS in Focus. The IASB Disclosure initiative.

KPMG The Bank Statement. Even if you are not a bank you should read this. And on the back page Escaping or embracing IFRS 16? An insight from ADAA’s Syed Shabbir.

G’day sport! Ten years on from the demise of Aussie GAAP we learn from Australia’s IFRS journey. For listed entities IFRS has been positive:

Greater scrutiny and analyst forecast accuracy.

Much less earnings management than before.

Annual reporting is longer but easier to read.

Improved comparability with global peers for Australian entities financial reporting practices.

However, prior AGAAP treatments for identifiable intangible assets deemed more appropriate. More here.

IFRIC Update. It’s technical, its detailed and mostly not on the agenda. Fruit growing on oil palms are a biological asset. More here. Right here, Right now IAS 7 Amendment. Investors seek two things:

1) By how much has net debt changed in the year.

2) By how much has cash and non-cash equivalents changed. From January 2017 this is a required disclosure. More here.

IASB Update. Goodwill and impairment in the IASB spotlight. The IASB agenda papers can be a fascinating source of What Could Go Wrong. WCGWs to paraphrase one audit firm. Two models (FVLCTS & VIU), too complex, too many intangibles, too little information. First, the IASB is considering turning back the clock to 2004 and removing the reliably measurable test for the separation test of intangibles on acquisition. Hurrah we say. Intangible assets acquired in a business combination rarely deliver cash separate from the tangible assets of the business – just ask the people. So why was there any need to assess brand, customer relationship and any other intangible you could not shake a stick at? Second, the IASB realizes what UK GAAP realized in 1998 – Pre-existing internally generated goodwill of the acquirer can shield subsequent impairment testing of goodwill arising on acquisition of the acquiree. Which it should not be allowed to do. Third, goodwill changes over time. What is assessed subsequently isn’t what was acquired. It is reported the Indian Premier League brand value is USD 4 billion. So why not sell it? It’s just not cricket, you wouldn’t buy the brand and leave the business behind.

Fair value or rather not fair value is one of IFIAR’s top performers for audit and accounting errors. The IASB is correct, impairments are not recognised early enough, something has to change. More here.

EY IFRS Update. All the standards and interpretations in issue at 31 March 2017. All the large audit firms have many tools freely available to help you navigate the amendments and updates to IFRS. Choose your supplier or choose your favourite. In truth, there is not much change for 2017. You must say the impacts of IFRS 15 and 16 this year. You cannot still say you do not know. More here. PWC IFRS news. IFRS 9, 15, 16 and IAS 32. When is a lease not a lease – when it is in the revenue standard. PWC are running a series of articles that cover aspects in the new standards you might not have thought of. Plus they set the context of a NIFRIC in IFRS.

A NIFRIC is ‘Not an IFRIC’ its an issue that was not taken on to the agenda. They are codified in the green book and technically have no standing.

PWC take us through them, this month the 14 NIFRICs in IAS 32. More here.

Its one thing to know something is wrong. It’s another thing to act upon it. AICPA proposal raises the ethical bar. Link. UAE & VAT. The GCC and the UAE is introducing VAT (most likely at 5%) on all goods and services of businesses that have a minimum turnover level from 1 January 2018. More here. Deloitte IFRS in Focus. The IASB Disclosure initiative. It is widely commented IFRS financial statements are on the large side. However, instead of taking action to change the input the output remains the same. The most significant actions to take are to stop the cut and paste and tailor instead, less is more so remove the immaterial. Link. KPMG The Bank Statement. Even if you are not a bank you should read this. A focus on stage transfer criteria. In other words measure the loss allowance as 12 month or life time expected credit losses. Link.

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IFRS news, updates from ADAA, IASB and the Accounting Profession April 2017

A final article from Syed. As we bade him farewell we thank him for his valued and insightful articles and wish him every success in his new role.

Operating leases are popular for an obvious reason: they keep liabilities off balance sheet. A sample of 1,022 listed companies using IFRS or US GAAP disclosed USD 3 trillion of off balance sheet lease commitments in 2014. An IASB survey concluded long-term liabilities of the heaviest users is understated by 27% in the African and Middle East region, 26% Europe, 22% America, 32% Asia/Pacific and a whopping 45% in Latin America!

Creativity is good, ask Banksy, but not in accounting. With the advent of IFRS 16 operating leases are gone and the search for elusive off balance sheet financing is at an all-time high. Financial reporting should merely be a true and fair result of appropriate accounting. Accounting should not influence business decisions but, unfortunately, this is not always the case. This article evaluates escape routes suggested by some, and the resulting consequences. Voluntarily exceptions. Mainly two kinds of voluntary exceptions exist. 1- Short term lease exception. Entities may opt for this exemption, which is

applied to leases with a lease term of 12 months or less. Expense are typically recognized on a straight line basis over the term of the lease (similar to IAS 17 operating leases). Consequentially, no balance sheet assets and liabilities are recorded other than prepaid and accrued lease payments.

Lease term is defined in IFRS 16, and is not necessarily the contractual maximum term. Especially for leases with expansion options or break clauses. Entities need to make a reasonably certain assessment of the lease term. The exemption cannot be applied to leases containing a purchase option. The exemption must be applied to all assets within the same class with a lease term of 12 months or less.

During the standard setting process the IASB discussed concerns about the possibility of structuring contracts to qualify for the exemption. Theoretically this could be done but not without economic consequences. There would be an economic disincentive for lessors to grant shorter leases, because shortening the lease term would increase the risk associated with a lessor’s residual interest in the underlying asset. Consequently, the IASB is of the view that a lessor would often either demand increased lease payments from the lessee to compensate for this change in risk or refuse to shorten the non-cancellable period of the lease.

Accordingly, be wary of economic consequences, if lease modification is on the charts for you to avail this exemption.

2- Leases of low-value assets exemption. A lessee may elect not to apply the

requirements of IFRS 16 for leases for which the underlying asset is of low value. The resulting effect on recognition of expense, asset and liability would be similar to the situation for the short-term lease exemption.

Low value assessment applies to the value of the underlying asset when new (regardless of the age of the asset being leased), on an absolute basis and irrespective of materiality.

The exemption cannot be used if the underlying asset is highly dependent on, or highly interrelated with, other assets or if the lessee cannot benefit from using the underlying asset on its own or with other readily available resources.

And the exemption cannot be applied to the head lease in a sublease arrangement.

The election for leases for which the underlying asset is of low value can be made on a lease-by-lease basis.

The IASB’s underlying reasons for these two voluntary exemptions was pragmatic based on costs and benefits. IFRS reporters should use the exemptions in a similar spirit enjoying the substantive relief and focusing their time and efforts on improving their accounting and disclosure of IFRS 16 for users of financial statements. Scope exceptions, specifically outsourcing. Certain types of arrangements will need detailed evaluation to determine if they are or continue to be leases, including outsourcing contracts, third party manufacturing contracts, power purchase contracts, equipment leases and transportation arrangements.

Generally outsourcing or contracting out is a business practice used by entities to reduce costs or improve efficiency by shifting tasks, operations, jobs or processes to a third party for a specified period of time. Prima facie, such arrangements are outside the scope of IFRS 16.

However, even if a contract is described as an outsourcing contract, or even said to not be a lease, it is still accounted for as a lease as long as it conveys the right to control the use of an identified asset in exchange for consideration. The new lease definition is the new on/off-balance sheet test. Lease modification. Whether to achieve a desired accounting objective or done in the normal course of business, a lease modification will have accounting consequences. A lease modification is a change in the scope of a lease, or the consideration for a lease, that was not part of the original terms and conditions of the lease. Based on the underlying changes, a lessee may end up recognizing a lease modification as a separate lease if it increases the scope of the lease by adding the right to use one or more underlying assets and consideration increases by an amount commensurate with the stand-alone price for the increase in scope.

For a lease modification that is not a separate lease, at the effective date of the modification, the lessee accounts for the lease modification by remeasuring the lease liability using a discount rate determined at that date. Concluding thought. Auditors often hear CEO’s say ‘the accounting should not drive the business.’ We agree and say the business should not drive the accounting. Accounting is a happenstance result, concluded by professional accountants presenting information truthfully, based on relevant facts and circumstances, in accordance with appropriate accounting standards.

Transaction structuring and creative accounting should not be part of the equation.

Escaping or embracing IFRS 16? An insight from ADAA’s Syed Shabbir

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IFRS news, updates from ADAA, IASB and the Accounting Profession May 2017

WHAT’S NEW FROM THE IASB?

The importance of standing back. The IAASB raises the bar! EY IFRS Developments. Principles of disclosure. PWC IFRS News. Leases IFRS 16, Revenue IFRS 15 and IFRIC Rejections Supplement IAS 34. Where governance is strong. The role played by professional accountants in tackling corruption is amplified.

Quality control. A webcast: ‘Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment’.

Who or what is the Chief Operating Decision maker? IASB clarifies.

Where IFRS goes IPSAS follows. Time for a role reversal?

Deloitte Closing out 2016. Topical issues reporting on 2016.

KPMG Lease definition. The new on/off balance sheet test.

And on the back page The new audit report-Key audit Matters (KAM) An insight from ADAA’s Mahmoud Shahin.

