audit committee institute - kpmg · 2020. 6. 11. · bribery and corruption (3.3) • monitor the...
TRANSCRIPT
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Audit Committee InstituteThe changing world of corporate reporting and current expectations of directors for 30 June 2019 and beyond
June 2019
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Instil a culture of acting lawfully, ethically and responsibly
This includes the need for the entity to preserve and protect its reputation and standing in the
community and with key stakeholders, such as customers, employees, suppliers, creditors, law
makers and regulators.
ASX Corporate Governance Principles and Recommendations 4th Edition, Principle 3, Recommendation 3.1
Relationships and reputation
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Agenda1. Financial reporting & regulatory developments
2. ASX Corporate Governance Principles and Recommendations 4th Edition
3. Climate risk
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Financial reporting & regulatory developments
Commissions & Enquiries
AASB & IASB
Treasury
Board of Taxation
ATO
ASX
ASIC &
APRA
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* Other matters include key disclosures of:– Sources of judgement and estimation– Accounting policy choice selection
ASIC financial statement surveillance
Business combinations
Expense deferral215 reviewed 55 queried
(79 matters)
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30 June 2018 results
Chart1
Revenue recognition
Asset values and impairment
Tax accounting
Consolidation accounting
Expense deferral
Business combinations
Other matters
Sales
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18
28
11
4
3
3
12
Sheet1
Sales
Revenue recognition18
Asset values and impairment28
Tax accounting11
Consolidation accounting4
Expense deferral3
Business combinations3
Other matters12
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Relationships and reputation in the financial report
ASIC and stakeholders – consistency and connection
Digital disruptionBrexit
Remuneration report
Estimates and judgements of applying new
standards
Climate-risk disclosures
Non-IFRS information
Ibor replacement
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IFRIC Agenda decisions
Need to change
accounting policy?
Saas hosted on the cloud
e.g. Over time transferof constructed good
Intangible assets
Borrowing costs
Financial instrumentse.g. Hedging and highly probablerequirement for specific derivative
RevenueAssessment of promised goods or services
Subsidiariese.g. Step acquisition whenaccounted for at cost
Disclosures required?
Time to adopt?
Contingent assetsDeposits relating to taxes other than income tax
(draft decision) LeasesSubsurface rights
Joint arrangementse.g. Liabilities in relation to a joint
operator’s interest in a joint operation
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New standards for 30 June 2019Year ends
AASB 2017-1: Transfers of Investment Property, Annual
Improvements 2014-2016 Cycle and Other Amendments
(AASB 1, 128 and 140)
AASB 15:Revenue from Contracts
with Customers
AASB 2016-5: Share-Based Payment Transactions
(AASB 2)
Interpretation 22: Foreign Currency Transactions and
Advance Consideration
AASB 2016-6 and 2017-3: Amendments and
clarifications to AASB 4: Insurance contracts
AASB 9:Financial Instruments
Half-Years
AASB 2017-7: Long-term Interests in Associates and
Joint Ventures(AASB 128)
AASB 1058: Income of Not-for-profit EntitiesPlus: AASB 15 NFP Implementation Guidance
NFP Public Sector LicensorsRight-of-Use Assets of NFP Entities
AASB 2018-2: Plan Amendment, Curtailment or
Settlement (AASB 119)
Interpretation 23: Uncertain Tax Positions
AASB 2018-1: Annual Improvements 2015–2017
Cycle (AASB 3, 112 and 123)
AASB 16:Leases
AASB 2017-6: Prepayment Features with Negative
Compensation(AASB 9)
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AASB 16 LeasesTesco says new accounting standard would
have increased 2018-19 operating profitReuters, 29 April 2019
Aspo changes its gearing target following the adoption of IFRS 16 standard
Globe Newswire, 29 April 2019
Metro Bank Quarterly Profit Halves, Customer Deposits Fall
The profit drop was partly attributed to a GBP2.0 million hit from the adoption of IFRS 16 in January, an accounting standard that "recognises an interest charge on the lease liability which is partly offset by
a reduction in lease expenses”.Morning Star, 1 May 2019
© 2019 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.
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10© 2019 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.
