At a Chartered Accountants Ireland webinar on 23 March on the governance of charities and not for profits (ROI), David Brady, non-executive director and management consultant, presented on the “charity board maturity model”. Five Levels of Charity Board Maturity*   Level Board characteristics Non-Compliant Negative attitude to governance. Unaware of strategic developments. Short-term funding focus. Receives only basic financial information. Unaware of outdated policies. Does not insist on a risk register. No rotation or succession planning. Antagonistic relationship with staff. Weak AGM process. Compliant Tolerant attitude to governance. Closed to developments other than self-beneficial. Ensures mixed portfolio of income sources. Ensures policies are current. Ensures risk register prepared for compliance. Rotation policy not implemented. Provides superficial staff support. AGM limited to board only. Effective Understands benefits of governance. Revises board and staff structures to exploit opportunities. Focused on seeking funding opportunities to support strategy. Use policy register to refresh and revise policies. Reviews risk register to manage risk and plan contingencies. Ensures appraisals and rotation policy implemented. External members attend AGM and decisions made. Progressive Seeks improvement governance. Keen to benchmark board maturity. Seeks collaboration in new initiatives that reflect market changes. Ensures policies updated in line with business/market changes. Defines risk appetite. Ensures skills gaps aligned with strategy. Ensures strategy informs decisions. Staff and board rotations planned and implemented. Elite Delivers a series of strategic programmes resulting insignificant impact and/or funding. Board and staff have collective problem-solving mind set. Reviews a series of financial and non-financial KPIs. Employs long-term resource planning. Promotes risk management culture. Reviews strategy regularly. Succession planning includes pro-active identification of new chair and board members. Embraces and learns from occasional failure positively. * Source: David Brady, FCA, of DB Consulting. In an insightful presentation in which he persuasively argued that compliance with a governance code should a basic expectation, David provided recommendations for moving a charity or non-profit on to the levels of effective, progressive or elite governance. The keynote presentation was followed a panel discussion featuring Inez Bailey, CEO of the Centre for Effective Services; John Roycroft, non-executive director National Advocacy Service for People with Disabilities and chair of its policy, communications and governance committee; and Aisling Fitzgerald, Director with PwC. Issues discussed in detail included: Is complying with a governance code, or an equivalent set of standards, sufficient to achieve good governance? A non-executive director’s experience of implementing the Charities Governance Code. Insights on how the senior management of a charity or non-profit can effectively manage and meet stakeholder expectations in relation to compliance and performance. Whether a charity is complex or non-complex per the Charities Governance Code. The importance of innovation in a charity or non-profit organisation. The societal contribution of the charity and non-profit sector in Ireland, and considerations for providing support to assist people suffering because of the crisis in Ukraine. The event was opened by Tony Ward, Chair of the Chartered Accountants Ireland Charity and Non-profit Network Group, chaired by Níall Fitzgerald, Head of Ethics and Governance, with a closing address delivered by Terea Campbell, Member of the Council of Chartered Accountants Ireland and Chair of the Institute’s Ethics and Governance Committee. A full recording of this webinar is available to viewed at: Governance of charities and non-profit organisations (ROI). Níall Fitzgerald FCA Head of Corporate Governance & Ethics at Chartered Accountants Ireland

On 23 February 2022 the European Commission presented its proposal for a Directive on corporate sustainability due diligence. If adopted by the European Parliament and the European Council, the new rules will apply: firstly to all large private companies with over 500 employees and €150 million turnover in the EU; after two years to companies with over 250 employees and €40 million turnover and where at least 50% of this was generated from operations in high-impact sectors such as manufacturing of food and textiles, wholesale of agricultural raw materials and live animals, extraction of minerals and others. The due diligence obligations do not apply to micro companies and SMEs. However, the Directive does provide for supporting measures for those likely to be indirectly affected as part of the supply chains of larger companies, for example a requirement for a larger company to bear the cost of any third-party assurance required from a SME to verify compliance with its code of conduct or measures to prevent