The importance of standing back. The IAASB raises the bar! Auditing is different to accounting. Both are about doing the right thing but auditing is about determining when enough is enough. By definition when the IAASB revises an auditing standard, it is because the previously thought enough was not enough! Which means the Auditing Profession recognize insufficient and/or inappropriate audit work is completed on ‘Accounting Estimates and Related Disclosures.’ The IAASB is revising ISA 540 because its stakeholders asked it to. One of those is IFIAR of which ADAA is a member. The project started with a focus on the implementation of IFRS 9 (the expected loss model) and quickly widened to apply to all entities’ key management estimates and judgements. The ISA focuses on key provisions to enhance the auditor’s application of, yes you guessed it, the old chestnut - professional skepticism. Revision to the standard includes:

Enhanced risk assessment requirements providing a better basis for identifying and assessing the risks of material misstatement related to accounting estimates.

More granular requirements to obtain audit evidence when inherent risk is not low.

Requirements to ‘stand back and evaluate the evidence including corroborating and contradictory evidence. Link here.

Quality control. A webcast: ‘Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment’. The key areas were:

Clarification on IT audit role and benefits.

Providing examples of internal controls relevant to the audit.

Assess inherent risk and control risk separately.

The importance of enabling data analytics.

The role and attributes of the Engagement Quality Control Reviewer. Listen here

Who or what is the Chief Operating Decision maker? One area the IASB seeks to clarify amending IFRS 8. Link here. Where IFRS goes IPSAS follows. Time for a role reversal? IFRS 3 does not always work for public sector entities. IPSAS 40 allows:

1. Acquisition method when one entity gains control over another.

2. Merger method when neither party gains control. Link here.

EY IFRS Developments. Principles of disclosure. In an attempt to enhance communication in financial reporting the IASB has made better communication in financial reporting a central theme for 2017 to 2021. The disclosure initiative aims to address how the effectiveness of disclosures can improve. Running alongside the initiative are projects on: clarifying and applying materiality, the general characteristics of materiality and guidance on making judgements about materiality when presenting and disclosing information in financial statements. Link here.

PWC IFRS News. Leases IFRS 16, Revenue IFRS 15 and IFRIC Rejections Supplement IAS 34. The requirement to produce quarterly financial statements brings IAS 34 into play. The question is how much disclosure is required in your interims? The answer is surprisingly more than you thought. Link here.

Where governance is strong. The role played by professional accountants in tackling corruption is amplified. Link here.

Deloitte Closing out 2016. Topical issues reporting on 2016.

Foreign currency impacts. Sterling assets and liabilities are going to be less. Watch provisions and recoverability.

Commodity prices remained low hitting impairment reviews, valuation of assets and derivative fair values. Link here.

KPMG Lease definition. The new on/off balance sheet test. We have labored on the new standards in the Digest for which we do not apologise. Some are calling it the accounting equivalent of voting for Brexit or Trump. Some are in denial and report they do not know. It is time to deal with the implications of IFRS 16. There is one key test in the new standard = who has control. Who has the right to direct the use of the asset? Does the customer obtain substantially all of the economic benefits? A customer takes a new car on a three-year lease. After three years, the residual is 40% of the new car price. Did the customer receive substantially all of the economic benefits? Yes for three years only the customer drove the car. The residual is a red herring. New KPMG publication here.

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IFRS news, updates from ADAA, IASB and the Accounting Profession May 2017

Huge change this year to the audit report for listed entities. Will it make a difference? In 2001, the audit report fitted on a page (RWE 2001). In 2005 after the IAASB’s revisions, it still fitted on a page (RR 2008). Now it does not, example RR 2016.

So why more revisions. The revisions for 2016 aim to do what the revisions for 2005 aimed to do and did not, to close the expectation gap. The Public assume a clean audit opinion means all the numbers in the financial statements are fine. They are not. The financial statements as a whole are materially fine. Fine subject to the limitations of the auditor’s work because it is not possible to test 100% every single transaction undertaken and balance reported. The revisions to ISA 700 requires the auditor to explain the audit work performed on the most significant judgements reported to the Audit Committee. IAASB illustrative key audit matters. IAASB new auditors report.

Will it make a difference? It is difficult to say until we have some experience of applying the revised standard. Fortunately, the English and the Dutch applied the standard a year early and reading RR 2016, (from page 176) you will notice significant change.

KPMG provide a graphic for the risks identified and reported to the Audit Committee. From those reported, KPMG select the eight risks of material misstatement that had the greatest effect on their audit. These are the Key Audit Matters (KAMs):

Disclosure of the effect on the trend in profit of items uneven in frequency or amount.

Presentation of ‘underlying profit.’

Measurement of revenue and profit in Civil Aerospace business.

Recoverability of intangible assets in Civil Aerospace business.

Pressure on and incentives for management to hit revenue and profit targets.

Basis of accounting for revenue and profit in Civil Aerospace business.

Liabilities arising from customer financing arrangements.

Bribery and corruption.

Eleven other identified risks reported to the Audit Committee are not considered to be KAMs. This distinction is important, not all risks are so impactful the auditor needs to disclose the work they undertook. The IAASB does not want the auditor to cut and paste boilerplate procedures lifted from auditing standards for every material transaction and account balance. The audit report is seven pages long we list some of the things that caught our eye.

All of the KAMs affect Civil Aerospace Business, only half affect Military, why is this?

The auditor says: ”Our findings are the result of procedures undertaken in the context of and solely for the purpose of our statutory audit opinion on the financial statements as a whole and consequently are incidental to that opinion and we do not express discrete opinions on separate elements of the financial statements.” ISA 701 does not change the limitations of an audit. ISA 701 gives greater insight to the audit work. The auditor is not saying there is no material error arising from this risk, merely from our audit procedures we didn’t find any.

“Our 2015 audit was reviewed by the Financial Reporting Council’s Audit Quality Review team. The review findings noted limited areas for improvement.” The UK FRC challenged the 2013 accounting for revenue risk sharing arrangements. The accounting restated. Why is the UK Regulator interested?

Audit work on pressure to hit targets for measurement of revenue, profit and recoverability of intangible assets: “we challenged with a heightened awareness of the possibility of unconscious or systematic bias the basis for an increase in the estimated market size and share of the Trent 900 engine which offset the significant reduction in the recoverable amount of Trent 900 program assets arising from new technical issues on these engines, the response to which is forecast to be costly.” It would be helpful to know how much forecasts of market size, share and cost increased in the DCF model to offset the impairment of intangible assets. Airbus reports there are currently 201 A380s flying and 107 on order. Assuming all A380s on order are built and require at least one full engine replacement in a lifetime and those flying require one replacement, is the market size 629 engines? How does the current actual market compare with the DCF model? The A380 introduced in 2005 competes with the B747 that is phasing out. Both are four engine aircraft. The new generation A330, 340, 350 and B777 and 787 are XWB two engine aircraft. Is the four engine XWB aircraft a thing of the past?

Engines require maintenance, in the report it refers to linking or not of higher margin maintenance contracts with lower margin engine contracts. Some are linked as for the 700 some are not. The auditor response: “Re-evaluated appropriateness of the accounting bases…by reference to accounting standards and re-examining historical long-term aftermarket contracts. We considered whether the disclosure included in the financial statements enables shareholders to understand how the accounting policies represent the commercial substance of the Group’s contracts with its customers. We made our own independent assessment, with reference to the relevant accounting standards, of the accounting basis that should be applied to each long-term aftermarket contract entered into during the year and compared this to the accounting basis applied by the Group…We found the Group has developed a framework for selecting the accounting bases, which is consistent with a balanced interpretation of accounting standards, and has applied this consistently. We found the disclosure was ample.” Ample is a word my grandfather used – is ample enough?

A final thought

A UK FRC post-implementation review of 150 auditors’ reports found the top five KAMs reported are: Impairment of assets. Tax. Goodwill impairment. Management override of controls. Fraud in revenue recognition. This list is almost the same as IFIAR reports of its top findings of audit deficiencies each year. Is ISA 701 a step forward or a step back?

The new audit report-Key audit Matters (KAM) an insight from ADAA’s Mahmoud Shahin

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IFRS news, updates from ADAA, IASB and the Accounting Profession July 2017

WHAT’S NEW FROM THE IASB?

Traditional financial reporting no longer meets the needs of business. IFAC and ACCA opinion.

Public contracts need to be public! To be transparent.

Law number (1) of 2017 Concerning the Financial System of the Government of Abu Dhabi. Effective for all 2017 reporting by ADAA Subject Entities.

IFRS 15 expectations on 2017 interims. Time for more.

Grant Thornton IFRS news. Round up from GT.

Rate Regulated activities. Is change coming and will you benefit?

Goodwill and impairment. Still more work to do.

Heritage assets. You will be surprised.

Extended auditor’s reports. Will they make a difference?

People matter. Our biggest asset is our people.

New Insurance standard. Did the face of provisioning just change.

On the back page Materiality Matters - insight from ADAA’s Ahmed Al Mazrouei.

Traditional financial reporting no longer meets the needs of business. Capital allocation and corporate behaviour require alignment to deliver goals of financial stability and sustainable development. IFRS and IPSAS cannot achieve this themselves. Which is why RPG 3 ‘Reporting Service Performance’ was developed and why Listing Rules require MD&A to accompany historic financial statements. Integrated Reporting improves financial reporting. However, since announced in 2014 adoption has been slow. IFAC reports that ACCA sees momentum grow as value creation is understood in a wider sense. Adopt it or not, there is great value in the understanding survey results. Public contracts need to be public. Public procurement is an important aspect in Public Financial Management (PFM) where government brings to reality the vision of budgets. According to the Center for Global Development, public contracting involves 15% of global GDP. Such big cash flows in the public sector need to be transparent and clearly disclosed. The irony is public contracts are not that public, which makes them inherently risky and vulnerable to corruption.