Income of not-for-profits Sufficiently
specific performance
obligation
Representative body fees
Non-refundable upfront feese.g. wait list/enrolment
Peppercorn lease amendment
Timing of income recognition
Interaction with other standards
e.g. financialinstruments
Emerging practical implementationconsiderations
ACNC –Legislative
review
1 January 2019
Is your NFP
equipped to deal
with these complex
accounting issues?
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On the horizon
Management Commentary
Practice StatementRefresh
Voluntary Tax Transparency
Code
Large proprietary company
thresholds doubled
Special purpose financial
statements
AASB Remuneration
reporting project
1 July 2019
1 July 2020
ASX Corporate
Governance Principles 4th
Edition
1 January 2020
AASBNot-for-profit
entity definition
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On the horizon
AASB 1059Service
Concessions: Grantors
AASB 2018-7:Definition of
material(AASB 101)
AASB 2018-6:Definition of a
business(AASB 3)
AASB 17Insurance Contracts
AASB 2014-10: Sale or
Contribution of Assets between an Investor and its Associate or Joint Venture
Standards issued not yet effective
Beginning on or after 1 January 2020 Beginning on or after 1 January 2022
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• Have all relevant ASIC areas of focus been addressed?• Is there a consistency and connect between the “front part” of the
financial report and the financial statements?• Is the transition to, and impact of, the new revenue and financial
instruments standards clearly explained?• Are the impacts of the leases standard disclosed?• Is your NFP entity ready to apply the new accounting standards?• Does the organisation have a process for monitoring IFRIC’s decisions?
Questions you should ask Red flags
?
© 2019 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.
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ASX Corporate Governance Principles and Recommendations4th Edition
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15© 2019 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.
ASX Corporate Governance Principles and Recommendations (CGP&R)
Issued on 27 February 2019
Effective 30 June 2021 year end
The 4th edition of the ASX Corporate Governance Principles and Recommendations (4th edition) has codified the ‘culture, governance and remuneration findings’ of the Banking Royal Commission as well as addressed many other contemporary business governance issues.
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Changes to address Governance issues arising from poor conduct or culture
“Social Licence to operate”
- Abandoned
What’s Changed - Overarching
Non-financial Risk- should we do it versus
can we do it?
• “Social Licence to operate” –removed
• Replaced with “reputation” and“standing in the community”
• Companies act to preserve andprotect their reputation and standingin the community
• Focus on key stakeholders –customers, employees, suppliers,creditors, law makers, andregulators
• Principle 3 – stronger emphasis onculture and values
• Continuously reinforce a culture ofacting lawfully, ethically andresponsibly
• Three new recommendations –articulation and disclosure oforganisational values (3.1),whistleblower policy (3.2), & anti-bribery and corruption (3.3)
• Monitor the adequacy of the entity'sfinancial and non financial riskmanagement framework
• Includes contemporary & emergingrisks such as conduct risk, digitaldisruption, cyber-security, privacy,data breaches, sustainability &climate change
• Footnote – “can we do it?” versus“should we do it?”
