The Future of Financial Reporting - ICPAK · PDF fileThe Future of Financial Reporting ... Disclosure initiative (IAS 1) ... Why the matter is considered to be of the most significance

THE 32nd ANNUAL SEMINAR17th -20th MAY 2016, SAROVA WHITESANDS - MOMBASA

Theme: “Accountability as a Driver for Economic Growth and Development”

The Future of Financial Reporting

Friday, 20 May 2016

20/05/2016Uphold Public Interest

IASB & IAASB Activity Update Recent changes in financial Reporting

New/amended IFRSs

New/amended ISAs Regulatory Changes

New Companies Act

CMA Code of Corporate Governance Practices 2015

Financial Services Authority Bill (Draft) Education

Learning Outcome approach

Competency requirements for audit professionals Ethics Public Sector

Applicability of IPSAS IFAC

Focus on SMPs

Accountability Now…

20/05/2016 Uphold Public Interest 3

IASB & IAASB Activity

update



Major IFRSs Q22016

Q32016

Q42016

IFRS 4 (Phase II) – Drafting on the new

Insurance contract standard has

commenced.

Drafting IFRS Issue IFRS

Conceptual framework – This is being

revisited to improve financial reporting by

providing complete, clear and updated set

of concepts.

Analysis Issue Conceptual

framework

IFRS 2 amendments – 3 amendments on

the classification and measurement of

share based payment transactions

Drafting IFRS Issue IFRS

IAS 1 amendment – Classification of

liabilities. Amend para 73 of IAS 1 on

classification of non-current liability.

Analysis Issue IFRS


Major IFRSs Q22016

Q32016

Q42016

IFRS 3 and 11 amendments –

Remeasurement of previously held

interest where a party to a joint

arrangement obtains control

Drafting ED Publish ED

Research Projects (IFRS 3) – Following

feedback from IFRS 3 post

implementation review, the board is

considering

• Whether changes should be made to

existing impairment test for goodwill

• Subsequent accounting for goodwill

Redeliberations

Definition of a business – Project aimed

at resolving difficulties that arise when

determining if a group of assets

constitute a business or not

Drafting ED Publish ED


Major ISAs Q22016

Q32016

Q42016

ISA 540 (Accounting Estimates) – aimed

at emphasising professional scepticism

when auditing accounting estimates. One

key concern is IFRS 9 ECL

Deliberations Publish ED

ISA 600 (Group Audits) – consideration

where audit EL is not located where

majority of the work is done.

Deliberations

IAS 315 (Revised) – Identification of risk

through understanding the entity and its

environment.

Deliberations

Integrated Reporting – Working group

established to respond to assurance

demands for integrated reporting.

Deliberations

Recent changes in financial

reporting



• Financial instruments – 1 Jan 2018IFRS 9

• Regulatory Deferral Accounts – 1 Jan 2016IFRS 14

• Revenue from contracts with customers – 1 Jan 2018IFRS 15

• Leases – 1 Jan 2019IFRS 16

• 2015 amendments – 1 Jan 2017IFRS for SMEs

New standards


Narrow-scope amendments Issue Effective

Acquisition of an interest in a Joint Operation (amendments to IFRS 11) May 2014 1 Jan 2016

Clarification on accepted methods of depreciation and amortization

(amendments to IAS 16 and IAS 38)May 2014 1 Jan 2016

Agriculture: Bearer Plants (amendment to IAS 16 and IAS 41) June 2014 1 Jan 2016

Equity method in separate financial statements Aug 2014 1 Jan 2016

Sale or contribution of assets between an investor and its Associate or

Joint Venture (amendment to IAS 28 and IFRS 10)Sep 2014

Postponed

indefinitely

Investment entities applying the consolidation exception (amendment to

IFRS 10, IFRS 12 and IAS 28)Dec 2014 1 Jan 2016

Disclosure initiative (IAS 1) Dec 2014 1 Jan 2016

Recognition of Deferred Tax for unrealized losses Jan 2016 1 Jan 2017

Disclosure initiative (amendment to IAS 7) Jan 2016 1 Jan 2017

Annual improvement 2012 – 2014 (IFRS 5, IFRS 7, IAS 19, IAS 34) Sep 2014 1 Jan 2016

A deep dive on IFRS 9, IFRS

15 and IFRS 16



Scope Same as IAS 39 - Loan commitments now in scope for impairment

Classification Financial Assets – Major change

Financial Liabilities – Same as IAS 39

Impairment Major changes from the Incurred Loss Model to the Expected Credit

Loss Model

Embedded

Derivatives

(ED’s)

Same as IAS 39 but embedded derivatives in financial assets in

scope of IFRS 9 are no longer separated

Reclassification No reclassification of financial liabilities permitted

Presentation and

disclosure

New presentation and extensive disclosure requirements.