Open contracts not only achieve transparency in government spending, but also more efficient spending, improved fiscal sustainability, and improved documentation addressing key user needs. More here. Rate Regulated activities. The IASB considers a model that recognises assets and liabilities that reflect rights and obligations arising from a rate adjustment mechanism in a regulatory environment. This could be a significant change for Water and Electricity companies benefitting those in a cost plus regime and hurting those in a rate-capped regime. More in IASB Update June 2017. Goodwill and impairment. It may be a next year project but change must be coming. There is a sense there are too many intangibles and impairments not being booked. The IASB looks to simplify the model and auto- amortise, more here. Heritage assets. Do heritage items meet the definition of an asset? Can they be measured and recognized in the financial statements? The IPSASB aims to improve financial reporting for heritage in the public sector, by considering the type of information that should be reported about heritage items. More here

Law number (1) of 2017 Concerning the Financial System of the Government of Abu Dhabi. Effective 2017 reporting by all Subject Entities: “Every Government Entity, Institutions and Company shall prepare and issue half-yearly Financial Statements within a period not exceeding 30 days from the end of the half of the fiscal year and shall issue annual audited Financial Statements within a period not exceeding 90 days from the end of the fiscal year.” Copy delivered to the Department of Finance. More here, search in Arabic.

IFRS 15 expectations on 2017 interims. In 2016 only 1% provided quantitative disclosure and 3.3% qualitative disclosure, meaning, 96.7% of 2017 Fortune 500 IFRS preparers surveyed by EY failed to comply with IAS 8. More in EY IFRS developments issue 126.

Grant Thornton IFRS news. In this issue:

IASB proposals on resolving disclosure issues.

IASB proposed improvements on certain areas of IFRS 8 ‘Operating Segments’.

IASB seeks to make targeted amendments to IFRS 9

Extended auditor’s reports. Investors and Audit firms have different opinions regarding disclosure of performance materiality applied in the audit of financial statements. ISA (UK & Ire) requires an explanation of how the auditor applied the concept of materiality in planning and executing the audit. The FRC report illustrates results of audit firms and benchmarks used for audits of companies for the past two years. People matter. “Our biggest asset is our people” has been a somewhat liberal platitude. Trotted out to make employees feel better. Not anymore. More and more entities are waking up to the idea of embedding social and human capital accounting, measuring its effects and bringing it forward into decision-making. “It is so important to monetise it as that drives decision-making” SSEs Group Sustainability Accountant. Read more in The Bruce Column. New Insurance standard. The old one grandfathered existing policies even if inconsistent in a group. The new one undoes all those. Results may be significantly impacted by the change. PWC IFRS News June.

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IFRS news, updates from ADAA, IASB and the Accounting Profession July 2017

Materiality appears 96 times in 16 of the IAASB’s auditing standards. Materiality appears 26 times in 18 of the IASB’s accounting standards. Materiality is material to the auditing and accounting profession. Materiality is so material there is a whole ISA on it.

Audit standard ISA 320.2 requires the auditor to set materiality based on “consideration of the common financial needs of users as a group. The possible effects of misstatements on specific individual users, whose needs may vary widely is not considered.”

If you are an analyst comparing competitor inventory levels, or a potential creditor considering the impact of debt factoring and leverage on whether to extend credit terms, or a customer purchasing a service package, you should not conclude the auditor will have assessed your needs in setting materiality. They may have but they may not have.

It’s not all bad though the IASB comes to the rescue with the IFRS Conceptual Framework “the objective of general purpose financial reporting is to provide financial information that is useful to investors, lenders and other creditors in making decisions about providing resources to the entity.” Which is good because investing is about valuation and dividends and lending is about getting your money back with interest.

Therefore if you are an investor, lender or other creditor your needs will have been considered by the auditor and you may conclude the auditor will pay close attention to matters such as impairments, intangibles, depreciation, amortization and cash flows in setting materiality.

Actually no, you cannot.

The audit opinion states: “In our opinion, the accompanying financial statements present fairly in all material respects…”

This means a line item, a disclosure note or even a primary statement might be materially wrong but because the opinion is on the financial statements as a whole then providing the error does not influence the economic decisions of users, made on the basis of the financial statements, then it is not a problem.

ISA 320.4 “The auditors’ determination of materiality is a matter of professional judgement, and is affected by the auditor’s perception” of what the users needs are. What did the auditor perceive users’ needs to be?

If you are deemed one of Those Charged With Governance (TCWG) then ISA 260 A13 reports materiality is one of those matters that may (and therefore may not but is mostly in practice) be communicated to you. Communication is a two way street so the Chair of the Audit Committee should expect a serious discussion with the auditor on how the level of materiality selected was chosen and what factors and needs of users, and who they are, were considered. If you have a government shareholder this should include the needs of government.

ISA 320. A2, states: “In the case of a public sector entity, legislators and regulators are often the primary users of its financial statements. Furthermore, the financial statements may be used to make decisions other than economic decisions…The determination of materiality for the financial statements as a whole (and, if applicable, materiality level or levels for particular classes of transactions, account balances or disclosures) in an audit of the financial statements of a public sector entity is therefore influenced by law, regulation or other authority, and by the financial information needs of legislators and the public in relation

to public sector programs.” Therefore, TCWG should ensure Government needs are considered by the auditor in setting materiality.

Materiality isn’t just materiality though. There is Planning materiality, Performance materiality, Component materiality and the SUD.

Planning materiality

Is the amount determined by applying a percentage to a benchmark. Typically auditors use a percentage of an adjusted profit measure, Profit before tax or Revenue. Other benchmarks can be used however they are highly unusual outside of investment property and asset management activities.

Performance materiality

Is the amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of any uncorrected and undetected errors exceeds materiality for the financial statements as a whole. It also refers to the amount or amounts set by the auditor at less than the materiality level or levels for particular classes of transactions, account balances or disclosures.

Performance materiality is determined by applying a ‘haircut’ a percentage to Planning materiality. Percentages applied by audit firms range from 50 to 75%.

Performance materiality is about precision. It is a professional judgement based on the auditor’s assessment of the risk that the audit does not detect errors. Performance materiality is the materiality to focus on. You should ask what haircut has been applied and why? Particularly with regard to your auditor’s assessment of your internal control systems and unusual or one-off business activities during the year. In the UK FRC’s survey (link on front page) two audit firms applied the maximum percentage (took advantage of the smallest haircut) in 100% of the audits reviewed. Indicating very little professional judgement or very little audit risk.

Component materiality

Is the amount prescribed by the Group Auditor to the Auditor of a Component (subsidiary, associate, joint venture) of the group that they should apply in the audit of the component. Amounts are less than Group Materiality and will be determined by the significance of the component’s revenue, profit, assets, liabilities (either or all) to the reported group.

Statement of Unadjusted differences (SUD)

Auditors collate errors and unadjusted differences identified duting the audit to ensure they do not add up to an amount that is greater than materiality which would require an adjustment.

The UK FRC’s survey is worth a read page 34 refers to the audit report for UBM which discloses that the auditor applied a lower performance materiality because UBM had implemented a new financial system and processes in the Americas and EMEA and made a significant acquisition during the year.

If your business has changed processes, changed procedures, changed people (acquisitions/disposals) did your auditor’s assessment of materiality change?

When discussing materiality with your auditor, challenge them to evidence and justify the professional judgement they applied.

Materiality Matters – an insight from ADAA’s Ahmed Al Mazrouei

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IFRS news, updates from ADAA, IASB and the Accounting Profession August 2017

WHAT’S NEW FROM THE IASB?

Principles of Disclosures. Ongoing discussions for more directed principles. The assets is not ready for its intended use: Can we recognize revenue? Clarifying IFRS 9. A look at the classification and measurement of financial assets.

Fair Value Measurement. What is wrong with IFRS 13? On the back page Auditing Estimates - insight from ADAA’s Richard Wright.

Principles of Disclosures. Transparent reporting is an indispensable demand for any industry regulator and to users of the financial statements. Disclosures to the financials are effective tools to a better communication with readers, who also want those disclosures to be consistent and comparable. The IASB, the EFRAG, the EFFAS, and the ABAF/BVFA are meeting to discuss the Principles of Disclosure project. In order for disclosures to be effective, some principles have to be guided. Users of the financials don’t want to continue reading a reproduction or a summary of a standard, but what they should seek is an insight into how does the entity relate to the standards and how they apply judgment in their unique business environment. Even non-IFRS disclosure measures can be presented, if useful and not deceptive, but should be distinguished and reconciled with the IFRS measures. An interesting suggestion during the discussion was to present accounting policies and the related financial information in the same note.

Disclosure requirements are judgmental, however principles and general guidelines need to be established to help companies determine what information and measures need to be presented that would satisfy transparency, comparability, and consistency. You can find the discussion paper here.

The assets is not ready for its intended use: Can we recognize revenue? Can we recognize revenue generated from assets before it is ready for its intended use? The answer is yes if the amendments to IAS 16 is approved. Sale of the items would be recognized in profit and loss instead of deducting the cost of the item from PP&E. More here. Clarifying IFRS 9. Are you going to measure your financial assets at amortized cost, fair value through other comprehensive income, or fair value through profit and loss? That all depends on your intentions. Do you plan to hold to collect, hold to sell or hold to collect and sell? The classification of financial assets under IFRS 9 will greatly affect their measurement. PWC shares its insights on all of these issues here.

