Letter to the International Accounting Standards Board (IASB)

July 14th, 2010

On July 9, Raymond Baker and Tom Cardamone of Global Financial Integrity, leading coordinator of the Task Force on Financial Integrity and Economic Development sent a letter to the International Accounting Standards Board (IASB) to make comment on the IASB Dicussion Paper’s promotion of country-by-country reporting.

Download the PDF to the left or see the full text below.

International Accounting Standards Board
Extractive Industries Project
1st Floor
30 Cannon Street,
United Kingdom

9  July 2010

Dear Sir or Madam

Extractive Activities – Comments on Discussion Paper issued 6 April 2010

We write to make formal response to the above consultation paper.

The Task Force on Financial Integrity and Economic Development is a consortium of governments and research and advocacy organizations, focuses on achieving greater transparency in the global financial system for the benefit of developing countries. It is primarily financed by the Norwegian government but also has the support of the Leading Group on Innovative Financing for Development which represents the governments of fifty five nations. The promotion of country-by-country reporting, described in your Discussion Paper as the Publish What You Pay proposals is one o our five key objectives.

Our particular concerns about the Discussion Document can be summarised as follows:

1. Users of accounts

The IASB panel notes that their report has been prepared within the IASB framework. As a result they suggest that the only users of information whose needs they are allowed to consider are the suppliers of capital.

This claim invalidates the conclusions they reach. It has over many years been established that there are a wide range of users of the audited financial statements issued by reporting entities subject to International Financial Reporting Standards and other accounting standards. As long ago as 1975 the UK’s Accounting Standards Steering Committee, a body that can be seen as a precursor of the current International Accounting Standards Board, published a seminal document entitled the Corporate Report[1]. That report identified the users of accounts (as they are referred to in law, for example in the UK) as:

  • The equity investor group (shareholders)
  • The loan creditor group (banks and bondholders)
  • The analyst-adviser group who advise the above groups
  • Employees
  • The business contact group
  • The government
  • The public.

It is curious to note that UNCTAD in their 2008 report entitled “Guidance on Corporate Responsibility Indicators in Annual Reports”[2] said that in their opinion financial statements might be used by:

  • Investors and financial institutions;
  • Business partners;
  • Consumers;
  • Employees;
  • Surrounding community;
  • Civil society organizations; and
  • Governments and their institutions.

If the IASB is to fulfill its obligations as established by the constitution of the International Accounting Standards Committee Foundation (IASCF[3]) then it clearly has to take all these users into account when undertaking its work. This is because according to that constitution the IASB objectives are:

(a) to develop, in the public interest, a single set of high quality, understandable and enforceable global accounting standards that require high quality, transparent and comparable information in financial statements and other financial reporting to help participants in the world’s capital markets and other users make economic decisions;

(b) to promote the use and rigorous application of those standards;

(c) in fulfilling the objectives associated with (a) and (b), to take account of, as appropriate, the special needs of ….emerging economies; and

(d) ….”

Abbreviation has been made and emphasis added but it is important to note that:

  1. We find it impossible to imagine a situation where the public interest could be equated solely with the interest of capital providers when there is such widespread and long standing recognition of other users having interest in financial statements, use that the demand made for country-by-country reporting data by Publish What You Pay (PWYP)does evidence, given the backing of that coalition by more than 300 NGOs and civil society organisations from around the world and its close involvement with the Extractive Industries Transparency Initiative, itself backed by many governments. As such to ignore the needs of these users represents, in our opinion, a breach of the constitutional obligation of the IASB since that constitution does not allow the needs of the world’s capital markets and other users to be considered separately: it requires that the financial statements the IASB promotes embrace the needs of both simultaneously.
  2. We can find no rational basis for the IASB panel to suggest, as it has and as some of its members have suggested elsewhere, that even though the data PWYP demands may be of interest to NGOS and others that accounts  prepared under IASB rules should not supply that information. The information requested is accounting data; it could only be produced based on information held within the accounting records of reporting entities subject to IFRS and as such the task of the IASB is to ensure that the information in question, if relevant to the economic decision making needs of users of accounts (see next section of this letter) must be included in the single set of high quality accounts that the IASB framework should make sure is available to users of financial statements. To argue that this accounting data should be instead made available elsewhere, as has been suggested, is to breach the obligation the IASB has publicly accepted.

