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Chapter 3: Social reporting
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CSR covers the following areas:
Ethical behaviour by a company and its employees (business ethics)
The treatment of employees by the entity (employer)
The treatment of human beings generally (for example, respect for human rights,
refusing to use suppliers who employ slave labour or child labour, and so on)
The entity’s relationship with society at large, and the communities in which it
operates
Environmental issues, such as the responsibility of companies to protect and
sustain the natural environment.
CSR issues are not the same for each company, because companies operate in
different environments. However, for most companies there are some CSR issues,
which they might deal with in any of the following ways:
They might ignore the issues, regardless of the effect of any bad publicity on
their reputation and public image.
They might comply with legislation and regulations on CSR issues, but do very
little of a voluntary nature.
They might seek to promote active CSR initiatives, which will probably involve
communicating information about these initiatives both to shareholders and the
general public.
1.2 Reporting requirements
There are no international accounting standards on social and environmental
reporting.
In some countries, large companies are required to present social and environmental
information on an annual basis. In the US the Securities and Exchange Commission,
which regulates the stock markets, requires listed companies to quantify their
environmental expenditure. They are also required to discuss the effects that
compliance may have on their profits and any lawsuits against them relating to
environmental issues. Denmark and the Netherlands require mandatory
environmental reporting and other countries such as Sweden and France require
environmental information to be published alongside the financial information in
the annual report.
In the European Union, quoted companies are now required to present certain
information in the annual directors’ report, as a narrative business review. This
review should contain information about the main trends and factors likely to affect
the future development, performance and position of the company’s business, and
information about:
environmental matters (including the impact of the company’s business on its
environment
the company’s employees
social and community issues.
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The review should also include:
analysis using financial key performance indicators, and
where appropriate, analysis using other key performance indicators, including
information relating to environmental matters and employee matters.
In the UK, for example, the government has issued guidance on key environmental
performance indicators, including 22 quantifiable performance measures relating to
emissions into the air, emissions into the water, emissions into the earth and the use
of non-renewable resources.
Since the business review is a part of the annual directors’ report, the external
auditors are required to give an opinion on whether the information in the report is
consistent with the financial statements.
However, this requirement for a business review applies only in the EU, not
internationally.
1.3 Voluntary CSR reporting
Because of the potential importance of CSR issues for their reputation and public
image, many large companies voluntarily publish an annual CSR report. This is
often called an Environmental Report, or a Social and Environmental Report. The
intended users of social and environmental reports, or environmental, social and
governance (ESG) reports, include stakeholders other than shareholders.
The IASB is happy for companies to present such information, but does not
prescribe the content or the format of reports. As a result, the length and style of
such reports differs significantly between companies, and the content can vary
substantially for companies in different industries.
Some companies include their report on social and environmental issues as part of
their financial statements (normally in the directors’ report), whereas other
companies publish a report as a separate document. Preparing the information as a
separate document helps to distinguish between the readers: the annual report is
designed for the shareholders, whereas the corporate social responsibility report is
prepared for the other stakeholders in addition to the shareholders.
Contents of an environmental report
Typically, an environmental report will include an outline of:
the entity’s policies towards environmental issues
any improvements since previous years
an assessment of the key risks faced and how the company intends to respond
government legislation on environmental matters and how the entity ensures
compliance with the legislation
significant initiatives taken by the company to improve environmental issues
key environmental performance indicators: targets of the industry and the
relative performance of the entity.
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financial information relating to environmental costs, including the entity’s
accounting policy.
Contents of a social report
A social report (which may be combined with the environmental report) may refer
to:
employee numbers and employee involvement
employee sick leave, health and safety issues, accidents at work, recruitment of
ethnic minorities and the disabled
involvement with local charities and local communities
working groups to communicate with stakeholders.
Voluntary guidelines for the content of social and environmental reports
The information provided does not have to be audited, but most organisations will
request some kind of audit on the information before it is published to enhance its
credibility.
Even so, since the content of these voluntary reports is not regulated and not
audited, companies can include whatever they choose (the ‘good news’) and omit
whatever they do not want in the report (the ‘bad news’). For this reason, voluntary
environmental reports have been treated with some caution by readers.
