Advanced Financial Accounting
Lecture 1: Setting the Scene
1. Focus on International Financial Reporting Standards (IFRS)
What are IFRS?
➢ Globally accepted set of standards for financial reporting
➢ Developed by the International Accounting Standards Board (IASB)
o Set up in 2001 succeeding the International Accounting Standards Committee (IASC)
that was set up in 1973
➢ An independent private organization in London
➢ Funded by contributions from both private and public sector
➢ Very elaborate and transparent due process to safeguard independence and high quality
IFRS organization structure
➢ Public oversight (on process, not content) by Monitoring Board comprising securities
regulators and European Commission
➢ Independent oversight by Foundation Trustees
➢ Various advisory bodies
➢ Interpretations Committee to address upon
2. Changing role of Financial reporting
Value relevance of accounting information
Earnings Relevance
➢ Relevance has decreased over time. Mostly for new companies.
➢ Potential causes
o Increasing importance of sometimes unrecognized intangible assets
▪ R&D
▪ Branding
▪ Software
▪ People
o Alternative real-time sources of financial information
o Growing importance of non-financial information
,Changing role of annual report
Importance of non-financial information
➢ Externalities
o Effect on people, environment, society
➢ Internalisation of externalities
o Carbon pricing
o Penalties
o Customer behaviour
o Reputational risks
➢ Sustainability goals
o Paris agreement
➢ Shift from Financial capitalism to inclusive capitalism
o Coalition for inclusive capitalism set up by Lady Lynn Forester de Rothschild
➢ Diversity and inclusiveness
➢ Paying your fair share of tax
➢ Impact investment (e.g. EU sustainability taxonomy)
➢ Stewardship
What we have seen over the years
➢ All sorts of requirements for non-financial information in financial statements or in annual
report
o Remuneration management
o Corporate governance
o Country-by-country reporting of tax payments
o Sustainability information
o Health and safety information
o Diversity information
o Inequality
➢ Annual report is considered by government / regulators as a convenient mailbox for
disclosures by organizations
➢ Disadvantages: piecemeal, ‘flavor of the day’, no integration, no clear link with strategy, value
chain or performance.
o More difficult for companies to understand.
Initiatives
➢ Corporate Reporting
o ‘Core and More’ principle (Accountancy Europe)
▪ Webpage, where you start with headlines and can see more and more
information.
➢ Integrated reporting
o International Integrated Reporting Council (IIRC)
, ▪ Focus on investors
o Global Reporting Initiative (GRI)
▪ Broader range of stakeholders
o In some countries (like South-Africa) integrated reporting is mandatory
➢ Strategic report (UK)
➢ Non-Financial Reporting Directive (European Union)
Call for consolidation
➢ Different focus
o Investors only
o Or wider stakeholder group
➢ Different geographical area
o Global
o US
o EU
➢ Different topics
o Climate-risk
o Carbon
o All
➢ Initiatives for coordination
o Corporate reporting dialogue
o Merger of IIRC and SASB
How does sustainability reporting relate to financial reporting?
➢ Large Five Sustainability Standard Setters issued
statement of Intent in September 2020: Statement-of-
Intent-to-Work- Together-Towards-Comprehensive-
Corporate-Reporting
➢ Capital market perspective versus multistakeholder
perspective
Strategic direction of new sustainability standards board
➢ Trustees agreed in March 2021 on following strategic
direction SSB:
o Investor focus for enterprise value
▪ So no multi-stakeholder view
o Sustainability scope, prioritizing climate
▪ Sustainability in a broad sense (so the whole of Environment, Social and
Governance, ESG)
o Build on existing frameworks
▪ In particular FSB’s TCFD as well as the alliance of leading standard-setters in
sustainability reporting focused on enterprise value (SASB, GRI, IIRC, CDP,
CDSB)
o Building block approach
▪ Setting a globally consistent and comparable sustainability reporting baseline
▪ Providing flexibility for coordination and reporting requirements that capture
wider sustainability impacts
, Structure ISSB Exposure Drafts
➢ Draft IFRS S1 – General Requirements for Disclosure of Sustainability-related Financial
Information
o Requires an entity to disclose material information about all of the significant
sustainability-related risks and opportunities to which it is exposed
o assessment of materiality shall be made in the context of the information necessary
for users of general purpose financial reporting to assess enterprise value
o If no specific IFRS Disclosure Standard on the topic, refer to other standards and to
other frameworks
o Information to be provided in the same package of reporting together with financial
reporting
➢ Draft IFRS S2 - Climate-related Disclosures
o Requires an entity to disclose information about its exposure to climaterelated risks
and opportunities, enabling users of an entity’s general purpose financial reporting:
▪ to assess the effects of climate-related risks and opportunities on the entity’s
enterprise value;
▪ to understand how the entity’s use of resources, and corresponding inputs,
activities, outputs and outcomes support the entity’s response to and
strategy for managing its climate-related risks and opportunities; and
▪ to evaluate the entity’s ability to adapt its planning, business model and
operations to climate-related risks and opportunities.