Area Change


Licences

• IAS 18 – Little guidance existed other than the need to account for the substance.

• IFRS 15 – Detailed guidance as to which licences transfer a right at a point in time and which grant access to IP over time.

Multiple-element arrangements

• IAS 18 – Little guidance on how to determine the number of deliverables (or elements) within a contract.

• IFRS 15 – Requires that a deliverable must be ‘distinct’ in order to be separately accounted for.

Variable consideration

• IAS 18 – Revenue recognised to the extent it can be measured reliably, but little application guidance.

• IFRS 15 – Where variable consideration exists the minimum amount highly probably not to lead to a significant reversal of revenue in future years must be included in the transaction price.

IFRS 15

Material rights

• IAS 18 – No specific concept existed but most entities defer revenue.

• IFRS 15 – Detailed guidance on what a material right is and requirement to defer revenue.

Agent vs principal

• IAS 18 – An entity is acting as a principal when it bears the significant risks and rewards associated with providing the goods or services.

• IFRS 15 – An entity is acting as a principal when it obtains control of the goods or services prior to transfer to the customer. Different principle, but similar indicators.

Cost capitalisation

• IAS 18 – No cost capitalisation guidance so costs usually only deferred if they met the definition of an asset under IASs 2, 16, or 38.

• IFRS 15 – More costs to obtain contracts will be capitalised as well as more costs incurred up front to the extent that they help the seller fulfil later deliverables.

Allocation of consideration

• IAS 18 – Little guidance existed with residual method and relative fair value being the most popular approaches.

• IFRS 15 – Requires relative stand alone selling price method (similar to relative FV). Residual method generally not permitted.

Sell-through approach

• IAS 18 – Revenue is recognised when risks and rewards of ownership for a good or service have been transferred to the customer.

• IFRS 15 – Revenue is recognised when control of a good or service is transferred to the customer.

Consulting and service contracts

• IAS 18 – Limited guidance for determining when revenue is recognised at a point in time or over time.

• IFRS 15 – Detailed guidance on when to recognise revenue at a point in time or over time.


Lessee accounting • Operating lease

• Finance lease

• All leases on balance sheet (except

short term leases)

• Income statement:

• Financing approach (Type A)

• Straight line approach (Type B)

Lessor accounting • Operating lease

• Finance lease

Remains the same.

Lease term • Include renewal options that are

"reasonably certain" of being

exercised

• Include renewal options where lessee

has “a significant economic incentive”

to exercise

Variable lease

payments

• Contingent rentals are generally

expensed as incurred

• Remeasurement not required

• Usage or performance-based rents

are not included

• Rents based on index/rate and in-

substance fixed are included

• Remeasurement required

Current Model IFRS 16

New ISAs


The International Auditing and Assurance Standards Board (IAASB) released new andrevised auditor reporting standards that are designed to significantly enhanceauditor's reports for investors and other users of financial statements. Most notableenhancement is a new requirement for auditors of listed entities' financial statements tocommunicate 'Key Audit Matters' that the auditor views as most significant, with anexplanation of how they were addressed in the audit.

The complete suite of new and revised standards consists of ISA 700 (Revised) Forming an Opinion and Reporting on Financial Statements

ISA 701 Communicating Key Audit Matters in the Independent Auditor's Report

ISA 570 (Revised) Going Concern

ISA 705 (Revised) Modifications to the Opinion in the Independent Auditor's Report

ISA 706 (Revised) Emphasis of Matter Paragraphs and Other Matter Paragraphs in the IndependentAuditor's Report

ISA 720 (Revised) The Auditor’s Responsibilities relating to Other Information

ISA 260 (Revised) Communication with Those Charged with Governance and

Conforming Amendments to ISAs 210, 220, 230, 510, 540, 580, 600, and 710

The new and revised auditor reporting standards will be effective for audits offinancial statements for periods ending on or after 15 December 2016.