adverse human rights or environmental impacts in its supply chain. It is expected that the Directive will apply to approximately 13,000 EU companies and 4,000 third-country companies (non-EU companies operating in the EU). What are the proposed rules? The objective is to require companies to: implement processes that mitigate the risk of adverse human rights and environmental impacts in their value chains; integrate sustainability into their corporate governance and management systems, and frame business decisions in terms of human rights, climate and environmental impact, as well as in terms of the companies’ resilience in the longer term. Companies concerned must have a due diligence policy that is reviewed and updated annually, detailing: the company’s approach to due diligence a code of conduct describing the rules and principles to be followed by the company’s employees and subsidiaries the processes to implement due diligence, including measures to verify compliance with the code of conduct and to extend its application to established business relationships. Companies are required to conduct human rights and environmental due diligence by: putting in place a due diligence policy; integrating due diligence into their policies and management systems; identifying actual and potential adverse impacts; preventing, ceasing or minimising adverse impacts; ending, neutralising and remediating adverse impacts; establishing and maintaining a complaints procedure; monitoring the effectiveness of their due diligence policy and measures; publicly communicating on their due diligence. Business relationships In establishing the extent to which due diligence is to be applied, there is one approach for the company’s own operations and subsidiaries and another for its business relationships. In relation to the latter, a company’s obligations extend only to established business relationships that are, or expected to be, lasting and that do not represent a negligible or ancillary part of the value chain. There are further considerations in the Directive that apply to a company’s direct and indirect business relationships (e.g. suppliers of the company’s direct suppliers), including circumstances in which a business relationship cannot reasonably be brought to an end. Combating climate change through strategy, risk and remuneration Companies will be required to: have a plan that ensures their business model and strategy of are compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5°C in line with the Paris Agreement; include emission-reduction objectives in cases where climate change is or should have been identified as a principal risk or a principal impact of the company’s operations; have regard to the fulfilment of the above obligations when setting variable remuneration, if variable remuneration is linked to the contribution of a director to the company’s business strategy and long-term interests and sustainability. New directors’ duties The Directive introduces a duty for directors of EU companies to set up and oversee the implementation of corporate sustainability due diligence processes, including a due diligence policy, and to adapt the company’s strategy to take into account adverse impacts on human rights and the environment arising from their own operations. The Directive also clarifies the general duty of care requirement in relation to these new rules. Directors are required to take into account the consequences of their decisions for sustainability, including, where applicable, human rights, climate change and environmental consequences, in the short, medium and long term. Third party assurance The Directive refers to situations where seeking independent third-party verification is appropriate; for example, verification of compliance with contractual assurances provided by a supplier in relation to meeting human rights and environmental required by the Directive.  Independent third-party verification in this context is to be provided by an auditor that is independent of the company, free from any conflicts of interests, has experience and competence in environmental and human-rights matters and is accountable for the quality and reliability of the audit. Enforcement A national authority will be designated to supervise and impose effective, proportionate, and dissuasive sanctions, including fines and compliance orders. Civil liability will apply to companies, directors (in cases where courts decide to lift the corporate veil) and/or senior executives (where legally accountable). Victims may be entitled to compensation for damages arising from the failure to comply with the obligations of the new rules. The company’s own monitoring measures and compliance functions will play an important role in ensuring effective identification, prevention, minimisation, ending and mitigation of adverse impacts on human rights and the environment. The Directive establishes minimum requirements for monitoring, though companies should also be aware of other measures (e.g. whistleblowing), that can assist in identifying adverse impacts or breaches of the company’s policies and procedures.   