A number of organisations have produced codes of practice and guidelines for
companies to follow, but to date these are non-mandatory. This can lead to
problems in comparability of the content of these reports, although having the
information in the annual report is better than not disclosing at all.
Global Reporting Initiative
One of the most popular guidelines were issued by the Global Reporting Initiative
(GRI). Their Sustainability Reporting Guidelines were originally published in 1999 to
develop and share guidelines globally. In October 2006, the latest version of these
guidelines was published, known as the G3 (third generation) guidelines. Many
large international companies have registered to use these guidelines and links to
their reports can be found on the GRI website (www.globalreporting.org).
The G3 guidelines provide guidance on the following areas of the report:
defining the report content
reporting principles to ensure a quality report, consisting of reliability, clarity,
balance, comparability, accuracy and timeliness
determining which entities will be included in the report
determining the base content that should be included in the report in four areas:
strategy and analysis, organisational profile, report parameter and governance
management approach to risks and opportunities and the associated
sustainability
performance indicators.
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The Institute of Social and Ethical Accountability (ISEA) has developed a series of
principles-based standards that are intended to provide the basis for improving the
sustainability performance of organisations. These standards (which are called
AccountAbility standards or the AA1000 Series) include standards on sustainability
and social reporting. On the GRI website, individual company sustainability reports
are noted as complying with the GRI guidelines and the AA1000 series if that is the
case.
Some sustainability reports are referred to as ‘triple bottom line reporting’ because
they report on performance and targets in three major areas: economic (financial),
social and environmental.
Institutional investors’ demand for corporate social responsibility by
companies
There has been a significant increase in the demand by major institutional investors
for companies in which they invest to pursue social and environmental policies.
One such initiative was launched by the United Nations, with the support of 32
major international institutional investors.
In 2006, the UN Global Compact issued six Principles for Responsible Investment.
These are intended to encourage institutional investors to give attention to
environmental, social and corporate governance (ESG) issues when making their
investment decisions. One of the six principles is that companies should be
encouraged by their shareholders to provide disclosures on ESG issues – in other
words, to report on these issues.
Although there are no international standards on CSR reporting, there is a strong
trend towards the provision of more information, on a statutory or a voluntary
basis, and this trend in corporate reporting can be expected to continue in the
future.
Example: BP Amoco Sustainability Report
BP Amoco produced a 78-page ‘Sustainability Report’ for 2005, covering its
business, environmental record and role in society. BP Amoco follows the GRI
guidelines, and subscribes to the ten UN Global Compact Principles.
In its Sustainability Report, there is a cross reference from these ten Principles (and
the associated GRI indicators of performance) to the specific part of the report
where details are provided.
The ten Principles are as follows:
(1) Businesses should support and respect the protection of international
proclaimed human rights within their sphere of influence.
(2) Businesses should make sure that they are not compliant in human rights
abuses.
(3) Businesses should uphold the freedom of association and the effective
recognition to the right of collective bargaining.
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(4) Businesses should uphold the elimination of all forms of forced and
compulsory labour.
(5) Businesses should uphold the effective abolition of child labour.
(6) Businesses should eliminate discrimination in respect of employment and
occupation.
(7) Businesses should support a precautionary approach to environmental
challenges.
(8) Businesses should undertake initiatives to promote greater environmental
responsibility.
(9) Businesses should encourage the development and diffusion of
environmentally-friendly technologies.
(10) Businesses should work against all forms of corruption, including extortion
and bribery.
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Management commentary
Definition and purpose of management commentary
ED 2009/7: Management commentary
2 Management commentary
2.1 Definition and purpose of management commentary
‘Management commentary’ is additional information about an entity that
complements the information provided in the financial statements of an entity. Two
important features of management commentary are that:
it is provided by management, and expresses the view of the management of the
entity
it is a commentary; therefore much of it is in a narrative form.