Fair Value Measurement. What is wrong with IFRS 13? Answer – application and disclosure. ESMA seeks improvement in compliance and comparability and identifies improvements to the standard.

a) Disclosures are regards as either too generic or boilerplate. Ticking the box on paragraph 93 is not enough. 94-99 require more details especially for Level 2 and 3 measurements. Level 3 items are unlikely to qualify as one class therefore a reconciliation is required. Using third party pricing does not explain how the input complies with IFRS 13.

(b) The unit of account can be confused, for example, between an individual security and a significant holding. Level 1 items measured at market price do not include a ‘control premium’ creating a divergence of views of to apply level 2 or not.

(c) Decrease in market activity should affect active market assessments, surprisingly it often does not.

(d) Some specifics for derivatives (best to read the report).

ESMA expects issuers and auditors to consider their findings when preparing and auditing financial statements. We do too! Report here.

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IFRS news, updates from ADAA, IASB and the Accounting Profession August 2017

BACKGROUND

Producing estimates can be difficult, due to their subjective nature, lack of precision, and use of judgement. Auditing them need not be. Once an estimate is made, theoretically it should be easy to test whether it is reasonable. For example, I can estimate how many points Lewis Hamilton will have accrued in the Formula 1 Driver Standings after the season finale in Abu Dhabi. This estimate will likely be inaccurate, but it is possible to audit the estimate by checking my past performance, the data I have used, the likely finishes in each race etc.

The IAASB, who are responsible for setting auditing standards, have issued an exposure draft of proposed changes to auditing standard ISA 540 which deals with the auditor’s responsibilities for accounting estimates and disclosures in an audit.

The current ISA 540 was issued in 2008 as part of the IAASB’s clarity project. It was designed to enhance the rigor applied to auditing accounting estimates, including fair values, and required the auditor to focus attention on areas of higher risk, accounting judgment, and possible bias, thereby assisting the auditor to form appropriate conclusions about the reasonableness of estimates.

WHY CHANGE?

Accounting estimates and related disclosures have become more complex:

Valuation of financial instruments

Intangibles

Investment Property

Environmental clauses requiring provisions

Litigation provision After a significant consultation exercise, stakeholders have indicated that clearer and additional guidance is needed to enable auditors to appropriately deal with these complexities.

The exposure draft is also a response to the new accounting requirement to report expected credit losses (estimates) in banks introduced by IFRS 9 Financial Instruments which is effective from January 1, 2018.

Further, the current ISA 540 may not be adequate. The latest IFIAR inspection survey continues to indicate that the most pervasive inspection finding within engagement performance relates to the audit of accounting estimates.

This may be due to the difficulty auditors face when assessing the reasonableness of assumptions, performing risk assessment procedures, testing the accuracy of data used, or taking relevant variables into account in the audit of accounting estimates.

It could also be due to other factors such as Confirmation Bias, the fundamental human urge to “search for, interpret, favour, and recall information in a way that confirms one's pre-existing beliefs or hypotheses”

It may also be due to a lack of scepticism. In an audit with tight deadlines it can be subconsciously easy to accept management’s position rather than go against the grain and challenge that positon.

IAASB chairman Arnold Schilder gave his opinion:

‘Accounting estimates are used in many financial statements - often they are complex and require judgment or have estimation uncertainty. It is especially important that auditors are required to design and perform procedures to ensure estimates’ reliability. The proposed standard will bring significant changes to many audits’ WHATS NEW

The proposed new standard will require auditors to increase their focus on risks of material misstatements arising from accounting estimates, and to address those risks with more robust and specific audit requirements. It also seeks to emphasize the importance of the appropriate application of professional skepticism.

The IAASB also sought to make the new standard scalable, recognising that the standard applies to all accounting estimates. Hence it requires the auditor to evaluate the inherent risk in accounting estimates as low, or not low, to determine what further audit procedures are completed.

If low inherent risk, reduced testing can be completed:

(i) Obtaining audit evidence about events occurring up to the date of the audit report;

(ii) Testing how management made the accounting estimate and the data on which it is based; or

(iii) Developing a point estimate or range based on available audit evidence to evaluate management’s point estimate.

When inherent risk is not low, the auditor is required to design further audit procedures to obtain audit evidence about matters relating to complexity, judgement and estimation uncertainty. CONCLUSION

The proposed standard:

enhances requirements for risk assessment procedures to include specific factors related to accounting estimates, namely complexity, judgment, and estimation uncertainty;

sets a more detailed expectation for the auditor’s response to identified risks, including strengthening the auditor’s application of professional scepticism; and

is scalable regardless of the size or sector of the business or audit firm.

The deadline for comments is 1 August 2017. ADAA would like more guidance around auditors’ identification and assessment of contradictory evidence.

The proposed changes are significant and will have an impact on the manner of most audit engagements.

Current ISA 540 requires estimates to be reasonable, and disclosures to be adequate. The proposed standard requires both to be reasonable. Management should assess whether current estimates will stand up to the new audit procedures, and auditors should begin to amend their audit programmes to incorporate the changes proposed by the exposure draft.

Auditing Estimates – an insight from ADAA’s Richard Wright

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IFRS news, updates from ADAA, IASB and the Accounting Profession September 2017

WHAT’S NEW FROM THE IASB?

Materiality guidance. Making Materiality Judgements. ADAA Resolution no 1 of 2017 Effectiveness testing of Internal Control must be included in the scope of audit services. PWC’s IFRS news. In this issue IAS 8, IFRS 13 and 16 and EY’s latest 120 page IFRS 16 leases publication.

Financial statements are not the source of all wisdom for investors. Keep calm and carry on.

KPMG’s IFRS Blog focuses on IFRS 15.

Deloitte’s IAS Plus website comments real time on a wide range of sources of IFRS related activities August 2017 they report on professional skepticism.

And on the back page testing the effectiveness of internal controls an insight from ADAA’s Hana Al Harati.

Materiality guidance. In July ADAA published Materiality Matters. In September the IASB publishes Making Materiality Judgements. Singing from the same hymn sheet. The definition of materiality remains largely the same. Emphasis is placed on:

Not obscuring information.

Information considered material (even if the amount is immaterial) if it could reasonably be expected to influence.

Needs of primary users of financial statements, not all.

Nature and magnitude more relevant than size and nature.

Financial statements are not the source of all wisdom for investors. Tesla, launched in 2010, has burnt USD 7 billion of cash and makes no profits and yet it has a value greater than General Motors even though GM sells more than 100 times more cars than Tesla and does so profitably. This doesn’t mean Tesla’s financial statements are useless. More likely that the intangibles are not captured in the balance sheet. Financial statements are a reality check based on historic events. It may be Tesla will deliver dividends to shareholders. Current investors do but the information to support that conclusion is not in the financial statements. Is IFRS under threat? No argues Hans Hoogervorst keep calm and carry on IFRS is the best and most comparable source of information for investors.

ADAA Effectiveness testing of Internal Control. Resolution No 1 of 2017 published in the Official Gazette requires Subject Entities to ensure that the scope of audit services provided by the Statutory Auditor includes testing the effectiveness of internal control systems. This will be a significant change for some Subject Entities because ISA 330 only requires testing of the effectiveness of internal controls if the auditor is to rely on the controls, or if substantive audit procedures by themselves are not enough. PWC’s IFRS news. In this issue:

Four new standards come into effect between 2018 and 2021. Investors do not like uncertainty and will try to fill any gaps in information. Companies should ensure they provide the required information and do not let the market guess.

IFRS 13 gets a health check. Level 3 disclosures are filled with boiler plate generic information. Measuring quoted investments is a unit of account question. Highest and best use might not be current use, so which do you use?

Leases lab deals with variable lease payments. Variable payments based on an index or rate are remeasured when the index or rate moves. Variable payments not based on an index or rate, are excluded if they are genuinely avoidable. Variable payments that are in substance fixed payments are included because they are, in substance not avoidable from the perspective of the lessee. More here. And EY’s 120 page publication here.

KPMG’s IFRS Blog focuses on IFRS 15.

“If you have long term contracts or are recognizing revenue over time I strongly advise you to check you have a legally enforceable right for payment for your performance to date. If not, you’re likely to need to record your revenue at a point in time rather than over time – most likely only once the contract is completed.”

Other issues:

If you are recognizing profit for services on a blended margin basis you very likely have to separate those services and profit recognition will not be smoothed.

Business unit heads need to revisit performance measurement KPIs if revenue recognition changes.

Contract changes with customers may also be required. Read KPMG’s ten questions to ask here.

Deloitte’s IAS Plus website comments in real time on a wide range of sources of IFRS related activities. In August 2017 they report the IAASB, IAESB and IESBA have come together and published Toward Enhanced Professional Skepticism.pdf. Perhaps as regulators we are a little too skeptical we have read the document and see not very much that is new. For sure if you don’t understand the business and are not conscious of the factors that influence you, your professional skepticism will be diminished. It seems ironic the IFAC Boards should publish their views as events unfortunately unravel in South Africa where a lack of professional skepticism is reportedly to blame.

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IFRS news, updates from ADAA, IASB and the Accounting Profession September 2017

It matters not if you are a big company, a small company, a profit orientated entity or a public sector entity, there are only two ways for your auditor to approach their work:

One is to rely on your system of internal controls.