Persons who work for companies subject to due diligence obligations under this Directive or who are in contact with such companies in the context of their work-related activities can play a key role in exposing breaches of the rules of this Directive. Directive in the context of the EU Green Deal and Ireland This Directive represents a significant step towards achieving a primary objective of the European Green Deal, for sustainability to be further embedded into the corporate governance frameworks of organisations across the EU. The Directive complements the EU Corporate Sustainability Reporting Directive (CSRD) by adding a corporate duty to perform due diligence. This Directive will underpin the EU Sustainable Finance Disclosure Regulation (SFDR) which requires financial market participants to publish a statement on their due diligence policies with respect to principal adverse impacts of their investment decisions on sustainability on a comply-or-explain basis. The Directive will also complement the EU Taxonomy Regulation, a transparency tool that facilitates decisions on investment and helps tackle greenwashing by providing a categorisation of environmentally sustainable investments in economic activities. The Directive will also complement several other EU Directives and policies aimed at combatting human trafficking and forced labour, establishing deforestation-free supply chains, an action plan on a circular economy, a strategy for financing the transition to a sustainable economy, and more. Sustainability in corporate governance, or ‘sustainable corporate governance’, encompasses encouraging businesses to consider environmental, social, human and economic impact in their business decisions, and to focus on long-term sustainable value creation rather than short-term financial value. The value of good corporate governance to long-term sustainable success is not new to companies familiar with the first principle of The UK Corporate Governance Code. While the Directive will apply to large private companies, we can expect that many businesses in Ireland’s small, open, export-lead, economy will be impacted. Níall Fitzgerald FCA Head of Corporate Governance & Ethics at Chartered Accountants Ireland Note: Click for further information on the Corporate Sustainability Due Diligence Directive.    

The Financial Reporting Council has issued the first in-depth assessment of the quality of reporting from private companies who have chosen to follow the Wates Principles. The report, which was conducted with the University of Essex, shows that the Wates Principles are the most widely adopted corporate governance code used by large private companies.   The research shows that companies are grasping the spirit of the Wates Principles in their governance reporting. They are using the principles as a tool for self-reflection and improvement, and seeing the yearly governance reporting as an opportunity, not a burden. This research also includes examples of good reporting and acknowledges that it is too early to draw too many conclusions as most companies were in their first cycle of reporting. The financial sector was the biggest adopter of the Wates Principles.

In our fifth Governance Webcast for 2022, John Moloney discusses with Barry Dempsey, Chief Executive Chartered Accountants Ireland, the role of the board and board subcommittees in embedding sustainability in the organisations strategy and monitoring its progress. John and Barry discuss a range of matters including: What sustainability means to many and who is responsible for it in a company Insights on how boards of listed and private companies deliberate and achieves consensus on what sustainability improvement initiatives to prioritise. The responsibilities of directors and ensuring access to relevant sustainability expertise The questions non-executive directors should be asking in relation to sustainability related risks faced by the company. The discussion was recorded at the Chartered Accountants Ireland Governance Conference in 2021, Boards and Sustainability. Its reproduction is very timely as the momentum of companies to address sustainability increases. The interview is available to view on the Chartered Accountants Ireland YouTube channel: Governance Webcast Series – Interview with John Moloney on Boards, Sustainability and Strategy. John Moloney is Non-executive Chair of DCC plc and Chair of their Governance and Sustainability Committee and a Member of their Remuneration Committee. John is also a Non-Executive Director of Smurfit Kappa plc and Chair of ABP Food Group. John has extensive top management and board level experience, having held the position of Group Managing Director of Glanbia plc until November 2013. John was previously a Non-Executive Director of Greencore Group plc. John holds an MBA from the National University of Ireland, Galway (NUIG).