The Canadian Accounting Standards Board has defined management commentary
as a ‘narrative explanation, through the eyes of management, of how your company
performed during the period covered by the financial statements and of your
company’s financial condition and future prospects.’ The IASB agrees with most of
this definition, but believes that management commentary should include
quantitative information as well as narrative; therefore to call it a ‘narrative’
explanation is misleading.
Management commentary is useful to the users of financial statements because it
provides them with additional information that supplements the figures in the
accounts. It also gives them an insight into how management view the performance
of the business and what they hope to achieve in the future. An assessment of the
risks and opportunities facing the entity can also be useful for an investor who may
want to make a decision as to whether to continue investing in the entity.
Management commentary is common in many countries. In the European Union,
companies are required to include a business review in their annual report and
accounts. A business review is a management commentary, and might sometimes
be called an Operating and Financial Review (OFR). In the UK there is a statement
of best practice that gives guidance on the content and presentation of information
in an OFR, which is consistent with the statutory requirements for the content of the
business review.
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2.2 ED 2009/7: Management commentary
This ED will not result in an IFRS but proposes non-binding guidance on the
preparation of a management commentary.
The proposals are intended to provide a basis for the development of good
management commentary. It offers a non-binding framework which could be
adapted to the legal and economic circumstances of individual jurisdictions.
Main features of the ED
The ED defines management commentary as a narrative report accompanying
financial statements prepared in accordance with IFRSs that provides users with
historical and prospective commentary on the entity’s financial position, financial
performance and cash flows, and a basis for understanding management’s
objectives and its strategies for achieving those objectives.
The ED prescribes a framework for the preparation and presentation of
management commentary to assist management in preparing decision-useful
management commentary to accompany financial statements prepared in
accordance with IFRS.
Management commentary may help users to understand:
the entity’s risk exposures, its strategies for managing risks and the effectiveness
of those strategies
how resources that are not presented in the financial statements could affect the
entity’s operations
how non-financial factors have influenced the information presented in the
financial statements.
Management commentary should:
provide management’s view of the entity’s performance, position and
development
supplement and complement information presented in the financial statements;
and
be orientated to the future.
The relevant focus of management commentary will vary with facts and
circumstances but a decision-useful management commentary should include
information that is essential to an understanding of:
the nature of the business
management’s objectives and strategies for meeting those objectives
the entity’s most significant resources, risks and relationships
the results of operations and prospects
the critical performance measures and indicators that management uses to
evaluate the entity’s performance against stated objectives.
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Paper P2 (INT)
Corporate Reporting
CHAPTER
4
Group financial
statements
Contents
1 Revision of principles of consolidation
2 Revision of principles of consolidation: the basic
calculations
3 Other aspects of IFRS 3 (revised)
4 Revision of intra-group adjustments
5 Accounting for associates and joint ventures
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Revision of principles of consolidation
International accounting standards and group accounts
Parent company and subsidiaries
The nature and purpose of consolidated accounts
The requirement to prepare consolidated accounts
1 Revision of principles of consolidation
You should already be familiar with the preparation of simple consolidated
accounts from your earlier studies. This chapter provides revision material, but also
introduces some topics that might not be familiar to you, such as accounting for
joint ventures and step acquisitions. It is important that you should understand the
basic rules of consolidation before you go on to study more complex group
accounts.
1.1 International accounting standards and group accounts
There are four IASs and IFRSs relating to the financial statements of groups of
companies:
IAS 27 Consolidated and separate financial statements
IAS 28 Investments in associates
IAS 31 Interests in joint ventures
IFRS 3 Business combinations.
In 2008, revised versions of IAS 27 and IFRS 3 were issued and these are
examinable. These revised accounting standards have made some important
changes to the rules on accounting for business combinations.
IAS 1 (revised) and group accounts
The requirements for preparation of financial statements, including consolidated
financial statements, were changed by IAS 1 (revised) which was issued in
November 2007.
One of the requirements of IAS 1 (revised) is that entities should make a distinction
in their financial statements between:
changes in equity during the period that are due to transactions between the
entity and its owners in their capacity as owners, such as new share issues and
equity dividend payments, and
changes in equity during the period that are due to other reasons, such as profit
or loss in the period and revaluations of current assets.