Opinion first;

Affirmative statement about the

auditor’s independence and

fulfillment of relevant ethical

responsibilities;

Enhanced description of the

responsibilities of the auditor and

key features of an audit;

Enhanced description of the

respective responsibilities of

management and the auditor

regarding going concern;

Material going concern uncertainty

reported in a separate section in the

audit report; and

Revised reporting requirements

relating to “other information”

included in an entity’s annual report


All International Standards on Auditing (ISA) audit reports, not just

those for listed entities, will look different compared to current audit

reports, for example:

In addition, audit reports on listed entity

financial statements will include “key audit

matters” (KAMs) – a significant change

The new ISA 701 observes that professional judgement will be needed to determine which, and how many, key audit matters to include in the audit report.

Key audit matters are selected from those matters involving significant auditor attention in the audit. The concept of significant auditor attention, the ISA says, “recognizes that an audit is risk-based”, and areas of significant auditor attention “often relate to areas of complexity and significant management judgement in the financial statements”. These are, therefore, the areas that, “often involve difficult or complex auditor judgements”.

What descriptions of key audit matters will include:1. Why the matter is considered to be of the most significance

2. How the mater was addressed in the audit

3. Reference to related disclosure(s) if any

4. May describe the most relevant aspects of the response, brief overview of the procedures performed

5. May also include an indication of the outcome of the procedures or any key observations



KAMs are selected from matters

communicated with those

charged with governance.

Those matters that, in the

auditor’s professional judgment,

were of most significance in the

audit of the financial statements

for the current period.

Key Audit

MattersManagement Letter

Issues



IT environment and control deficiencies

Revenue recognition

Goodwill impairment

Inventory valuation

Property valuation and impairment

Taxation (deferred and

current)

Claims & litigation

Acquisition and disposals of

operating activities

Management override of

controls

• Stakeholders have requested earlier warning of potential issues that may exist with respect of an entity’s ability to continue as a going concern

• The auditor’s work effort on going concern has been enhanced as follows in the revised auditing standard on going concern:

• New guidance was added to support the auditor’s evaluation of disclosures when a material uncertainty exists;

• A new requirement has been added for the auditor to evaluate the adequacy of disclosures in “close-call” situations

• When a material uncertainty related to going concern exists, and the auditor determines that the disclosures in the financial statements are adequate, the auditor’s report will highlight this in a separate section in the auditor’s report under the heading “Material Uncertainty Related to Going Concern” (for listed entities: if this is determined to be a KAM, the KAM section of the audit report will cross refer to this section of the audit report)

• All auditor’s reports will include descriptions of the responsibilities of the auditor and management in relation to going concern to provide an additional focus on going concern


At its March 2015 meeting, the IAASB approved changes to ten International Standards on Auditing (ISAs) to address the audit implications of disclosures in the audit of financial statements with related conforming amendments.

The changes clarify the concept of disclosures as an integral part of the financial statements and emphasize the need for auditor consideration of disclosures earlier in the audit process. Strengthened requirements and new guidance focuses on requiring the auditor to understand relevant aspects of the information system relating to information disclosed in the financial statements, identifying and assessing the risks of material misstatements in quantitative and qualitative disclosures, obtaining sufficient appropriate audit evidence relating to disclosures, and evaluating the overall presentation of the financial statements, including their relevance and understandability.

The changes are effective for audits of financial statements for periods ending on or after December 15, 2016.

The amended ISAs are: ISA 200, ISA 210, ISA 240, ISA 260, ISA 300, ISA 315, ISA 320, ISA 330, ISA 450, ISA 700.


The IAASB approved ISA 800 (Revised) and ISA 805(Revised) at its September 2015 meeting. The revisedstandards include limited amendments to provide clarityabout how the new and revised Auditor Reportingstandards apply in the context of special purposefinancial statements. These amendments are notintended to substantively change the underlyingpremise of these engagements in accordance with theextant ISAs.

ISA 800 (Revised) and ISA 805 (Revised) are effectivefor audits of financial statements for periods ending onor after December 15, 2016.