In our fourth Governance Webcast for 2022, Gráinne Madden discusses with Níall Fitzgerald key developments in whistleblowing and speaking-up requirements in Ireland and the UK, their implications for governance policies and procedures, and the related responsibilities of directors and senior management. Gráinne Madden discusses a range of matters including: An overview of the EU Whistleblowing Directive due to be transposed into Irish Law The UK Government’s review of whistleblowing legislation Designing effective whistleblowing and speaking-up policies and procedures Considerations for directors and senior management on receipt of a potential protected disclosure Whistleblowing and speaking-up policy considerations for SMEs The discussion with Gráinne Madden is available to view on the Chartered Accountants Ireland YouTube channel: Governance Webcast Series – Interview with Gráinne Madden on whistleblowing and speaking-up requirements. Gráinne Madden is principal in GMJ Associates, an advisory firm specialising in corporate governance, whistleblowing and speaking-up, culture and corporate social responsibility (CSR). Gráinne lectures for third level masters’ programmes and is also a training facilitator for Transparency International Ireland’s Integrity at Work Initiative, which supports organisations in developing cultures of openness and accountability.    

In this third interview in our new governance webcast series, Níall Fitzgerald discusses key corporate governance issues affecting organisations in Ireland and Northern Ireland with some members of the Chartered Accountants Ireland Ethics and Governance Committee, who share their perspectives as non-executive directors, audit and governance advisors.   The panel discuss a range of issues including: What is on the horizon for corporate governance regulatory reform How directors and business-owners are addressing sustainability Large private and listed companies and the evolving role of the audit committee Challenges and practical considerations for SMEs and family businesses Governance challenges for charities, non-profits, and sporting organisations The effect of Covid-19 on governance. The discussion with Teresa Campbell, Keith Morrow and Barrie O’Connell is available to view on the Chartered Accountants Ireland YouTube channel: Governance Webcast Series – Interview with members of the Chartered Accountants Ireland Ethics and Governance Committee.   Teresa Campbell FCA is a Director with PKF-FPM Accountants, a non-executive director, member of the Council of Chartered Accountants Ireland, and Chair of the Chartered Accountants Ireland Ethics and Governance Committee. Keith Morrow FCA is Legal Entity Rationalisation lead at NortonLifeLock, a non-executive director and member of the Chartered Accountants Ireland Ethics and Governance Committee. Barrie O’Connell FCA is a Partner, Head of Audit Markets and member of the Audit Executive Team at KPMG Ireland. He is a non-executive director, member of the Council of Chartered Accountants Ireland Council, and member of the Chartered Accountants Ireland Ethics and Governance Committee.  

In this second interview in our new governance webcast series, Ian Drennan discusses with Níall Fitzgerald, key corporate governance issues affecting compliance with company law, the role of corporate enforcement and key developments in this area and the implications for company directors. Ian Drennan discusses a range of issues including: how the Office of the Director Corporate Enforcement (soon to become the Corporate Enforcement Authority), performs its role in collaboration with other regulators and law enforcement agencies, such as the Charities Regulator, the Central Bank of Ireland and An Garda Síochána; the main sources of information for the ODCE and the common types of offences that it investigates; the role of statutory auditors in reporting indictable offences under the Companies Act 2014; individual and collective responsibility of directors, including the accountability of directors for offences committed by a company; corporate governance reform and what this means for the future of corporate enforcement in Ireland; and the unique role accountants in business and practice play in ensuring good governance. The interview with Ian Drennan is available to view on the Chartered Accountants Ireland YouTube channel: Governance Webcast Series – Interview with Ian Drennan. Ian Drennan FCCA is the Director of Corporate Enforcement at the Office of the Director of Corporate Enforcement in Ireland.  

In the first interview from our new governance webcast series, Dr Margaret Cullen and Níall Fitzgerald discuss board effectiveness, some of the issues currently impacting Irish and UK boards and how those issues can affect behaviours, and key concerns boards have in relation to their responsibilities at the beginning of 2022. Dr Cullen discusses a range of topics in this webcast, including: three competencies that are critical to board effectiveness; what senior management can do to self-manage behaviours and ensure their contributions facilitate effective decision-making; individual and collective accountability and the importance of good decision-making processes; and the governance issues that are having the greatest impact on SMEs, large private and listed companies. The interview with Dr Margaret Cullen is available to view on our YouTube channel. Dr Margaret Cullen is an experienced non-executive director, lecturer, and researcher. She is founder and principal of Think Governance Limited, a corporate governance consulting firm.