In this case it is suggested that the premise on which the Discussion Document has been prepared is incorrect and as such all the conclusions it reaches are flawed in consequence.

It is therefore recommended that the IASB recommence this process at the first possible opportunity and that in the process it take note of the demand made of it by the recent G20 finance ministers meeting in Busan, Republic of Korea, June 5, 2010, whose communiqué[4] said  “We encouraged the International Accounting Standards Board to further improve involvement of stakeholders”. For this reason we recommend in the strongest possible terms that PWYP and other representatives of civil society be engaged with the process of revising this Discussion Document when this necessary process is undertaken.

2. Use of Accounts

The IASB panel have said (para 1.23 and in many other places) that the only use made of financial statements is the appraisal of potential future cash flows arising from a reporting entity by the current and potential providers of capital to it.

The issue of whether those providers of capital are the only users of accounts has been dealt with, above.

It is also, however, a wholly inappropriate claim for the IASB to make that the only use made of accounts prepared under International Financial Reporting Standards is the appraisal of future cash flows. This is very obviously not true. The Corporate Report, issued in 1975 as noted above, noted that published accounts should enable a user to appraise information on:

  1. The performance of the entity;
  2. Its effectiveness in achieving stated objectives;
  3. Evaluating management performance, including on employment, investment and profit distribution;
  4. The company’s directors;
  5. The economic stability of the entity;
  6. The liquidity of the entity;
  7. Assessing the capacity of the entity to make future reallocations of its resources for either economic or social purposes or both;
  8. Estimating the future prospects of the entity;
  9. Assessing the performance of individual companies within a group;
  10. Evaluating the economic function and performance of the entity in relation to society and the national interest, and the social costs and benefits attributable to the entity;
  11. The compliance of the entity with taxation regulations, company law, contractual and other legal obligations and requirements (particularly when independently identified);
  12. The entity’s business and products;
  13. Comparative performance of the entity;
  14. The value of the user’s own or other user’s present or prospective interests in or claims on the entity;
  15. Ascertaining the ownership and control of the entity.

Of all of these objectives the IASB has chosen just one to make the entire focus of its work.

In the process it has also ignored those uses of accounts that have developed since 1975 including (but not exclusively) the assessment of:

  • geo-political risk;
  • environmental risk;
  • risk arising from transfer mispricing;
  • the abuse of tax havens / secrecy jurisdictions;
  • the risk of involvement with corruption, wittingly or unwittingly;
  • money laundering risk;
  • corporate responsibility.

The demand for information made by Publish What You Pay falls into those areas foreseen in 1975 and since then, all of which are reasonable, anticipatable, actual and justifiable uses of financial statements and which cannot in any meaningful way be satisfied by information supplied in any other form. To deny the validity of these uses of financial statements does, once again, mean that the IASB is acting in contravention of the obligation to prepare a framework for financial reporting in the public interest which it has accepted and which is the basis on which responsibility for doing so has been devolved to it. On these grounds we request that the Discussion Document now be redrafted taking these others uses of financial statements into consideration and that stakeholders using information for these purposes be included in that process.

3. Materiality

The IASB panel has made two fundamental errors with regard to materiality in making its recommendations.

Precisely because of the error it has made in determining the users or accounts and their needs for information, already noted, the IASB panel has failed to recognise the need for information to assess a wider range of risks  – including that demanded by Publish What You Pay with regard to the extractive industries – at a country by country level, without exception.

In the case of this data – as is also, for example, the case with data concerning disclosure of related party transactions, directors remuneration and other key data essential for the appraisal of regulatory and other compliance and which by themselves have no bearing whatsoever on the likely level of future cash flows – a qualitative measure of materiality has to be used. This, by definition, means that materiality has to be determined in these cases within the accounting framework i.e. it has to be set within either law or an appropriate International Financial Reporting Standards and the matter is not devolved to the reporting entity to determine for itself – at which point materiality is then assessed quantitatively.

Precisely because the IASB panel has failed to appreciate the need for information on a country-by-country basis is not based on materiality to the entity, but on materiality to the user, and the fact that the  need is bound to be location specific, without exception, when it comes to assessment of the regulatory compliance of the entity then the data in question must be made available for all states in which a reporting entity operates without exception.

The Discussion Document is, therefore, wrong in suggesting that reporting entities be allowed to determine what disclosure is made by them according to the materiality o the disclosure in question  to the reporting entity and not in accordance with the needs of users and this matter must be resolved by incorporating a qualitative requirement into any IFRS for the Extractive Industries that  requires that country-by-country reporting take place for each and every jurisdiction in which the reporting entity operates, without exception.