The IAASB approved ISA 810 (Revised) at its December 2015 meeting. The limited amendments to ISA 810 (Revised) leverage the additional transparency in the auditor’s report on the audited financial statements resulting from the IAASBs new and revised auditor reporting standards issued in January 2015, in particular ISA 700 (Revised), Forming an Opinion and Reporting on Financial Statements, and new ISA 701, Communicating Key Audit Matters in the Independent Auditor’s Report.

ISA 810 (Revised) will become effective at the same time as the auditor reporting standards addressing general purpose financial statements–for engagements to report on summary financial statements for periods ending on or after December 15, 2016.


Regulatory changes



Overview

• 42 parts

• 1026 sections

• 1022 pages

• Over 70 pages of regulation

• Gazetted on 18 Sept 2015

• Modelled after UK Companies Act 1985 &2006

Types of Companies

Private

• Unlimited

• Limited by shares

Public

• Limited by shares

• Limited by guarantee

Company formation

• A limited company can now have one shareholder

• Existing companies can reduce its shareholding to one member

Foreign Companies

• This section is currently being amended and will not be effective until after the amendment.

Alteration of share capital

• Division, subdivision or consolidation

• Allotment of new shares

• Reducing its share capital requirements

Other…

• Company objectives now universal except constrained by company constitution

• Disclosure of director’s emoluments in FS

• Unlimited company cannot become limited only vice versa


The new code is based on an apply or explain principle, recognising that no single set of

rules can be applicable to all types of companies.

The core principles are as follows:

Board operation and control

Formal & transparent procedures in board appointments.

Related party transactions

Board to put in place policy on related party transactions.

Director term

The term for independent board member shall not exceed 9 years.

Chairman / CEO

Functions cannot be done by the same person.

Board diversity


Board age limit

Recommends an age limit of seventy years.

Rights of shareholders

The board shall recognize, respect and protect rights of shareholders.

External auditor rotation

The board shall rotate independent auditors every 6 to 9 years

Ethics and social responsibility

Board ensure ethical issues are managed effectively.

Accountability, risk management

Structure to independently verify the integrity of the FS.

Internal control

The board shall put in place an effective system of internal control.

Transparency and disclosure

Board shall promote timely and balanced disclosures.


The new code is based on an apply or explain principle, recognising that no single set of

rules can be applicable to all types of companies.

The core principles are as follows:

Board operation and control

Formal & transparent procedures in board appointments.

Related party transactions


Director term

The term for independent board member shall not exceed 9 years.

Chairman / CEO

Functions cannot be done by the same person.

Board diversity


Board age limit

Recommends an age limit of seventy years.

Rights of shareholders

The board shall recognize, respect and protect rights of shareholders.

External auditor rotation

The board shall rotate independent auditors every 6 to 9 years

Ethics and social responsibility

Board ensure ethical issues are managed effectively.

Accountability, risk management

Structure to independently verify the integrity of the FS.

Internal control

The board shall put in place an effective system of internal control.

Transparency and disclosure

Board shall promote timely and balanced disclosures.

Following the recommendations of the Presidential task Force on Parastatal Reforms 2013, the government committed to

create the Financial Services Authority (FSA), to merge and takeover the functions of the CMA, IRA, RBA and SASRA

The objectives of the bill are to:

Enhance the support and efficiency and integrity of financial markets; and

Protect financial customers by promoting fair treatment of financial customers by financial institutions.

To achieve this objective the main tools proposed by the FSA are:

1. Market intelligence and analysis

2. Licensing

3. Conduct rules and guidance

4. Supervision for market integrity

5. Supervision for customer protection

6. Enforcement

7. Dispute resolution

8. Customer education


As shown in the schematic, the FSA

regulates all financial institutions

(FIs) on the left-hand side of the

middle row for

conduct purposes. As shown in the

lower row, the FSA also regulates a

sub-set of these financial institutions

for prudence under the sectoral

laws (the Capital Markets

Act, Central Depositories Act, the

Insurance Act, the Retirement

Benefits Act, and the Sacco Societies

Act).

The Proceed of Crime and Anti Money Laundering Act (POCAMLA) 2009, established the Financial Reporting Centre (“FRC”) - the competent authority for supervising financial institutions and designated non-financial businesses and professions.