Michelle Byrne and Sinéad McHugh set out the climate-related areas of focus for preparers of financial statements. It is quickly becoming apparent that climate change is likely to drive some of the most profound and persistent changes to business in our lifetimes. Earlier this year, Ireland signed into law its Climate Action and Low Carbon Development (Amendment) Act 2021, which is a legally binding path to net-zero emissions no later than 2050 and to a 51% reduction in emissions by the end of the decade. We have seen increased discussions as to how climate-related matters will affect a company’s current and future business strategies, operations, and long-term value during the recent Climate Finance Week Ireland 2021 and more recently at the 26th UN Climate Change Conference of the Parties (COP26). Furthermore, from a corporate perspective, investors, regulators and other business stakeholders are increasingly demanding increased disclosures on climate change matters and are challenging companies that are not factoring the effects of climate change into their critical accounting judgements. The SEC, FRC and IAASA all recently issued statements emphasising the importance of considering the impact of climate change when preparing financial statements. They also emphasised the importance of consistency between a company’s targets and assumptions disclosed in the front half, and assumptions and estimates used in preparing the back half of the financial statements. To a greater or lesser extent, the risks and uncertainties arising from climate change are likely to have an impact on the financial statements of all companies. Some areas of focus for all companies in preparing their financial statements are set out below. Impact on the financial statements While asset impairment may potentially be the most obvious area impacted in the financial statements, companies should also consider other areas that may be impacted by climate-related factors (such as useful lives of assets, fair value of assets, and provisions). The paragraphs that follow provide a summary of some of the key areas impacted by climate-related factors. Carrying value of assets Cash flows play an important part in assessing the recoverability of an asset. During the impairment process, consideration must be given as to whether value-in-use (VIU) calculations need to be adjusted for climate-related risks. For example, companies may need to factor the following into their calculations: Changing customer preferences, technology and market trends may need to be reflected in the revenue and growth forecasts; Energy intensive industries will likely need to incorporate higher costs in future cash flows as a result of carbon taxes and general climate-related increases in energy costs; Increasing costs of compliance with new policies or legislation (for example, carbon budgets, stricter environmental controls, or increasing costs of insurance due to climate factors); and Increased capital expenditure to develop or acquire more energy-efficient production assets. The key climate-related assumptions applied in the VIU calculation, together with a description of management’s approach to determining the value assigned to each key assumption, should be disclosed. Increasingly this information is considered to be material for disclosure even if the climate-related impact on VIU assumptions is not significant. Useful economic life of assets To meet emission targets, companies may need to replace some of their asset base with equipment that is more energy efficient or powered from alternative sources. In addition, climate factors may indicate that an asset could become physically unavailable or commercially obsolete earlier than previously expected. As a result, certain assets may have reduced useful economic lives. In some cases, a company may develop a more energy efficient product to substitute a legacy product, resulting in a change in the estimated useful life of the client relationship intangible asset associated with the legacy product. Any change to the useful economic life is recorded in the financial statements prospectively. Disclosure of the change in estimate in the financial statements is required. Even if the amounts are not considered material, companies may wish to include disclosure of the revision to useful lives to demonstrate consideration of climate-related factors in the preparation of the financial statements. Fair valuation of assets Climate change risks or changes to laws and regulations due to climate change actions may impact the measurement of assets measured at fair value. These risks and actions could affect inputs into valuation models in a number of ways. For example, similar to VIU calculations, cash flows may be impacted by changing revenue, growth, and cost assumptions due to climate risks and actions. Alternatively, if cash flows are not adjusted, the discount rate may instead be adjusted for these risks through a relevant risk premium or discount factor. Any changes in assumptions that are critical to the valuation of the asset need to be clearly