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Remuneration
Disclosure of Environmental, Social and Governance (ESG)
Risks
What’s Changed - Overarching
Diversity (Gender)
• Environmental risk and social risks– capture a broader range of risks
• Commentary allows for IR or asustainability report to be crossreferenced
• Focus on climate change – entitiesshould benchmark their disclosuresagainst their peers &/or, taskforcefor climate related financialdisclosures (TCFD)
• Principle 8 – align executive paywith values and risk appetite
• 8.1 – remuneration as a key driverof culture & focus for investors
• 8.2 – link performance basedremuneration to short, mediumand longer term performanceobjectives and strategic goals
• Rec: 1.5 – have and disclose adiversity policy and set measurableobjectives for achieving genderdiversity
• Applicable to senior executives andthe workforce generally
• Board target to be 30% (ASX top300)
• Gender pay gap audits anddisclosure considered tooprescriptive
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Board Skills / Evaluation
Independence / over boarding
What’s changed – Board Related
Board responsibilities
• Com 2.2: Assess whether the boardhas the skills to deal with existing &emerging risks
• Rec 2.6: have an induction programand periodically review the need forongoing director professionaldevelopment
• Rec 2.2: Board skills matrix –entities explain what is meant by theskills listed in the Board skills Matrix
• Rec 1.3: instilling the entity’s valuesand performance generally
• Defining the entity’s purpose• Approving values and code of conduct• Framework for management reporting
to board is adequate• Effectiveness of governance
processes• Plus Rem, Risk and holding
management to account
• Rec 2.3: indicators of directorindependence now includes,material business relationships,close personal ties, professionaladvisers and long tenure(regularly assess > 10 years)
• Rec 1.3: Non-executive directorsto notify and seek approval beforeaccepting any new role
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The integrated reporting framework
Periodic corporate reports
What’s changed – Reporting
Accuracy and balance in periodic corporate
reporting
• Includes the full annual & halfyearly report, the Operating &Financial Review (OFR) in theDirectors Report, CorporateGovernance Statement, anyseparate Integrated Report,Sustainability Report, andpublished reports prepared for thebenefit of investors (i.e. investorbriefing pack, additionalsegmental information, potentiallya web-based investor centre)
• Rec 4.3 - ‘disclose its process toverify the integrity of any periodiccorporate reports it releases to themarket that is not audited orreviewed by an external auditor’
• Process-based (not confined toreport content), also requiring aconsideration of verificationapproach, may need to start worknow to be ready for FY20
• International Integrated ReportingCouncil’s (IIRC) framework, isreferenced as a tool that will assistentity’s to better explain theirstrategy (‘the what’), businessmodel, governance, and risk,financial & non-financial (‘the how’),and use of resources (‘the with’) todeliver on their strategy
• Aligns with the ASIC media releasein December 2017 & the AICDpolicy on integrated reporting
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Ideas that must inform conduct from Hayne
When acting for another, act in the
best interests of that other
Deliver Services
with reasonable care & skill
Provide Services that
are fit for purpose
Be FairDo not
mislead or deceive
Obey the Law
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Key themes emerging from Hayne
Lack of accounta-
bility
Conflicts of interest skewed
decision-making
Voice of the customer not heard
Incentives aligned to profits not conduct
Poor conduct and behaviour was motivated
by profit
Misconduct occurred
because it could (imbalance of
power between the entity and the consumer)
Use of intermediaries
created conflicts of interest that did not work in
the favour of the customer
Lack of accountability when the law was broken (culture of
acceptance of poor behaviour, misconduct and poor outcomes)
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Questions you should ask• How engaged is the board in risk?
• How effectively does the board communicate and oversee its riskappetite and risk management framework?
• How well do we hold our executives and staff to account for theirbehaviours – i.e. do we enforce our standards of conduct?
• How well defined are the roles of board and executive committees?
• What information is reported to management, the board andstakeholders and how does it flow up?
• How would we describe our culture?
• How is “bad news” communicated and received?
• Are decision making roles and processes clear across theorganisation?
• How well do we understand and respond to the interests and concernsof our stakeholders?
• How often do you disagree with a management recommendation?
• Are you comfortable that you receive adequate information to makecomplex decisions?
• Have you recently reviewed the metrics you use to measure culture?
• Do you have an appropriate level of understanding aboutorganisational remuneration, in order to assess its impact on cultureand performance?
Red flags• Decision-making is slow and/or overly
complex.
• Policies and procedures are cumbersome ordon’t exist.
• Complaints, feedback and regulatorybreaches are common.
• There is a culture of complacency within theorganisation when it comes to escalation andmanagement of risk or cultural issues.
• Board reporting takes up a significantamount of management time (papers are toobig).
• Committees, working groups etc areestablished with no apparent purpose orterms of reference.
• “Bad news” is frowned upon.
• Misconduct and risk failures are condonedthrough inaction.
© 2019 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.
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Climate risk
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Climate risk: Recent announcements
Some climate risks are distinctly ‘financial’ in nature.
Many of these risks are foreseeable, material and actionable now.
Directors may also consider whether it would be worthwhile to disclose
additional information recommendations of the TCFD where that information is not
already required for the OFRs.
Company directors who consider climate change risk actively, disclose it properly and respond appropriately will reduce
exposure to liability. And, as time passes, the benchmark keeps rising.