It should be noted that a perverse moral hazard to tax abuse (at the very least) would be created if this recommendation were not adopted. The primary purpose of the Publish What You Pay demand for information is to assess the quantum of payments from reporting entities within the extractive industries to the governments that host their upstream operations. If a quantitative standard for materiality is adopted a perverse incentive to minimise those payments will be created to ensure that they fall below any standard of materiality adopted by the reporting entity and so fall out of account. This cannot be acceptable and is further reason why a qualitative rather than a quantitative measure of materiality is essential in this case: the absence of payment to a host government is as important an issue to Publish What You Pay and its civil society partners as a large payment. Quantitative materiality measures cannot therefore be applied in this case.

4. Voluntary opting out of the required accounting framework

For the same reason as those noted in the previous section it is inappropriate that any reporting entity be given the option of not disclosing information for any jurisdiction where it considers it would be inappropriate for reasons it alone and at its sole discretion can determine, with the mere requirement that it simply refer to that non-disclosure, as the IASB panel propose.

A further perverse moral hazard is created by this recommendation. In the countries where corruption on the part of a host country seeking to abuse the benefit streams paid to it by a reporting entity is most likely considerable pressure on that entity to not disclose could be applied by, for example, threatening withdrawal of concession rights. When the option to not disclose has been provided by the IASB few companies could in that case argue it was not in their commercial interest to acquiesce and not disclose.

This is precisely why the option of not disclosing must not be provided: the likelihood of corruption, and its spread into reporting entities will increase if this option is made available. For that reason no option of this sort should be provided and the Discussion Document must be amended in this respect.

5. Incompleteness of the proposed accounting framework

The IASB panel have treated the requests made by PWYP as if they were a menu of disclosure options and not a request for coherent, complete accounting information that is the minimum needed to ensure necessary information to reasonably appraise the likely completeness and accuracy of the benefit payments made by reporting entities to host governments on a country-by-country basis. Given that IFRS are meant, according to the IASB panel and the IASB framework, to provide a complete set of financial statements this failure to recognise the requested data as constituting such data is hard to explain.

As example, the IASB panel does consider it appropriate that the significant components of the total benefit streams paid to host to government and their agencies should be disclosed on a country-by-country basis.  However, they then reject the notion that revenues arising from extractive industry production should be disclosed on a country-by-country basis, with separate disclosure of sales to external customers and intra-group transfers. This makes no sense at all. Unless sales and profit performance by country can be appraised there is no prospect of determining whether the disclosures made of benefit streams paid are meaningful when much of the latter will be made up of taxes on revenues in the form of royalties or taxes on profits, calculated as revenues less costs. Accounting information only ever makes sense in comparison, whether in absolute or ratio terms. By denying the opportunity for the creation of meaningful absolute or ratio comparisons with regard to benefit stream payments the IASB panel is deliberately or inadvertently undermining the usefulness of the information they agree might be disclosed. There is no accounting logic to this and as such the approach adopted, of cherry picking demands made, has to be rejected and the entire range of information requested by PWYP has to be adopted as a whole by the IASB if its obligation to produce “high quality, understandable and enforceable global accounting standards that require high quality, transparent and comparable information in financial statements” is to be fulfilled.

6. The cost -benefit analysis

The IASB panel propose that their recommendations with regard to the PWYP proposals be subject to a  cost benefit analysis before they are adopted.

This recommendation is, taking into consideration the observations already made in this letter, inherently flawed and is bound to result in rejection of the proposals. There are three reasons for this:

a. In appropriate assessment criteria

The proposed cost benefit analysis is intended to be based on the assumptions in the IASB panels’ paper i.e. that financial statements are prepared solely for the benefit of capital providers and all else must make do with the information supplied for their benefit which has the sole purpose of allowing them to appraise the likely future cash flows of the entity. The PWYP proposals, asking for complete, coherent accounting data that could only be supplied within the context of a set of financial statements are designed primarily (although by no means exclusively) for other stakeholders and are intended to appraise past performance primarily in the context of regulatory compliance either of the entity itself or of the parties with which it engages. These are all entirely valid uses of accounting data, but all the benefits that might flow from this use are excluded from consideration by the IASB panel in the proposed cost-benefit analysis. That analysis does therefore include all costs but excludes almost all benefits form consideration and is, therefore, from the outset inherently biased as to outcome. This is despite the fact that all the intended benefits are in the public interest, as indeed IFRS are meant to be under the terms of the IASC constitution. This is because the intended benefits are intended to enhance tax and regulatory and legal compliance, reduce the risk of fraud and corruption, enhance corporate accountability and transparency, promote corporate responsibility and good governance as well as enhancing risk assessment on all these issues, all of which are, if the IASB panel proposal is to be believed, benefits that cannot be taken into consideration when appraising the benefit arising from an International Financial Reporting Standard.