disclosed and the impact quantified. Changes in expected credit losses Given the short-term nature of trade receivables, the impact on receivables in companies operating in non-financial industries is likely to be less severe. Conversely, the long-term nature of some financial assets held by lending organisations may mean that assets held at the current balance sheet date could be exposed to severe adverse economic conditions. This could be due to exposure to customers in more significantly impacted industries such as oil and gas and mining, or due to climate-related events such as floods and hurricanes. Such events can impact the creditworthiness of borrowers due to business interruption, decline in asset values, and unemployment. Lenders could suffer increased credit losses through exposure to assets that become stranded or uninsurable, as these assets will no longer offer suitable collateral. These risks will need to be incorporated into the expected credit losses (ECL) model. Disclosure of the effect of climate-related matters on the measurement of expected credit losses or on concentrations of credit risk may also be necessary. Provisions, contingencies and onerous contracts The pace and severity of climate change, as well as accompanying government policy and regulatory measures, may impact the recognition, measurement, and disclosure of provisions, contingencies and onerous contracts. For example: New provisions or contingencies may need to be recognised or disclosed due to new obligations (for example, fines levied for failing to meet climate-related targets); The timing of when an asset may need to be decommissioned may change due to regulatory changes or shortened lives, accelerating the required cash outflows for asset retirement obligations; Cash flows and discount rates used in measuring provisions may need to take into account the risks and uncertainties of climate change and accompanying regulations; and Existing contracts may become onerous due to an increase in the costs of fulfilment (for example, due to an increase in the cost of energy or water). Carbon trading schemes There are currently different acceptable approaches to accounting for carbon trading schemes. This is an area that may evolve as such arrangements become more common and they apply to more companies. It will also be necessary to consider whether the acceptable approaches will be equally acceptable for any new schemes when implemented. Conclusion It is becoming increasingly apparent that investors and regulators are expecting more company-specific information on the impact of climate risks on the company’s financial statements. Given this increased focus, there is a high level of expectation that directors, preparers and auditors will have considered how and where climate-related actions may impact on the financial statements. Even if the conclusion reached is that climate-related risks do not have a material impact on a company, there is a growing expectation that the company will disclose how these risks were considered and why they were not considered material for the company. Michelle Byrne is a Director in the Financial Reporting Advisory Team in Audit & Assurance at Deloitte Ireland. Sinéad McHugh is a Partner in Audit & Assurance at Deloitte Ireland.

Maurice Barrett highlights some noteworthy aspects of ESMA’s common enforcement priorities statement for preparers, management and directors. The European Securities and Markets Authority (ESMA) is the Europe-wide body responsible for safeguarding the stability of the EU’s financial system. ESMA achieves this through the protection of investors and promoting stable and orderly financial markets. Co-ordination of accounting enforcement across the EU is part of ESMA’s activity. As part of this accounting enforcement role, ESMA publishes an annual Public Statement setting out the common enforcement priorities (CEPs) for the annual financial reports of listed companies. Together with EU national accounting enforcers – including the Irish Auditing and Accounting Supervisory Authority (IAASA) – ESMA pays particular attention to these CEPs when examining entities’ financial statements. In addition to these Europe-wide CEPs, national accounting enforcers may set additional national priorities. IAASA does this in its annual Observations paper, which is available at www.iaasa.ie. The 2021 ESMA CEPs statement, which is available at www.esma.europa.eu, sets out the enforcement priorities under three headings: Several aspects of the 2021 CEPs statement are noteworthy: The pervasive nature of the impact of COVID-19 across each of the three headings; The identification of climate change as an area of concern for accounting enforcers and the recognition that climate-related matters are something about which investors and other users of financial reports require information; and The focus attached by ESMA – and, therefore, EU national accounting enforcers – to areas other than IFRS financial statements. Of the seven areas included in ESMA’s CEPs statement, only three refer to IFRS financial statements. This is considered