The other is to not.

The first approach requires experienced auditors who understand your business and can compare and contrast your system of internal controls with their other clients and advise you how to improve. The second does not. Inexperienced auditors simply substantively test large samples back to source documentation. Otherwise known in the trade as ticking and bashing!

Truth is since the introduction of computer based accounting systems in the last millenium no audit is wholly substantive. The comptometer lady a legend of the past that only the oldest auditor will recall. Today’s auditors are millennials, hard wired, cell phone savvy, permanently plugged to social media. Why would a millennial whose daily feeds rely on internal controls of the internet giants and fellow tweeters, not choose to rely on your system of internal controls? The answer is ISA 315 and ISA 330

ISA 315 requires the auditor to understand the controls relevant to the audit, evaluate the design of those controls assess and perform an audit procedure other than just inquiry on those controls.

ISA 330 only requires the auditor to test internal controls if the auditor intends to rely on them or if substantive testing alone does not provide sufficient and appropriate audit evidence.

ISA 330 is thus a two-part test of what to do, and is it enough, both of which the auditor will say are matters of professional judgement.

In the 1970’s the then President of the ICAEW (Lord Benson) formed what was a precursor to the International Auditing and Assurance Standards Board, the Board that now sets the ISAs. The reason for Lord Benson’s action was because in the 1970s attending the inventory count was a matter of professional judgement. He thought attendance should be mandatory. His intervention led to the mandatory attendance of the auditor at the inventory count being embedded in ISA 501 paragraph 4.

We think assessing and testing the effectiveness of internal controls should be mandatory.

Which requires a framework to compare your internal controls with? While ISA 315 (Revised) is framework neutral, the standard is influenced by the COSO Internal Control–Integrated Framework (1992).

COSO (The Committee of Sponsoring Organizations of the Treadway Commission) was formed in 1985 by the American Accounting Association, the American Institute of CPAs, Financial Executives International, the Institute of Management Accountants, and the Institute of Internal Auditors.

COSO defines internal control as ‘a process, effected by an entity’s board of directors, management and other personnel, designed to provide reasonable assurance of the achievement of objectives in:

Effectiveness and efficiency of operations.

Reliability of financial reporting, and

Compliance with laws and regulations.’

9) The organization identifies and assesses changes that could significantly affect the system of internal control.

COSO identifies five components and seventeen steps: Control Environment

The control environment sets the tone. A weak control environment will inevitably result in weak internal controls.

1) Demonstration of a commitment to integrity and ethical values.

This isn’t addressed by communicating a values statement to employees, it requires both words and deeds. Evidence of training and testing and of how unethical actions and integrity breaches have been dealt with in the past.

2) The board of directors demonstrates independence from management and exercises oversight of the development and performance of internal control.

Ask does the Board and Audit Committee thoroughly test the assertions of management or are they a rubber stamp? It is not wrong to trust management. It is not wrong to ask them to verify their assertions too. This requires detailed minutes of meetings and retention of documents presented and follow up actions evidenced.

3) Management establishes with Board oversight, structures, reporting lines, and appropriate authorities and responsibilities in the pursuit of objectives.

Assessment requires consideration of roles and responsibilities, levels of authority. Are they appropriate and are they enforced?

4) The organisation demonstrates a commitment to attract, develop and retain competent individuals in alignment with objectives.

Assessment of recruitment activities, performance appraisal systems and rewards may all feature.

5) The organization holds individuals accountable for their internal control responsibilities in the pursuit of objectives.

This requires evidence to demonstrate there are processes in place to hold employees accountable for their actions in fulfilling their objectives. What are the consequences of not doing so? What has happened in the past?

Risk Assessment

6) The organization specifies objectives with sufficient clarity to enable the identification and assessment of risks relating to objectives.

These are indirect controls related to the identification of relevant risks to the organization which may lead to an identification of inconsistent or missing objectives. Grouping of objectives into categories supports risk assessment.

7) The organization identifies risks to the achievement of its objectives across the entity and analyzes risks as a basis for determining how the risks should be managed.

The achievement of step seven depends on the proper execution of step six. In applying step seven, the following questions must be answered:

What are the risks of achieving the objectives identified in step six across the different levels of the entity?

What is the likelihood of a specific risk occurring, how severe could it be, how quickly could it affect the entity and for how long?

In the event of an occurrence, how will management respond? Is it through acceptance, avoidance, reduction or sharing risk?

8) What is the potential for fraud in assessing risks to the achievement of objectives?

Testing the effectiveness of internal controls – an insight from ADAA’s Hanan Al Harati

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Organizations that do not do this formally risk their control environment becoming outdated. Given the nature of the ever-changing business environment, key stakeholders may wonder if the frequency of risk update is appropriate.

Control Activities

10) The organization selects and develops control activities that contribute to the mitigation of risks to the achievement of objectives to acceptable levels.

Some see control activities as “necessary evils” rather than what they truly are = an effective way to make sure objectives set are achieved or, at the very least, provide an early warning of not achieving, enabling managers to react accordingly.

11) The organization selects and develops general control activities over technology to support the achievement of objectives.

Even though technology works to a high level of accuracy, outputs are based on inputs. Rubbish in results in rubbish out. Therefore, there is just as much need to place controls around electronic business processes as there is over the manual/people operated processes. Effective segregation of duties is vital.

12) The organization deploys control activities through policies that establish what is expected and procedures that put policies into action.

This requires developing and documenting clear and accessible policies and procedures. Deploying control activities through business units or functional leaders, and Internal Audit conducting regular and ad hoc assessment and reporting of control activities.

Information & Communication

13) The organization obtains or generates and uses relevant, quality information to support the functioning of internal control.

This requires ongoing training and accumulation of technical knowledge of how to leverage information technology to provide more useful, more comprehensive information to aid the functioning of internal control. Understanding current and developing technologies is part of the toolkit to maintain relevance. It requires ownership and being a catalyst to help your organization leverage compliance.

14) The organization internally communicates information, including objectives and responsibilities for internal control, necessary to support the functioning of internal control.

Information must be properly communicated and cascaded to the appropriate persons. It has to be carried out in the right manner and at the appropriate time. The use of separate reporting lines is necessary for a Whistle Blowing program to function optimally. Is this happening in your organization? A question that necessities an honest answer.

15) The organization communicates with external parties

regarding matters affecting the functioning of internal control.

We only know what we know. Utilising third parties facilitates knowing what they know. Opening up oneself to third party scrutiny increases accountability and identifies areas to improve. Gathering information and not taking appropriate action is worse than not gathering the information at all. Especially if a scandal arises along with the perception that somebody should have known because the information was available.

Some organizations perform a fraud risk assessment separate and apart from the risk assessment of the business. This is a mistake.

Monitoring Activities

16) The organization selects, develops, and performs ongoing and/or separate evaluations to ascertain whether the components of internal control are present and functioning.

Why was Sarbanes Oxley such a “tough sell”? Maybe because it forced responsibility and accountability, which many resisted. If internal control activities are important enough to spend the time, why resist formalizing them which improves consistency? Formalizing monitoring controls improves the control environment and provides a more efficient and effective oversight function.

17) The organization evaluates and communicates internal control deficiencies in a timely manner to those parties responsible for taking corrective action, including senior management and the board of directors, as appropriate.

Reporting deficiencies noted in “ongoing evaluations” is an important aspect of a healthy internal control process. This does not apply to a routine mistake but rather a weakness noted in controls design upon review. Deficiencies identified by ongoing evaluations should not be swept away but formally logged, reported and remediated. Reporting level depends on the severity of the issues as dictated by guidelines discussed above.

Concluding thoughts

An effective system of Internal control can prevent poor judgments and poor decisions from being honestly made.

An effective system of internal control can prevent fraud. It can’t prevent all forms of fraud. Collusion can bypass segregation of duty controls. However, monitoring controls should pick this up.

An effective system of internal control will not prevent external events from conspiring to cause an organization to fail. However, it will detect when it is happening and provide time for remediate actions.

Having an effective system of internal control in place is like having a smoke alarm it won’t prevent fire but it will tell you when it is happening so you can do something about it.

Internal Audit, Audit Committees, Non-Executive directors, Executive directors, Heads of business unit functions down to the most junior employees all have a role to play.

Advice on control deficiencies and breakdown in internal controls can come from many sources, internal and external. Suppliers, customers, investors, regulators. Whilstle blowers come from many sources. It makes sense to use them all.

ISA 315 requires the external auditor to make enquiries of internal audit function about their work at the financial statement audit assertion level.

ISA 600 requires the component auditor to communicate to the group engagement team any identified significant deficiencies in internal control at the component level.

ISA 265 requires the external auditor to communicate deficiencies in internal control to management and those charged with governance.

If your auditor is not assessing and testing the effectiveness of your system of internal controls your audit service may provide the right answer (a clean audit opinion) but did you get the best value from it?

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IFRS news, updates from ADAA, IASB and the Accounting Profession October 2017

WHAT’S NEW FROM THE IASB?

The law of unintended consequences. IASB issues Practice Statement 2: Making Materiality Judgements. PWC IFRS news. IFRIC, IFRS 16, IFRS 9 and IFRS 15. Pay attention to the words, not just numbers. Know how to explain it not just calculate it. IFRS 9 changes IFRS 7.