The Council would encourage entities to consider whether they have a material
exposure to climate change risk by reference to the recommendations of the Financial Stability Board’s TCFD and, if
they do, to consider making the disclosures recommended by the TCFD.
Noel Hutley, Senior Counsel
ASIC Media Release, December 2018ASX Corporate Governance Principles & Recommendations
4th Edition: Recommendation 7.4
APRA executive board member Geoff Summerhayes
Guy Debelle –Deputy Governor
RBA
qualitative external factors such as the industry in which the entity operates, and investor expectations may make
such [climate] risks ‘material’ and warrant disclosures when preparing financial
statements, regardless of their numerical impact.
AASB/AuASB Joint Bulletin Climate-related and other emerging risks disclosures:
assessing financial statement materiality using AASB/IASB Practice Statement 2, April 2019
Climate change poses a "systemic risk" to the economy
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Industries expected to be impacted Finance Energy Transportation Materials and Buildings
Banks
Insurance
Asset owners
Asset managers
Oil and Gas
Coal
Electric Utilities
Air Freight
Passenger Air Transportation
Maritime Transportation
Rail Transportation
Trucking Services
Automobiles and components
Metals and Mining
Chemicals
Construction Materials
Capital Goods
Real Estate Management and
Development
Agriculture, Food, and Forest Products
Beverages
Agriculture
Packaged Foods, and Meats
Paper and Forest Products
l
Source: Final Report, Recommendations of the Task Force on Climate Related Financial Disclosures (June 2017)
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Climate risks
Source: Final Report, Recommendations of the Task Force on Climate Related Financial Disclosures (June 2017)
Risks Opportunities
Policy and LegalTechnology
MarketReputation
Transition Risks
AcuteChronic
Physical RisksStrategic PlanningRisk Management
Final impact
Income Statement
Cash Flow Statement
Balance Sheet
RevenuesExpenditures
Assets & LiabilitiesCapital & Financing
Resource EfficiencyEnergy Source
Products / ServicesMarkets
Resilience
Opportunities
Figure 1Climate-Related Risks, Opportunities, and Financial Impact
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Inclusion in financial statements
Source: Climate-related and other emerging risks disclosures: assessing financial statement materiality using AASB/IASB Practice Statement 2
Investor ExpectationsCould investors reasonably expect that climate-related risks or other emerging risks have
a significant impact on the entity and would that risk qualitatively influence investors’ decisions, regardless of the quantitative impact on the financial statements?
Entity AssessmentHave these risks affected any of the amounts recognised
or disclosed in the financial statements?
Entity AssessmentAre climate-related risks or other emerging risks likely to
have a material impact in the entity’s specific circumstances?
Determine relevant
disclosures
Explain assumptions
made
Consider the risks when determining amounts
recognised and
No disclosures necessary
YES NO
YES NO NOYES
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Questions you should ask• Are you in one of the industries expected to be impacted?• Do the Directors/Executives understand climate-related risk?
• Have Management considered climate risk and opportunityacross the value chain and for a range of climate scenarios?
• Do you understand stakeholders expectations in regard tomanagement and disclosure of climate-related risk?
• Have you committed to reporting using the TCFDrecommendations?
• Have you disclosed climate risk in your Annual Report ?
• Have you included impacts in Financial Statements?• Are you aware of the shareholder resolution activity related
to climate change?
© 2019 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.
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Audit Committee InstituteRelationships and reputationAgendaFinancial reporting & regulatory developmentsASIC financial statement surveillanceRelationships and reputation in the financial reportIFRIC Agenda decisionsNew standards for 30 June 2019AASB 16 LeasesIncome of not-for-profits On the horizonOn the horizonQuestions you should askASX Corporate Governance Principles and Recommendations�4th EditionASX Corporate Governance Principles and Recommendations (CGP&R)What’s Changed - OverarchingWhat’s Changed - OverarchingWhat’s changed – Board RelatedWhat’s changed – ReportingIdeas that must inform conduct from HayneKey themes emerging from HayneQuestions you should askClimate riskClimate risk: Recent announcements Industries expected to be impacted Climate risks Inclusion in financial statementsQuestions you should askSlide Number 29