How does this affect IFRS and the work of the IASB?
➢ Compliance with IFRS accounting standards from the IASB does not require compliance with
IFRS sustainability disclosure standards from the ISSB
➢ Nor does compliance with ISSB standards mean compliance with IFRS
➢ But the two sets of standards affect each other
o Both may refer to management commentary for (required) disclosures
➢ Consistency financial statements with the commitments made in the management
commentary
➢ IASB considering effect on own agenda:
o Management Commentary Practice Statement
o Intangibles
o Asset retirement obligations
o Climate-risk related financial disclosures
➢ Joint projects with ISSB
How about the European Union?
➢ Financial Reporting
o Endorsement of IFRS (limited exceptions)
o Required for all listed entities
▪ Member States may allow or require other entities to apply endorsed IFRS
o Requires reasonable assurance by the financial auditor
➢ Sustainability disclosures
o EU has its own law (draft Corporate Sustainability Reporting Directive)
o EU is drafting its own technical standards for sustainability reporting
o Mandatory phase-in from 2024
o Will require limited assurance, later on reasonable assurance (not clear yet who can
provide assurance)
Lecture 1: Setting the Scene
1. Focus on International Financial Reporting Standards (IFRS)
What are IFRS?
➢ Globally accepted set of standards for financial reporting
➢ Developed by the International Accounting Standards Board (IASB)
o Set up in 2001 succeeding the International Accounting Standards Committee (IASC)
that was set up in 1973
➢ An independent private organization in London
➢ Funded by contributions from both private and public sector
➢ Very elaborate and transparent due process to safeguard independence and high quality
IFRS organization structure
➢ Public oversight (on process, not content) by Monitoring Board comprising securities
regulators and European Commission
➢ Independent oversight by Foundation Trustees
➢ Various advisory bodies
➢ Interpretations Committee to address upon
2. Changing role of Financial reporting
Value relevance of accounting information
Earnings Relevance
➢ Relevance has decreased over time. Mostly for new companies.
➢ Potential causes
o Increasing importance of sometimes unrecognized intangible assets
▪ R&D
▪ Branding
▪ Software
▪ People
o Alternative real-time sources of financial information
o Growing importance of non-financial information
,Changing role of annual report
Importance of non-financial information
➢ Externalities
o Effect on people, environment, society
➢ Internalisation of externalities
o Carbon pricing
o Penalties
o Customer behaviour
o Reputational risks
➢ Sustainability goals
o Paris agreement
➢ Shift from Financial capitalism to inclusive capitalism
o Coalition for inclusive capitalism set up by Lady Lynn Forester de Rothschild
➢ Diversity and inclusiveness
➢ Paying your fair share of tax
➢ Impact investment (e.g. EU sustainability taxonomy)
➢ Stewardship
What we have seen over the years
➢ All sorts of requirements for non-financial information in financial statements or in annual
report
o Remuneration management
o Corporate governance
o Country-by-country reporting of tax payments
o Sustainability information
o Health and safety information
o Diversity information
o Inequality
➢ Annual report is considered by government / regulators as a convenient mailbox for
disclosures by organizations
➢ Disadvantages: piecemeal, ‘flavor of the day’, no integration, no clear link with strategy, value
chain or performance.
o More difficult for companies to understand.