KPMG IFRS Institute publishes 2017 Accounting Change Survey results. EY IFRS. All EY’s IFRS publications on a page. And on the back page A flash in the pan an insight from ADAA’s Hasina Al Adawi

The law of unintended consequences. IASB issues Practice Statement 2 Rarer than hen’s teeth. Seven years since the first, the second arrives. So why not a standard? Well when something gets into the too difficult box and the IASB has completed a lot of work, a practice statement is an easier out. It’s not mandatory to comply with in order to comply with IFRS. So ignore it then. That is one option, but this one has a point.

Practice statement 1 ‘Management Commentary’ said the numbers don’t tell the whole story, so management please do. Please provide your version of what the numbers say.

Now in 2017 the IASB says: The numbers are too cluttered, too much detail, too much boiler plate, too much disclosure. Financial reports are too long and too difficult to read. And we agree.

IAS 1.7 tells us the purpose of financial statements is to meet requirements of users who are not in a position to require an entity to prepare reports tailored to meet their particular information needs. It also says (1.17) in virtually all circumstance, an entity achieves a fair presentation by compliance with applicable IFRS. So like the middle lane motorist sitting safely at 100kph audit firms have published checklists and illustrative accounts for IFRS reporters to safely follow. Tick the box on those and all will be okay. Yes, but no more! You are free. The practice statement says: “An entity may not provide a disclosure specified by an IFRS standard if the information resulting from that disclosure is not material.” This is the case even if the standard contains a list of specified disclosure requirements, or describes them as minimum requirements. But there is a sting – “the entity must consider whether to provide information not specified by IFRS if that information is necessary to understand the impact of particular transactions other events and conditions on the entity’s income, balance sheet and cash.” More here.

PWC IFRS news. IFRIC, IFRS 16, IFRS 9 and IFRS 15.

When IFRIC decides a standard is clear enough, an Agenda Decision is published. It is educational material and not part of existing standards and not mandatory. Nonetheless enforcers in many jurisdictions expect entities to apply accounting policies in line with the Agenda Decisions. (Why would you not? Ed). Hence the IASB has started a project to amend IAS 8 so that what were previously measurement decisions (estimates) become policy decisions. For example; measuring inventory at FIFO or weighted average cost.

IFRS 16 – how to get started.

IFRS 9 – Hedge accounting deferral option.

IFRS 15 – When to capitalize contract costs and the practical expedient. More here.

Pay attention to the words, not just numbers. Illustrative disclosures under IFRS 7 as amended by IFRS 9. Enhance your understanding with Deloitte’s illustrative International Bank GAAP financial statements here.

KPMG IFRS Institute publishes 2017 Accounting Change Survey results.

IFRS 15 poses greater implementation challenges than anticipated. Sixty percent are running behind time due to competing priorities and resource constraints.

Fewer companies are to implement system changes before IFRS 15 is effective. Not surprising given running behind time!

Sixty percent are surprised at the challenges implementing the leasing standard – identifying embedded leases, selecting and implementing an effective leasing system.

Forty percent report costs are over budget. More here.

EY IFRS. All EY’s IFRS publications on one page.

What new Standards are in play at 30th September 2017?

Consolidation and joint arrangements. Want to know more?

And IFRS 9, 15, 16. More here.

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IFRS news, updates from ADAA, IASB and the Accounting Profession October 2017

An odd title you might think for an article on ethics. What does a frying pan have to do with ethics? Nothing, as it happens.

‘A flash in the pan’ is a phrase first coined in a review of Reflections a 17th century play written by the first English poet laureate John Dryden. The context was "If Cannons were so well bred in his Metaphor as only to flash in the Pan, I dare lay an even wager that Dryden durst venture to Sea."

The phrase was adapted in the 18th century to refer to a person that showed great initial promise but failed subsequently to deliver.

To flash in the pan means the cannons cannot be effective. To show great promise and not deliver in the 21st century is not what we want our accountants to be.

Fortunately, when we find something that is not right, help is at hand from the International Ethics Standards Board for Accountants (IESBA).

Non-Compliance with Laws and Regulations (NOCLAR). Is an act of omission or commission, intentional or not, contrary to prevailing law or regulations.

The IESBA published a standard in 2016, dealing with NOCLARs arising during an engagement or employment.

For a matter to be deemed a NOCLAR it has to have either:

1. A direct impact on the decision of material amounts and disclosures in the financial statements of the client’s or employee’s company. And/or

2. The NOCLAR is a fundamental matter to the company’s operations and its ability to continue as a business, or to avoid any material penalties.

The standard applies to all professional accountants. Responsibility to resolve or deter NOCLAR rests with management or if the NOCLAR involves management, those charged with governance.

Instances not considered NOCLARs, include:

Clearly inconsequential matters.

Personal misconduct unrelated to the client or employer’s business activities.

Non-compliance by persons other than the professional accountant’s client or employer.

If legal or regulatory provisions in a jurisdiction address NOCLAR then the professional accountant complies with those jurisdictions provisions even if they are different from the IESBA’s standard.

When aware of a NOCLAR the professional accountant must act. Not doing so is an abdication of professional ethical responsibilities and a disciplinary matter for the member’s Accounting Institute. The IESBA’s NOCLAR framework is designed for:

Auditors in public practice

Professionals in public practice who are not Auditors

Individuals with senior roles in a business

Individuals not in senior role in the business.

The responsibilities of the professional accountant differ for audit and non-audit engagements.

NOCLAR framework for Audit services

Determine if either of the two features of NOCLAR apply.

Document your understanding of the regulations and applicability to the matter, the persons involved, timing and nature.

Discuss with the legal counsel at your firm and follow up with the reporter of the NOCLAR to confirm understanding of the matter and the relevant facts.

Discuss the matter with management at the company to advise them to take appropriate measures to address and resolve the NOCLAR.

In situations where management is involved the matter is reported to those charged with governance.

The auditor must evaluate management’s actions and if management has taken no action and the matter passes the public interest test the auditor reports the matter to a third party authority or regulator.

NOCLAR framework for Non Audit services

Similar to above except when the non-audit professional client lacks specific protocols to deal with NOCLAR. Then the NOCLAR is reported to the auditor. Differences between IESBA & American Institute of Certified Public Accountant (AICPA)

IESBA permits disclosure to third parties when necessary. AICPA prohibits such actions without prior client consent.

The AICPA does not tailor the standard for different professionals in the public interest.

The IESBA standard allows the current auditor to inform the successor of any NOCLAR. AICPA does not unless prior approval by client.

IESBA encourages non-audit service professionals to document the NOCLAR matters. The AICPA requires it.

Concluding thoughts

Professor Steven Mintz states “it’s one thing to know something is wrong; it’s another thing to act on it.”

Regardless of the jurisdiction any professional follows, all individuals should aim to do the right thing, by either reporting or resolving matters of non-compliance.

The framework and standards are there to guide the professional accountant but it is every professional’s ethical responsibility to take action when facing NOCLAR and other matters

A flash in the pan – an insight from ADAA’s Hasina Al Adawi

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IFRS news, updates from ADAA, IASB and the Accounting Profession November 2017

WHAT’S NEW FROM THE IASB?

CIPFA and IFAC launch public sector financial accountability index. The result: a world map of government accounting.

IPSAS news: Filling the gaps. ED 63 addresses Social Benefits.

KPMG IFRS 15 Revenue Supplement disclosure requirements.

IFAC calls for nominations for the IFAC Boards and Committees and the Independent Standards Setting Boards. Your opportunity to influence.

“For every complex problem there is an answer that is clear, simple, and wrong” Root cause analysis

Refresh your knowledge. Take the IFRS Foundation quiz.

ESMA publishes database of enforcement decisions. 21st extract includes enforcement actions on Joint Control.

Materiality definition clarification. FASB focus on a reasonable person.

Audit evidence. How much is enough?

And on the back page Identifying cash generating units an insight from ADAA’s Ebrahim Al Shaikhali.

CIPFA and IFAC launch public sector financial accountability index to improve understanding of public sector accounting and budgeting, and stimulate public financial management (PFM) reforms. The output is a world map of financial reporting by central governments, which will be expanded over time to include state/provincial and local government. Map here. IPSAS news. IPSAS filling the gaps. ED 63 addresses Social Benefits. The ED clarifies accounting for: social benefits, social risks, and universally accessible services. It also updates the accounting of delivery of retirement, unemployment, and disability benefits. Recognition is based on an obligating event, or optionally on an insurance based approach. The ED requires five-year projected cash flow disclosure, which will be challenging. ED here

IFAC calls for nominations for the IFAC Boards and Committees and the Independent Standards Setting Boards. Your opportunity to influence international auditing and financial reporting standards. Nominate here. “For every complex problem there is an answer that is clear, simple, and wrong” If firms cannot tell us what went wrong then we’re left with two conclusions, either there is cover-up in place or, worse still, the firm still doesn’t know why it went wrong.” Root cause analysis from IFAC Global knowledge gateway. Refresh your knowledge. Take the IFRS Foundation quiz. ESMA publishes database of enforcement decisions.

Power to block is not power to control. Power requires unilateral ability to make decisions to direct the relevant activities.

Qualified consent or veto power of strategic decisions over relevant activities, ESMA concludes, is joint control. www.esma.pdf

KPMG IFRS 15 Revenue Supplement. The Supplement complements the illustrative financial statements and focuses on the disclosure requirements of IFRS 15.