Casinos, real estate agencies, dealers in precious stones and metals and accountants are designated as Designated Non-Financial Businesses or Professions (“DNFBP”) under POCAMLA, for compliance with AML obligations. The FRC became operational in April 2012.

The Act provides that reporting obligations shall apply to accountants when preparing or carrying out transactions for their clients in the following situations (section 48)

Professional accountants in public practice are therefore reminded to read the act and its regulations and consult the Institute and the FRC to ensure compliance. These provision including reporting to the FRC, designation Money Laundering Reporting Officers (MLRO) etc.

The Institute’s practice monitoring program has also been reviewed to monitor compliance with the act.


Accounting Education

and Development


Pre-Qualification

Entry Requirements for

Professional Accounting Education Program(IES 1)

Content of Professional Accounting Education (IESs 2,3,4)

Practical Experience (IES 5)

Assessment (IES 6)

Post-Qualification

Continuing Professional Development (IES 7)

Specialization (IES 8)

Learning outcomes approach is aimed at enhancing the development of professional competence needed to perform a role as a professional accountant.

A learning outcomes approach integrates learning outcomes, program design, assessment activities, and governance in a process of continuous improvement

An effective program is critical to the development of competent professional accountants, strengthening the quality of services they provide.


The benefits of a learning outcomes approach for stakeholders include:

Increasing the credibility of the accountancy profession;

Increasing the quality of services provided by the individual;

Enhancing professional growth for the individual;

Increasing confidence of the individual;

Providing a higher degree of accountability for the program provider and the individual;

Potentially improving less effective portions of a learning and development program, increasing the time available for more critical areas; and

Reducing the reputational risk, or improving the reputation, of the program provider.

The Institute is working on ensuring that the CPD programs focuses on the learning outcome.


36

Learning Outcomes Teaching and Learning

Activities

Assessment

Cognitive

(Demonstrate:

Knowledge, Comprehension,

Application, Analysis,

Synthesis, Evaluation)

Affective

(Integration of beliefs, ideas and

attitudes)

Psychomotor

(Acquisition of physical skills)

Lectures

Tutorials

Discussions

Laboratory work

Clinical work

Group work

Seminar

Peer group presentation

etc.

•End of module exam.

•Multiple choice tests.

•Essays.

•Reports on research

project.

•Practical assessment.

•Fieldwork.

•Portfolio.

•Performance.

•Project work.

•Production of artefact

etc.

IPD

MAINTAIN & FURTHER DEVELOP COMPETENCE

IES 7: It is the responsibility of the professional accountant to develop and maintain professional competence by

undertaking relevant CPD activities

CPD PROGRAM FOR NEW

ROLE

CPD PROGRAM FOR

PROMOTION

CPD PROGRAM FOR ENTRY POSITION

CPD PROGRAM

FOR NEW JOB

IES 7: IFAC member bodies required to:a. Promote CPDb. Facilitate access to CPD opportunities and resourcesc. Require accountants undertake appropriate CPD d. Measure, Monitor and Enforce

CPD

Learning & Development

Education Training

Practical Experience

Observation, Feedback, &

Reflection

Self-directed & unstructured

gaining of knowledge

CPD ACTIVITIES

VITAL CPD AREAS

Public Interest Area #1

Public Interest Area #2

CPD PROVIDERS:1. Accept All Relevant Activities2. Require CPD that is Relevant3. Require CPD in Areas that are Vital

to the Public Interest

1

2

34

5

Coaching Networking

1. Self-appraise2. Plan3. Act4. Document5. Evaluate

PROFESSIONAL ACCOUNTANTS:

Employ a CPD Process to Identify Relevant CPD Activities & Areas

MEASUREMENT OF CPD

ACTIVITIES

Output

Combination

Input

1. Compliance with Program

2. Effectiveness of Program

MONITOR & ENFORCE

Learning & Development

Education Training

Practical Experience

Observation, Feedback, &

Reflection

Self-directed & unstructured

gaining of knowledge

CPD ACITIVITIES

VITAL CPD AREAS

Professional Values, Ethics and Attitudes?

Digital Acumen?

