audit committee institute - kpmg · 2020. 6. 11. · bribery and corruption (3.3) • monitor the...

Audit Committee InstituteThe changing world of corporate reporting and current expectations of directors for 30 June 2019 and beyond

June 2019

2

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

© 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.

Agenda1. Financial reporting & regulatory developments

2. ASX Corporate Governance Principles and Recommendations 4th Edition

3. Climate risk

4© 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.

Financial reporting & regulatory developments

Commissions & Enquiries

AASB & IASB

Treasury

Board of Taxation

ATO

ASX

ASIC &

APRA


* 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)

?

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


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


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


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)

9

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



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?


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


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

13

• 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

?


ASX Corporate Governance Principles and Recommendations4th Edition


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.


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?”


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


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


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


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


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)

22

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.


Climate risk


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


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)


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


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

28

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?


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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

audit committee institute - kpmg · 2020. 6. 11. · bribery and corruption (3.3) • monitor the...

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