EC on Fair Value; Sustainability Reporting Rises; More

The European Commission has decided not to make unilateral changes to the way that the fair-value rules in International Financial Reporting Standards are applied in Europe—an idea that would have undermined the authority of the International Accounting Standards Board.

Instead, the Commission will accept the fair-value changes that IASB has made already—changes that critics say are little more than a sop to the suffering financial services industry—and push for further reforms through IASB’s own standards revision processes, rather than circumventing them.

The Commission had threatened to “carve out” certain parts of IFRS to reduce the financial hit that many banks will have to report in their accounts when they mark distressed financial assets down to their post-crash market value.

Instead, IASB last month made limited changes to bring IFRS into line with U.S. Generally Accepted Accounting Principles, including a step that will allow banks to reclassify some assets so that they do not have to be carried at fair value.

The carve-out threat has passed, but the Commission still wants to see IASB change its standards. It said there was a need for “in-depth reflection” on the application of fair-value accounting, but in the meantime it will propose further changes to International Accounting Standard No. 39, and International Financial Reporting Standard No. 7.

Notes from a meeting of the Accounting Regulatory Committee, which advises the Commission on accounting issues, suggest that areas of concern include the treatment of embedded derivatives.

The Corporate Reporting User Forum, which represents institutional investors from across Europe, has warned the Commission not to press for further changes to the measurement of financial instruments.

In a letter to the Financial Times, the forum said further action would “risk severely undermining the confidence users have in the accounts produced by European companies.” It added: “Now especially, investors need comparability and transparency, not further uncertainty and inconsistency.”

Momentum Builds for Sustainability Reporting

More large companies around the world are reporting their non-financial “sustainability” performance compared to three years ago, but the quality and consistency of such disclosures needs to be improved, according to a study from KPMG.

The firm analyzed the financial statements and other disclosures published by multinational businesses and found that 80 percent were releasing corporate responsibility data, an increase from 50 percent in 2005, when the firm last ran a similar study. The research covered companies in the Global Fortune 250 plus the 100 largest companies by revenue from 22 countries.

A national breakdown of the figures shows that the extent of non-financial reporting varies a great deal between countries. Japan lead the way, with 91 percent of its companies issuing reports; Mexico and the Czech Republic were bottom with just 20 percent.

U.S. companies were in third position, but gaining ground fast. Reporting levels among its companies had increased significantly—from 32 percent in 2005 to more than 70 percent today.

The research highlights some areas where companies should improve their reporting, according to KPMG. The firm called for better integration between corporate responsibility reporting and financial statements and noted that 40 percent of the Global 250 kept topics such as supply chain risk and climate change out of their annual report to shareholders.

The study also shows that more companies are paying for formal assurance over their non-financial reporting. Some 40 percent of companies now used such assurance, compared to 30 percent in 2005. Companies wanted assurance to improve the quality of reported information and build credibility among stakeholders.

New Standard on Non-Financial Assurance

A not-for-profit standard-setting body, AccountAbility, has released an updated version of its guidance on assurance over corporate sustainability reporting (CSR). AccountAbility claims its revised standard will help companies that want to build the credibility of their non-financial reporting.

The new standard—AA1000AS (2008)—sets out the requirements for conducting independent assurance on the nature and extent of an organization’s understanding of and response to its non-financial, sustainability issues and on the quality of its publicly disclosed information on its sustainability performance.

The standard replaces a 2003 version widely used around the world. The old standard listed the principles that applied to an organization producing a report and those that applied to the assurance provider. This split caused confusion, AccountAbility says, and its revised standard defines clearer roles and responsibilities and puts more emphasis on assurance.

Alan Knight, head of standards at AccountAbility, says the new standard “clearly signals the closing gap between financial reporting and assurance and non-financial reporting and assurance.”

Europe Targets Members Slow on Governance

The European Commission has started legal action against 12 of its member states for failing to implement key measures on company law and corporate governance.

The Commission is taking action aimed at forcing member states to transpose into their national laws measures set out in three different European Union directives. All of the targeted states have missed the final deadlines for turning the directives into national law, the Commission says.

It is taking Belgium, Greece, Spain, France, Portugal, and Sweden to court for failing to implement the Cross-Border Mergers Directive, intended to ease the path for limited liability companies to merge across borders. The Commission adopted the directive in 2005 and countries were supposed to have made it into national law by the end of last year.

The directive “fills an important gap in company law and is an important measure in the context of the Commission’s Action Plan on Company Law and Corporate Governance in the EU,” the Commission said in a statement.

It is also taking action against Belgium, Spain, Luxembourg, Portugal, and Romania for failing to implement a directive simplifying the formation, maintenance, and alteration of companies’ capital, which they should have implemented by April this year. And it is targeting the Czech Republic, Hungary, the Netherlands, and Poland regarding a directive on transparency obligations of listed companies, which they should have implemented by March 2008.

The Transparency Directive is an important part of the Commission’s efforts to improve the quality of the information companies disclose about their financial performance. It requires companies to produce half-yearly financial information and sets minimum standards for the release of regulated information.