significant and is indicative of the direction of travel of corporate reporting and accounting enforcement at the European level. It reflects a trend to consider corporate reporting from a more holistic point of view and a much broader perspective than the more traditional approach of considering only the monetary amounts and disclosures in the IFRS financial statements. Impact of COVID-19 The CEPs statement notes that the impact of COVID-19 has been severe and the path to recovery may be prolonged. The statement repeats the messages included in last year’s CEPs statement regarding the need for a careful assessment of the longer-term impacts of COVID-19 on an entity’s activities, financial performance, financial position and cash flows (such as going concern assumptions, significant judgements, estimation uncertainty, presentation of financial statements, and impairment of assets). Bearing in mind the impact COVID-19 is having on trade and supply chains, the CEPs statement reminds entities to provide transparent disclosures of arrangements that take the form of supply chain financing. The CEPs statement calls for transparency on the criteria and assumptions used in the recognition of deferred tax assets arising from the carry forward of unused tax losses and unused tax credits due to the COVID-19 pandemic. IAS 20 Accounting for Government Grants and Disclosures of Government Assistance requires disclosure of information related to government assistance, including the accounting policy adopted and the methods of presentation adopted in the financial statements. The CEPs statement reminds entities to provide a description of the nature and extent of any significant public support measure received by category (for example, loans, tax relief, and compensation schemes). COVID-19 may impair entities’ ability to meet any pre-determined sustainability-related goals in the short- and medium-term. Accordingly, the CEPs statement recommends that entities provide disclosure as to how the pandemic is affecting their plans to meet such targets and whether any new or adjusted goals have been determined. The ESMA CEPs statement also urges caution if entities adjust APMs used or develop new APMs with the sole objective of depicting the impact that COVID-19 has on financial performance. ESMA contends that, in most instances, the COVID-19 impact should not be presented separately in APMs. Climate-related matters Entities and auditors must consider climate risks when preparing and auditing IFRS financial statements. The identification and assessment of climate-related risks may require a longer-term horizon than that considered for financial risks. Entities should consider climate-related matters by ensuring consistency in the information disclosed across the management report, the non-financial statements, and the financial statements. The CEPs statement reminds entities that, in addition to the information required by individual IFRSs, paragraph 112(c) of IAS 1 Presentation of Financial Statements requires that information on climate-related matters be provided in the notes if not presented elsewhere in the financial statements when such information is relevant. Paragraphs 122 to 124 of IAS 1 require disclosure of the significant judgements management has made in the process of applying an entity’s accounting policies. In this regard, entities need to consider disclosure of management judgements related to climate risks. Entities are also required to disclose information in accordance with paragraphs 125 to 133 of IAS 1 regarding major sources of estimation uncertainty. Entities are expected to disclose in the financial statements how forward-looking assumptions, estimates and judgements applied in preparing the financial statements are consistent with the information included in the management report and the non-financial statement. The CEPs statement notes that ESMA – and, by extension, EU national accounting enforcers – expects entities to consider climate change when assessing whether the expected useful lives of non-current assets and the estimated residual values in IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets should be revised. In addition, under IAS 36 Impairment of Assets, entities should: Assess whether indications exist that non-financial assets are impaired as a result of climate risk or Paris Agreement implementation measures; Use assumptions reflecting climate risks; and Adapt the sensitivity analysis disclosed to consider climate risks and commitments in the assumptions used. Entities should carefully consider the requirements in IAS 37 Provisions, Contingent Liabilities and Contingent Assets regarding, for example, contingent liabilities for potential litigation, regulatory requirements to remediate environmental damage, additional levies or penalties related to environmental requirements, contracts that may become onerous, or restructurings to achieve climate-related targets. Articles 19a and 29a of the Accounting Directive require the management report of certain entities to include a non-financial statement containing