It is recommended in the strongest possible terms that the basis of appraisal of benefits arising from implementation of the PWYP proposal for country-by-country reporting be amended so that all these benefits can be taken into consideration before any cost benefit analysis be undertaken or it will be inherently flawed and will seriously undermine the credibility of both the IASB and its standard setting process.

b. Data must be available

The IASB panel should also be asked to withdraw consideration of the possibility that the data required to produce country-by-country reporting of the type demanded is not available. If any reporting entity subject to IFRS did not have the data required to produce the financial reporting requested by PWYP it would, it is argued, have failed to maintain the necessary books and records required by the company law of the states in which they will be incorporated. Taking example from UK law it is necessary for an entity (and by definition its group) to maintain by law:

(1)Adequate accounting records means records that are sufficient—

(a)to show and explain the company’s transactions,

(b)to disclose with reasonable accuracy, at any time, the financial position of the company at that time, and

(c)to enable the directors to ensure that any accounts required to be prepared comply with the requirements of this Act (and, where applicable, of Article 4 of the IAS Regulation).

(2)Accounting records must, in particular, contain—

(a)entries from day to day of all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure takes place, and

(b)a record of the assets and liabilities of the company.

(3)If the company’s business involves dealing in goods, the accounting records must contain—

(a)statements of stock held by the company at the end of each financial year of the company,

(b)all statements of stocktakings from which any statement of stock as is mentioned in paragraph (a) has been or is to be prepared, and

(c)except in the case of goods sold by way of ordinary retail trade, statements of all goods sold and purchased, showing the goods and the buyers and sellers in sufficient detail to enable all these to be identified.

The disclosures required by PWYP relate to reserves, which for this purpose might be considered stocks and therefore subject to disclosure requirement, whilst it would be impossible for the directors of the entity to meet the obligations in paragraph 2 without having available the data PWYP requests. Therefore no additional costs of preparing these basic records should be allowed to be taken into account in any costs-benefit analysis because they must already exist if legal requirements are being met. We trust you agree.

c. Auditing costs

Whilst it is the case that country-by-country data is not prepared for disclosure at present, and this will be an additional cost, as will be the cost its explicit disclosure, the cost of auditing the underlying transactions should not be taken into consideration in any cost-benefit analysis. The settlement of legal obligations to make payment to governments under the terms of mineral and oil and gas extraction agreements will always be high risk transactions requiring particular attention from auditors within the context of the audit of the subsidiaries of any multinational corporation engaged in these activities. If it was to be claimed that additional cost was incurred in auditing these independent of the simple disclosure aspect then it would suggest that existing audits are not fulfilling their objective of assessing high risk transactions. As such no material additional audit costs, bar those of disclosure checking, should arise. We trust you agree.

7. The obligation to developing countries

We draw particular attention to the obligation laid out in the IASC Foundation constitution that in undertaking its work the IASB must “to take account of, as appropriate, the special needs of ….emerging economies”.

Those economies are particularly associated in a great many cases with the extractive industries. As a result they are also widely associated with the “resource curse”, which PWYP has so notably sought to tackle, not least by being responsible for promulgating the Extractive Industries Transparency Initiative.

The demands for accounting information that PWYP has made are intended to assist civil society, the populations of emerging economies, regulators of all sorts and extractive industry companies themselves overcome that curse.

It is hard to imagine any matter of public interest that might benefit those countries more than tackling this issue. It is in that case extraordinary that the IASB panel has refused to both consider the possibility that the audited financial statements of extractive industries companies might play an integral and fundamental role in achieving this aim, and at the same time might dismiss all benefits from consideration that might flow from achieving this goal. In our opinion this represents a fundamental error of judgment on their part.