Disclosures should contain both quantitative and qualitative information, which includes disaggregation of revenue, contract balances, performance obligations and assets recognized to obtain or fulfill a contract as well as significant judgements in the application of the standard.

IFRS 15 offers a range of transition options including:

Retrospectively to each prior period presented in accordance with IAS 8 subject to certain expedients.

Retaining prior period figures as reported under the previous standards with the cumulative effect of applying IFRS 15 recognized at the date of initial application as an adjustment to the opening balance of equity.

Read more here.

Materiality definition clarification. FASB’s new definition: “The omission or misstatement of an item in a financial report is material if, in the light of surrounding circumstances the magnitude of the item is such that it is probable that the judgement of a reasonable person relying on the report would have been changed or influenced by the inclusion or correction of the item.” More here. Audit Evidence. Collecting sufficient, relevant, reliable audit evidence is enough. Sufficient is a measure of quantity. Evidence to support one item can sometimes be sufficient e.g. a test of a computer control, a bank loan confirmation. Relevant is a measure of quality. It is not enough just to gather evidence that proves, evidence that disproves must also be sort. If disproving evidence is found it must be investigated and assessed. Appropriate is another measure of quality assessed by considering relevance and reliability.

Knowing when audit evidence is enough, is a matter of professional judgement. This is not some woolly concept. IAS provides audit procedures and thresholds for evidence gathered. Problems arise, not with interpretations of accounting standards, but with the quality of audit evidence gathered to support the interpretation.

Details here.

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IFRS news, updates from ADAA, IASB and the Accounting Profession November 2017

IAS 36 requires an impairment test if there is any indication of impairment or if an intangible asset has an indefinite useful life or the asset is goodwill. The premise is to ensure that assets are carried on the balance sheet at no more than their recoverable amount. IAS 36 defines recoverable amount as the higher of fair value less costs to sell and value in use.

Assets may be tested for impairment individually however most intangible assets do not produce cash inflows by themselves, this is why IAS 36 requires the identification of Cash Generating Units (CGUs). So what exactly is a CGU and how should entities identify them?

IAS 36 defines a CGU as the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. IAS 36 prescribes guidelines for identifying CGUs but guidelines can be interpreted and applied in differing ways. It is not uncommon to find competitors within the same industry identifying CGUs in a dissimilar manner. In practice defining a CGU may have an endless amount of parameters. It may be different departments within the same company, different entities within a conglomerate, groups of property, plant and equipment, geographical areas or separate lines of business.

It is important to note the requirements of IAS 36 state no single CGU may be larger than a single operating segment as defined by IFRS 8. An operating segment is defined to be a component of an entity:

That engages in business activities that generate revenues and incur expenses (including business activities with other components within the same entity).

Whose operating results are regularly reviewed by the entity’s chief operating decision maker (may be a group of people) to make decisions about resources to be allocated to the segment and assess its performance.

For which discrete financial information is available

The last two points of the definition are points some entities overlook. An example of this is determining a subsidiary to be a single CGU when the subsidiary has several lines of business evaluated by the group board separately when considering performance.

Companies can also fall into the trap of determining CGUs at a level that is too large which defeats the objective of impairment testing because efficient high performing assets may mask inefficient or underperforming assets

Identifying CGUs is challenging to large businesses, especially ones that are closely integrated or that have units that sell their production internally.

IAS 36 addresses this issue by stating that an asset or group of assets should form a separate CGU if it could sell its output in an, “active market” as defined by IFRS 13 ‘Fair Value Measurement.’ It is also important to note that IFRS 8 allows operating segments to be combined and aggregated into larger reportable operating segments if they meet certain criteria; however, the definition of a CGU to be used in IAS 36 is before the aggregation of more than one operating segment.

Testing assets for impairment individually vs. testing as part of a CGU.

When testing for impairment, entities must first consider assets individually. Meaning their recoverable amounts should be determined, however as mentioned above this may prove difficult because in many cases assets do not produce cash flows individually from other assets. If this is the case, then that asset cannot be tested for impairment individually but instead tested as a part of the CGU that it has been allocated to. The next step is to evaluate the CGUs recoverable amount. If the CGU’s recoverable amount is not lower than its carrying amount then no impairment exists on a CGU level. The individual asset cannot be impaired even if its fair value less costs of disposal is less than its carrying amount. To provide a clarification of these requirements, the standard offers the following example:

“A mining entity owns a private railway to support its mining activities. The private railway could be sold only for scrap value and it does not generate cash inflows that are largely independent of the cash inflows from the other assets of the mine.

It is not possible to estimate the recoverable amount of the private railway because its value in use cannot be determined and is probably different from scrap value. Therefore, the entity estimates the recoverable amount of the cash-generating unit to which the private railway belongs, ie the mine as a whole.”-IAS 36.67

Expanding on this example, what if the mining company decides to build a new private railway line and shifts its operations to using the new line exclusively. The result is that the original line is idle and has no use to the company (assuming switching back is not possible). The question that the company now faces is whether to impair the value of the original line. The answer lies in the fact that the asset no longer generates cash flows in conjunction with other assets. Furthermore, its fair value less costs of disposal can be estimated and is most probably its scrap value. Therefore, the asset should be impaired on an individual level.

While it is true that in practice some cases will not be as straightforward as the ones described entities still need to ensure that assets tested at a CGU level continue to meet the requirements set out in IAS 36 as business operations adapt and change with time. It is important to note that CGUs may not always change due to specific operational changes such as a divestment, a restructuring or an entry into a new market. The change can in fact occur over time gradually and therefore will not be so straightforward to identify.

In conclusion, identifying CGUs is important for testing impairment, allocating goodwill and even determining operating segments.

Difficulty in identifying CGUs and allocating goodwill and other assets to them will continue to pose challenges to entities across the board. Having large CGUs makes applying the standard more difficult. The basis of CGUs should be verified and challenged by auditors and management alike to minimize the possibility of having low performing assets masked by high value generating assets.

Identifying cash generating units – an insight from ADAA’s Ebrahim Al Sheikhali

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IFRS news, updates from ADAA, IASB and the Accounting Profession December 2017

WHAT’S NEW FROM THE IASB?

Key Audit Matters. IFAC get in on the act.

IPSAS and IFRS. Increased alignment. Proposals aim to bridge the gap regarding revenue and financial assets.

Internal Control. Implementation Tool for Auditors from CPA

Known unknowns of IFRS 9 and 17. KPMG survey of insurers who will be heavily impacted by the new standards.

Annual improvements to 2015-2017 cycle issued. affects IFRS 3, 11, IAS 12, 23.

Lead by example. How to present information about your entity.

PWC Applying IFRS 15 in the Real Estate Industry.

EY Current SEC and PCAOB developments. “The work of auditors is critical…”

And on the back page The first of the famous five an insight from ADAA’s Amna Huwail.

Key Audit Matters. You may have noticed the auditor opinion looks a little this year. Its longer and it’s got more information in it on what work the auditor did to address significant risks. But is longer better? IFAC KAM

IPSAS and IFRS. In the light of the conversion process between the IFRS and the public sector standards, the IPSASB published a new exposure draft to amend some principles towards the respective standards under the IFRS.

One proposal is to amend IPSAS 29 Financial Instruments towards IFRS 9, with simplified classification and measurement requirements for financial assets, a forward looking impairment model, and a flexible hedge accounting model. Find the comparison between IPASAS and IFRS and more here.

Another proposal is to amend the recognition and measurement criteria for revenue and non-exchange expenses under IPSAS 23 towards IFRS 15. More here.

Annual improvements 2015-2017 cycle issued. Some small (in IASB language narrow scope) amendments effective from 1 January 2019, with early application permitted. They clarify:

An entity remeasures its previously held interest in a joint operation when it obtains control. While it does not remeasure it’s previously held interest in a joint operation when it obtains joint control under IFRS 11.

IAS 12 to recognize income tax consequences of dividends on P&L, and

Any borrowing costs incurred after the asset is ready for use or sale, becomes part of general funds when calculating the capitalization rate on general borrowings under IAS 23. More here.

Lead by example. In the link is a starter kit to help you think about how to present information about your entity. It’s called Integrated reporting For SMEs but the principles are the same for any entity.

Internal Control. Implementation Tool for Auditors from CPA Canada: Specific requirements of CAS 315 identified in practice inspection as areas where auditors struggle to meet the requirements. Equipped with an understanding of common pitfalls, the tool provides an approach for appropriately identifying and assessing the risks of material misstatement through understanding the entity and its environment, including the entity’s internal control. KPMG Known unknowns of IFRS 9 and 17. KPMG survey of insurers who will be heavily impacted by the new standards. 85% are still assessing, or not finished assessing the impact of IFRS 17, whilst 65% said the same for IFRS 9. The survey provides information about the effect on data, systems and processes. Big changes required, no surprises there. It also discusses the business impact. Explore the lessons and tips that emerge here.

PWC Applying IFRS 15 in the Real Estate Industry. Just because 34c) says you can, it doesn’t mean you have to! IFRIC 15 overturned a rather bullish application of IAS 18. IFRS 15 was unfortunately hijacked during development by the developers and 34c) has brought that rather bullish application back. Scrutinize your contracts very carefully. If there is no alternative use for the good you are selling to the customer and you have the right to payment from the customer for performance to date. You have to recognise revenue. Which means you might have to borrow to pay dividends. Fine if the development gets finished, not so fine if it doesn’t. More here. EY Current SEC and PCAOB developments. “The work of auditors is critical in protecting investors and helping registrants and audit committees fulfill their respective duties.