CPD PROVIDERS:1. Accept relevant activities2. Require CPD that is relevant3. Require CPD in areas vital to the

public interest

1

2

34

5

Coaching Networking

1. Self-appraise2. Plan3. Act4. Document5. Evaluate

PROFESSIONAL ACCOUNTANTS:

Employ a process to identify relevant CPD activities and areas

MEASUREMENT OF CPD ACTIVITIES

Output

Combination

Input

1. Compliance with Program

2. Effectiveness of Program

MONITOR & ENFORCE

International Education Standard (IES) 8 Professional Competence for Engagement Partners Responsible for Audit of Financial Statements (Revised)

Prescribes the professional competence that professional accountants are required to develop and maintain when performing the role of an Engagement Partner responsible for audits of financial statements.

IES 8 (Revised) is written for those professional accountants who are already performing the role of engagement partner, and becomes effective on July 1, 2016.

IES 8 (Revised) focuses on the engagement partner, which is a role common to every audit engagement.


It provides that it is the responsibility of the professional accountant performing the role of an engagement partner to by undertaking relevant CPD activities, which include practical experience to develop and maintain professional competence.

The Institute is currently reviewing the impact on IES 8 (Revised) in its audit regulatory regime and will provide further guidance on the standard in due course.


Issued under consideration include:- Does the current framework support the need for

enhance competency for audit professionals (specifically engagement partners)?

How should learning outcome approach be embedded in professional accountants in public practice CPD requirements?

Should Audit be considered as a post CPA qualification?

Should ICPAK initiate a mandatory certification for one to be issued with an audit license?



Major IESs/Developments Q22016

Q32016

Q42016

IES 7 Continuous Professional

Development (CPD)

Deliberations Publish ED

Guidance on IES 1 Deliberations Concluded for

publication

New IESs on specialisation that is public

sector, banking and extractive industry

professional

Deliberations

Strategic work plan review Deliberations

Public Sector


In April 2016, the IPSASB published a revised Preface to International Public Sector Accounting Standards (Preface) titled “Applicability of IPSAS”, which change how the IPSASB communicates the type of public sector entities that it considers when developing an IPSAS or RPG.

The amendments include: - Provisions on the characteristics of public sector entities for which IPSAS are designed in the revised Preface;

Replacement of the term “Government Based Entities (GBEs)” with the term “commercial public sector entities;”

Deletion of the definition of a GBE in IPSAS 1, Presentation of Financial Statements; and

Amendments on the scope section of each IPSAS and RPG by removing the paragraph that states that these pronouncements do not apply to GBEs.

These amendments were brought about by different interpretations of the definition of GBE and the IPSASB believe that the principles-based approach communicates more transparently the types of public sector entities, while also enhancing consistency and understandability of the IPSASB’s literature.

The changes also acknowledge the role that regulators have in determining which accounting standards should be applied by different entities in their jurisdictions and ICPAK will work closely with PSASB (Kenya) in categorising public sector entities for which IFRS is applicable.


Current IPSASB projects : Social benefits;

Revenues;

Non-exchange expenses;

Heritage assets;

Infrastructure assets;

Public sector measurement; and

Leases.

Additionally, issues outside of the IPSASB work plan were also discussed: “IPSAS lite” (IPSAS for small and medium-sized entities);

Tax expenditures;

Natural resources accounting;

Consolidation;

Financial performance measures;

Service performance reporting; and

Implementation issues.


Successful adoption of IPSAS in Kenya for

public sector

Automation of reporting templates

IPPF for internal audit in the public sector

Views of constituents on the work of PSASB (K)


Unethical business practices harm organizations and economies. Large-scale business failures such as Enron—as well as the more recent failures related to the global financial crisis—highlight the consequences of unethical business practices and amoral management. Professional accountants, as stewards of transparency and trust, and subject to a professional code of ethics, have a key role to play not only in upholding but in encouraging and influencing ethical behaviour and decision making within their organisations.

IFAC, 2016



CPA Michael Mugasa

Partner, Pwc & Chair,

Professional Standards

Committee (PSC)

ICPAK

[email protected]

CPA Edwin Makori

Chief Manager, Professional

Services Division

ICPAK

[email protected]


mailto:[email protected]

mailto:[email protected]

Documents

The Future of Financial Reporting - ICPAK · PDF fileThe Future of Financial Reporting ... Disclosure initiative (IAS 1) ... Why the matter is considered to be of the most significance