Of course we accept that it is not yet proven that the disclosure requested (which is the absolute minimum possible, additional disclosure rather than less actually being desirable) will achieve this goal. It does, however, also seem almost unimaginable that they will not assist if implemented in the way PWYP request, on a country-by-country basis without exception, meaning data from many countries now unobtainable in any way whatsoever would come into the public domain universally and without exception, giving the biggest possible boost imaginable to the necessary process of holding the governments of those countries to account for the funds they receive  and the use they make of them.

We would ask that the IASB review the request made in this context and accept the absolute priority of fulfilling this request if the IASB is, in turn, to meet the public obligation it has accepted in its constitution.

8. The evidence of recent events

It is impossible not to comment at this juncture on the importance of country-by-country that has been revealed by the current Deepwater Horizon disaster that has engulfed both BP plc and the Gulf of Mexico.

The lesson is obvious: the risks within the extractive industries are specific, peculiar and in very many cases geographically located.

This has particular importance in the context of the high profile demand of the USA that BP compensate it in full for the damage it has caused: the particular and special relationship between an extractive industry company and the host government that grants its licence to operate is highlighted. This may be of significance to investors, of course. But even they need to specifically locate this risk in geography i.e. on a country by country basis. A small incident – the fracture of a pipe – has been shown to have massive ramifications. Users of financial statements in each jurisdiction in which an extractive industries company operates have to know whether the organisation locally – on which they have claim – can sustain the consequence. The US may be able to assess this for BP. That may not be true if the accident had happened in a developing country but the consequence for its economy may have been even more significant.

In the light of this obvious truth we contend that that position promoted by the IASB panel in the Discussion Document is not tenable, and not acceptable to the users of the financial statements of extractive industries companies.

It is for that reason that we call for urgent, timely, comprehensive and inclusive reconsideration of these issues.

Yours sincerely,

Raymond W. Baker                                                                         Tom Cardamone

Director                                                                                                Managing Director

Appendix 1 to letter to the International Accounting Standards Board dated XX June 2010

Answers to the questions posed by the IASB in its Discussion Document dated 6 April 2010

Question 1 – Scope of extractive activities

We believe that the reporting issues referred to in chapter 6 of the Discussion Document i.e. country-by-country reporting, should apply to all the countries of operation and to all operations of a company which has any engagement in the extractive industries. If this were not  done then profits on which taxes might be due in host countries or activities on which benefit streams might arise could be shifted out of host countries of operation and fall out of reporting. Since this would result in material misstatement of the resulting financial statements we believe full disclosure for all countries of operation and all operations of a company engaged in the upstream extractive industries is required.

Question 2 – Approach

We agree with the   project team proposal that  there should  be  a  single accounting and  disclosure model  that applies to extractive activities in both  the minerals industry  and  the oil  and  gas industry.   We do however make clear that we think it essential that it include full country-by-country reporting.

Question 3 – Definitions of minerals and oil and gas reserves and resources

We have no comment to make.

Question 4 – Minerals or oil and gas asset recognition model – recognition

We have no comment to make.

Question 5 – Minerals or oil and gas asset recognition model—unit of account selection

We note the observations made but add that it is vital that all units of account be delineated on a country-by-country reporting basis since a great part of the risk associated with any operation is nationally defined.

Question 6 – Minerals or oil and gas asset measurement model

It is our opinion that historical cost reporting is of most use for oil and mineral accounting since this best assists the user seeking to assess taxation payments made.

Question 7 – Testing exploration properties for impairment

We have no comment to make.

Question 8 – Disclosure objectives

We note that in  Chapter  5  the   project  team  proposes that  the disclosure  objectives   for extractive activities are to enable users of financial reports to evaluate:

(a)          the value  attributable to an entity’s minerals or oil and  gas properties;

(b)          the contribution of those assets to current period financial performance; and

(c)           the nature and   extent of  risks  and  uncertainties associated  with   those assets.

We do not agree for the reasons noted in the attached letter and think that the IASB panel have made a fundamental error of judgment in coming to these conclusions.

Question 9 – Types of disclosure that would meet the disclosure objectives

We note that the recommendations made exclude any consideration of country-by-country reporting.

For the reasons noted in the letter we do as a consequence disagree with the conclusions reached.

Question 10 – Publish What You Pay disclosure proposals

This matter is discussed above and in the document attached to this letter.


[2] accessed 15-8-08



Written by Scott Fahey

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