External audit the “linchpin of trust that holds our system of public market capital formation together” and highlighted the important role the PCAOB has played in promoting investor trust and the independence of the auditing profession.” All the issues in AICPACompendium.pdf

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IFRS news, updates from ADAA, IASB and the Accounting Profession December 2017

In ADAA IFRS Digest September 2017 we highlighted the importance of internal controls in the context of an audit of historic financial statements. Published in the Official Gazette 15th August 2017 is Decree number 1 of 2017. The decree requires Subject Entities to obtain from the Statutory Auditor (as part of the audit services) a separate report, on the effectiveness of the Subject Entities system of internal control. To assess the design effectiveness of a system, a Framework is required. Although the decree is framework neutral, COSO is one framework that might be applied. In September we highlighted the five components and seventeen steps of COSO. In this, and our next four publications, we go through the components and steps in more detail. Management is responsible for the preparation of their financial statements. Management is responsible for the system of internal control being designed and operating effectively. Internal Audit is a key tool in management making that assessment. COSO has many useful tools and publications available on their website, some of which are utilized in preparing this publication. The five components:

Control Environment

Risk Assessment

Control Activities

Information and Communication

Monitoring Activities Component One - Control Environment There are five principles that together demonstrates if the control environment is operating effectively. 1) The entity demonstrates a commitment to integrity and ethical values.

Tone at the top: Management, Directors, Those Charged with Governance lead by example. Their values, their integrity, their ethics, their behavior, sets the tone. The judgements they make, the quality of evidence they accept, the guidance they provide, their commitment to do what is right sets an example to all in the organization. In smaller organizations, it will be felt, evidence will be face to face, the owner’s presence setting the tone. In larger organizations it is found in mission and values statements, codes of conduct, policies, procedures and practices. The importance of tone from the top cannot be underestimated. Do as I do, is more powerful than, do as I say.

Standards of conduct: Establish what is right and what is wrong. Provide guidance for operating in between and what the associated risks might be. They take account of local laws and regulations, and custom and practice. The more international an organization becomes the greater the need to define standards. If something is not acceptable in one part of an organization in one part of the world how can it be deemed acceptable elsewhere? Standards of conduct don’t just apply to directors, management and employees, they apply to suppliers, customers and financiers. In fact, they apply to all stakeholders.

former CEOs, other senior management and Audit Partners are often sought. A key activity of the Board is to challenge the CEO and Senior management by asking probing questions and requiring follow up. 3) Management establishes, with Board oversight, structures, reporting

lines, and appropriate authorities and responsibilities in their pursuit of the objectives.

Organizational structures and reporting lines: Centralized, decentralized.

Adherence and deviations: Setting the tone and having standards is not effective without periodic assessment, intervention and enforcement. Assessment requires gathering evidence in support of an objective evaluation of performance in accordance with the prescribed standards. The decree refers to ‘testing the effectiveness of internal control over the financial reporting process’ and whilst it maybe SAP or Oracle or some other software that facilitates your financial reporting, it is people that apply it and oversee it. Evaluating adherence involves Internal Audit conducting assignments to assess people’s performance in their roles (and not just those at the bottom of the organization). It requires Audit Committees to assess themselves. It requires Audit Committees to evaluate the supplier of audit services. It requires Audit Committees to assess Internal Audit. It requires assessment of employees, managements and directors’ performance and remuneration. It requires assessment of procurement services, sales peoples’ incentive programs and potential collusions with customers.

The enforcement question has to be addressed too. Is the response to a deviation a penalty or a training activity? What changes must be made? 2) The Board of Directors demonstrates independence from management and

exercises oversight of the development and performance of internal control.

Authorities and responsibilities: The Board (or other oversight body) comprises both executive and non-executive members normally with a majority of non-executives. The CEO and senior management are responsible for designing and implementing the internal control system, the Board provides oversight and challenge. To facilitate oversight structures are put in place, either voluntarily, or because of local laws and regulations, including stock exchange listing requirements. These include:

Nomination committees for the selection of directors and evaluation of senior management and the Board of directors.

Remuneration committees to assess policies for executives and senior management to ensure a balance between long and short term decision making and an assessment of risk.

Audit Committees for oversight of financial reporting, integrity, transparency and internal control.

Other Committees to address specific risks arising from local regulations or perceived risks. E.g a Rick Committee.

Independence and relevant experience: Independence has according to the IESBA Code of Ethics two qualities:

Independence of mind – the state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgement, thereby allowing an individual to act with integrity, exercise objectivity and professional skepticism

Independence in appearance – the avoidance of facts and circumstances that a reasonable and informed third party would likely conclude a person’s integrity, objectivity, or professional skepticism is compromised.

Relevant experience can be difficult to find. Industry, regulatory and market experience are most likely found in the skillsets of the CEOs and Senior management employed by competitors! For this reason, retired

The question becomes how much accountability can or should be pushed down and what positions is it appropriate to hold accountable? Experience and qualification is a key consideration, as is growth and headroom.

Clarity of responsibility is key, as are communication channels for people to feel comfortable about reporting deviations from the expectations set in standards.

The first of the famous five, Control Environment– an insight from ADAA’s Amna Huwail

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Flat, pyramid. Matrix. Geographical, product or service. Insourced, outsourced? They are a myriad of structures and operating models management might adopt. Each structure requires an evaluation of reporting lines, information flows and potential conflicts of interest.

Authorities and responsibilities: Once entities grow to a certain size the owner manager model becomes ineffective. The question becomes how much empowerment is passed down inside the organization?

Limitations of Authority: to prevent the unintended consequences of a person acting inside their authority level but outside their competency level thereby taking on inappropriate risks, limitations must be put in place. Limitations can be system driven, or structurally driven they can include access controls both physical and virtual and segregation of duties. 4) The organization demonstrates a commitment to attract, develop and

retain competent individuals in alignment with objectives.

Policies and Practices: Provide the foundation for defining competence required to achieve objectives and provide a basis for evaluating performance. A rocket scientist requires a recognised degree from an appropriate University in rocket design, manufacture and operation.

Evaluate Competence: Competence is demonstrated from professional experience, training and certifications. The Board of directors evaluate the competence of the CEO. The CEO of Senior management. Senior management of Management and employees.

Attracting, developing and retaining: Competent, experienced and skilled people make less mistakes. They will embed and test internal control systems so that the systems are effective, minimizing the risks of fraud or error. As a colleague once said: “there are those who know they know, learn from them. There are those that don’t know they know, teach them. There are those that know they don’t know, be kind to them. And there are those who don’t know they don’t know…”

Plan and prepare for succession: The unplanned loss of key personnel at any level in an organization can have a detrimental impact on the effectiveness of a system of internal control. Sometimes people don’t know why they are doing what they are doing, so they don’t understand its importance. The cumulative knowledge of an organization should grow over time, but it will only do so if key employees are not cherry picked by its competition. Ask Ferrari. 5) The organization holds individuals accountable for their internal

control responsibilities in pursuit of objectives.

Accountability for Internal Control: The CEO is ultimately accountable to the Board of Directors for identifying and understanding the risks to the entity and establishing an effective system of internal control. To achieve such accountability, objectives, guidance, training, performance reporting, deviation measures etc. are pushed down to appropriate positions in the organization.

Performance measures, incentives and rewards: Reward is a great driver of behavior. Reward comes in many forms it is not just cash.

Having an effective system of internal control is not a short term goal it is ongoing. Organizations change, people change, technology changes. Performance measures, incentives and rewards need to be current and be flexible to change.

Objectives should be clear, communicated and understood at the appropriate levels in the organization.

Measure expected performance compared to actual performance and both positive and negative deviations. Trends indicate the direction of travel and can identify the possibility of a negative deviation before it happens.

Pressures: are an inevitable consequence of setting objectives. Pressure to achieve can be overwhelming and can result in unintended behavior. Objectives need to be stretching but realistically achievable. History demonstrates unrealistic objectives are not only unachievable, they can result in people doing things they would not normally do. Such as bringing forward revenue recognition and stretching valuations and provisions to hit budget. The role of finance teams is to ensure transactions are accounted for appropriately and information presented fairly not to play with accounting to achieve a desired result.

Performance Evaluation and rewards: Performance evaluation and award allocation always contains elements of subjectivity. Minimizing subjectivity is difficult. Being clear from the outset about objectives and awards helps. As do 360 degree evaluations. Feedback must be fair and freely given and evaluation outcomes fair and free from bias. Final thoughts

Leading by example.

Demonstrating a commitment to integrity and ethical values contributes to a higher valued organization.

Valued higher by all stakeholders.

Greater value is perceived in the quality of goods and services provided to customers.

Suppliers are attracted at lower costs.

And employees more motivated and committed.

A strong control environment with the appropriate tone from the top is not a ‘nice to have.’ In the modern globally interconnected world, it is a must have.

Sara Al Sajwani

Hasina Al Adawi

Hanan Al Harati

Amna Huwail

Ebrahim Al Shaikh Ali

Dawood Al Hammadi

Mahmoud Shahin

Ahmed Al Mazrouei

Richard Wright

Steven Ralls

Head of Accounting and Auditing Standards

AASD@adaa.abudhabi.ae

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Abu Dhabi Accountability Authority Hamdan Street, Falcon Tower, Abu Dhabi, P.O. Box: 435 -

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