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INTERVIEW PART 1
EU-FINSTAR is a European Union financial sector project delivering technical assistance to the Government and its State institutions supporting the introduction and implementation of reforms that approximate Ukraine’s legal framework and business standards to EU requirements and good international practice. EU-FINSTAR is funded by the EU and implemented by a consortium led by Human Dynamics, a specialized provider of consulting services headquartered in Vienna, Austria.
INTERVIEW QUESTIONS AND ANSWERS
Today, we present the first of a two-part series from an interview with Scott Calhoun who leads the implementation team for European Union financed technical assistance delivered through the EU-FINSTAR project. Technical assistance is provided to the Government and Ukraine’s three regulators responsible for prudential regulation and supervision of Ukraine’s financial services market. The interview focuses on EU assistance supporting the Government plan for a new regulatory reporting framework for Ukraine’s public interest enterprises (PIEs). New regulatory reporting requirements for PIE financial information will be introduced by the Government in 2019.
EN: Thank you for agreeing to the interview and for sharing information about EU-FINSTAR’s technical assistance to the Government’s reforms for the financial sector in line with the Association Agreement with the EU. Project information indicates the EU-FINSTAR project includes nine (9) component areas for assistance that support four key objectives: (1) introducing new legal frameworks for financial services approximated to the EU legal framework and international principles; (2) improving financial transparency; (3) strengthening key institutional capacities at the Ministry of Finance of Ukraine and the three financial regulators; and (4) supporting the development of core competencies that safeguard financial stability.
Among the areas EU-FINSTAR supports are the preparations for the Government’s introduction of new reporting requirements for public interest enterprises (PIEs). To begin, what is a PIE?
SC: Following a number of high-profile accounting scandals occurring in the 2000-2002 timeframe, governments and regulators began introducing reforms and new requirements to strengthen public entities’ accounting practices and the statutory audits for the entities’ financial reports. The reforms and new requirements for accounting and statutory audits included refinements for definitions of public interest entities or enterprises. EU legislation providing a new EU regulatory framework for statutory audit was adopted in April 2014, entering into force on or after 16 June 2016. There are key measures in the EU audit reforms that apply specifically to PIEs, with PIEs defined in the EU legislation.
Similar to EU requirements, Ukraine’s new Audit Law and amended Accounting Law contain key measures prescribed for PIEs. Amendments to the Accounting Law enacted in October 2017 define Ukrainian PIEs which is consistent with the definition for the EU that is implemented in all Member States. Ukrainian PIEs include:
• Banks,
• Insurance companies,
• Non-State pension funds and other financial institutions (except for those classified as small and micro enterprises,
• Securities issuers with securities admitted for trading, and
• Other enterprises designated by the State (for instance entities deemed to have a significant public relevance because of the nature of their business, their size or the number of employees)
EN: The new financial reporting requirements for PIEs appear to be very technical with unfamiliar terminology.
SC: Your observation about unfamiliar terminology is accurate. As of today, only a handful of individuals in Ukraine fully understand the meaning of IFRS XBRL Reporting. Although, within the next year more than 3,800 entities in Ukraine which meet the definition for a PIE will be required to begin submitting their IFRS financial reports to regulators using Ukraine’s IFRS Taxonomy reporting framework the Ministry of Finance publishes.
EN: The interview is intended to share reasons for why the new regulatory reporting is being introduced by the Government and to help the readers understand the terminology. Materials we have read indicate the project is supporting new regulatory reporting requirement for Ukraine’s PIEs for the way they provide financial information to regulators using Ukraine’s IFRS XBRL Taxonomy. What does this mean? What do these technical terms mean in plain language?
SC: Let me start by first sharing for background information about International Financial Reporting Standards that are required for Ukrainian PIEs to implement according to Ukrainian legislation.
International Financial Reporting Standards (IFRS) are accounting standards developed by the International Accounting Standards Board (IASB). IFRS is widely adopted around the world, and is becoming the global standard for preparing and reporting public company financial statements and information. IFRS Standards are rules to be followed by the company’s accountants in maintaining financial accounts so they are comparable, understandable, reliable, and relevant for internal and external users of the financial information. The company’s accounting policies and practices used in preparing and maintaining the financial accounts according to IFRS are also something statutory auditors are required to verify and provide conclusions in preparing and issuing the auditor’s “opinion” about the entity’s financial statements and reports.
Wide-spread adoption of IFRS Standards around the world is the consequence of growing international trade and shareholding, and these standards are progressively replacing different national accounting standards. Approximately 120 nations and reporting jurisdictions permit or require IFRS for domestic companies, with approximately 90 of these countries already fully conforming to IFRS as promulgated by IASB.
EN: What is XBRL?
SC: XBRL is the open international standard for digital business reporting that is used around the world. In a nutshell, XBRL provides a language in which reporting terms can be authoritatively defined. Taxonomies are reporting-area specific hierarchical dictionaries. They define the specific tags used for individual items of data, their attributes and their interrelationships. The terms can then be used to uniquely represent contents of the financial statements or for other kinds of compliance or business reports. XBRL facilitates reporting information to move between organisations rapidly, accurately, and digitally.
Simply stated for Ukraine’s purposes, XBRL is a technology for tagging data to identify and describe the information in a company’s financial statements. The data are machine-readable and can be searched, downloaded into spreadsheets, and reorganized for analytical purposes. Financial analysts frequently use XBRL to rapidly analyse a company’s financial statements and compare to the data provided by other companies in order to analyse industry trends and other benchmarks and to update the analysts’ financial models. Regulators around the world use XBRL to collect, analyse and disclose information. Some more advanced regulators are using XBRL data to look for statistical anomalies that may indicate questions about a company’s accounting practices.
EN: What is IFRS [XBRL] Taxonomy?
SC: The IFRS Taxonomy reflects and implements the presentation and disclosure requirements of the IFRS Standards. The Taxonomy defines terms for specific tags to be used for the individual items of data and includes attributes and inter-relationships. The IFRS Taxonomy also includes elements from accompanying materials to the IFRS Standards, such as implementation guidance and illustrative examples. In addition, the Taxonomy contains elements for disclosures not specifically required by IFRS Standards but commonly reported in good practice.
EN: Who is responsible for the IFRS Taxonomy?
SC: The IFRS Foundation prepares, at least annually, the updates for the Taxonomy reflecting changes in IFRS Standards. The Foundation publishes (in English) the IFRS Taxonomy along with accompanying updated and new IFRS Standards. Currently, the IFRS Foundation has endorsed and published translated IFRS Taxonomies in 13 languages (Arabic, Chinese, Dutch, French, German, Hungarian, Italian, Japanese, Korean, Portuguese, Spanish, Turkish, and Ukrainian).
The number of languages for the IFRS Taxonomy will be expanding as the European Securities and Market Authority (ESMA) announced that issuers in the 28 countries of the European Union must use IFRS XBRL Taxonomy for reporting the company’s annual financial information starting from January 1, 2020.
EN: Can we expect XBRL reporting to continue to be used by regulators?
SC: Yes, XBRL is emerging as the standard-of-choice for digital reporting in securities markets and stocks exchanges around the world. It is also used in all 28 countries of the EU by prudential regulators of banks and insurers. Banking regulators in the U.S. also use XBRL for regulatory reporting and for exchanging financial data.
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