Initiatives
➢ Corporate Reporting
o ‘Core and More’ principle (Accountancy Europe)
▪ Webpage, where you start with headlines and can see more and more
information.
➢ Integrated reporting
o International Integrated Reporting Council (IIRC)
, ▪ Focus on investors
o Global Reporting Initiative (GRI)
▪ Broader range of stakeholders
o In some countries (like South-Africa) integrated reporting is mandatory
➢ Strategic report (UK)
➢ Non-Financial Reporting Directive (European Union)
Call for consolidation
➢ Different focus
o Investors only
o Or wider stakeholder group
➢ Different geographical area
o Global
o US
o EU
➢ Different topics
o Climate-risk
o Carbon
o All
➢ Initiatives for coordination
o Corporate reporting dialogue
o Merger of IIRC and SASB
How does sustainability reporting relate to financial reporting?
➢ Large Five Sustainability Standard Setters issued
statement of Intent in September 2020: Statement-of-
Intent-to-Work- Together-Towards-Comprehensive-
Corporate-Reporting
➢ Capital market perspective versus multistakeholder
perspective
Strategic direction of new sustainability standards board
➢ Trustees agreed in March 2021 on following strategic
direction SSB:
o Investor focus for enterprise value
▪ So no multi-stakeholder view
o Sustainability scope, prioritizing climate
▪ Sustainability in a broad sense (so the whole of Environment, Social and
Governance, ESG)
o Build on existing frameworks
▪ In particular FSB’s TCFD as well as the alliance of leading standard-setters in
sustainability reporting focused on enterprise value (SASB, GRI, IIRC, CDP,
CDSB)
o Building block approach
▪ Setting a globally consistent and comparable sustainability reporting baseline
▪ Providing flexibility for coordination and reporting requirements that capture
wider sustainability impacts
, Structure ISSB Exposure Drafts
➢ Draft IFRS S1 – General Requirements for Disclosure of Sustainability-related Financial
Information
o Requires an entity to disclose material information about all of the significant
sustainability-related risks and opportunities to which it is exposed
o assessment of materiality shall be made in the context of the information necessary
for users of general purpose financial reporting to assess enterprise value
o If no specific IFRS Disclosure Standard on the topic, refer to other standards and to
other frameworks
o Information to be provided in the same package of reporting together with financial
reporting
➢ Draft IFRS S2 - Climate-related Disclosures
o Requires an entity to disclose information about its exposure to climaterelated risks
and opportunities, enabling users of an entity’s general purpose financial reporting:
▪ to assess the effects of climate-related risks and opportunities on the entity’s
enterprise value;
▪ to understand how the entity’s use of resources, and corresponding inputs,
activities, outputs and outcomes support the entity’s response to and
strategy for managing its climate-related risks and opportunities; and
▪ to evaluate the entity’s ability to adapt its planning, business model and
operations to climate-related risks and opportunities.
How does this affect IFRS and the work of the IASB?
➢ Compliance with IFRS accounting standards from the IASB does not require compliance with
IFRS sustainability disclosure standards from the ISSB
➢ Nor does compliance with ISSB standards mean compliance with IFRS
➢ But the two sets of standards affect each other
o Both may refer to management commentary for (required) disclosures
➢ Consistency financial statements with the commitments made in the management
commentary
➢ IASB considering effect on own agenda:
o Management Commentary Practice Statement
o Intangibles
o Asset retirement obligations
o Climate-risk related financial disclosures
➢ Joint projects with ISSB
How about the European Union?
➢ Financial Reporting
o Endorsement of IFRS (limited exceptions)
o Required for all listed entities
▪ Member States may allow or require other entities to apply endorsed IFRS
o Requires reasonable assurance by the financial auditor
➢ Sustainability disclosures
o EU has its own law (draft Corporate Sustainability Reporting Directive)
o EU is drafting its own technical standards for sustainability reporting
o Mandatory phase-in from 2024
o Will require limited assurance, later on reasonable assurance (not clear yet who can
provide assurance)