information regarding environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters. Such a non-financial statement must include a description of the entity’s business model and the policies pursued in relation to those matters, the outcome of those policies, the principal risks, and non-financial key performance indicators. In addition, the CEPs statement suggests that entities might apply the European Commission’s non-binding guidelines on reporting climate-related information (available at www.ec.europa.eu). It is ESMA’s view that to provide useful information for investors and other stakeholders in assessing the entity’s performance and position in relation to climate-related matters, the disclosures should not be limited to providing backwards-looking information. Instead, this information should be contextualised in the entity’s broader strategic orientation and the related implementation plans, indicating the expected progress to meet pre-defined targets. Expected credit losses disclosures  The CEPs statement sets out ESMA’s expectations on aspects of expected credit losses (ECL) disclosures, including: Management overlays When material adjustments are used in ECL measurement, entities should provide transparency to fulfil the overarching objectives and principles of paragraph 35B of IFRS 7 Financial Instruments: Disclosures. Such adjustments either take the form of ECL model revisions or are applied outside the primary models (“post-model adjustments”). In complying with the requirements of paragraphs 35G, 35D and 35E of IFRS 7, ESMA expects entities to disclose entity-specific information on its impact on the ECL estimate, the rationale, and the methodology applied. Changes in credit risk (stage transfers) ESMA highlights paragraphs 35F and 35G of IFRS 7 and reminds entities to disclose the basis for the inputs and assumptions and the estimation techniques used to determine whether there is a significant increase in credit risk (SICR) of financial instruments since initial recognition, or whether a financial asset is credit-impaired. Forward-looking information When explaining how forward-looking information (FLI) has been incorporated into the determination of ECL as required by paragraph 35G(b) of IFRS 7, ESMA encourages entities to provide specific disclosures on the main judgements and estimations related to uncertainties that have been taken into account when defining the scenarios and their weight. ESMA recommends that entities disclose quantitative information on the macro-economic variables considered. Effect of climate-related risk on the ECL measurement ESMA expects entities to disclose whether material climate-related and environmental risks are taken into account in credit risk management, including information about the significant judgements and estimation uncertainties. Specifically, to meet the objectives of paragraph 35B of IFRS 7, entities should explain how these risks are incorporated in the calculation of ECL, and any credit risk concentrations related to environmental risks and how those risks affect the amounts recognised in the financial statements. Environmentally sustainable activities The ESMA CEPs statement reminds entities of the disclosure obligations set out in Article 8 of the Taxonomy Regulation (available at www.eur-lex.europa.eu). Article 8 requires non-financial undertakings to disclose: The proportion of their turnover derived from products or services associated with economic activities that qualify as environmentally sustainable; and The proportion of their capital expenditure and the proportion of their operating expenditure related to assets or processes associated with economic activities that qualify as environmentally sustainable. The European requirements in this area continue to evolve ESMA encourages entities to plan and prepare for the timely and correct application of the relevant requirements, as the information to be disclosed may require the collection of data that may not be readily available. Conclusion The topics set out in the ESMA CEPs statement, along with those set out in IAASA’s Observations paper, will be used by IAASA as its reviews financial statements in 2022. ESMA and IAASA emphasise the importance of preparers, management, and directors taking these CEPs into account when preparing and approving their 2021 annual reports and financial statements and discussing them with their auditors at the planning, execution, and completion phases. The messages in the ESMA CEPs statement are directed at entities preparing IFRS financial statements and falling under the remit of national accounting enforcement. However, the topics raised could usefully be adopted by a broader population of entities. Maurice Barrett FCA is Senior Financial Reporting Manager at the Irish Auditing & Accounting Supervisory Authority.

2022 represents a new dawn for boards as the panic brought about by the COVID-19 crisis subsides and businesses learn to live with the associated uncertainty. For many boards, it represents an unprecedented opportunity to transform, writes Kieran Moynihan. The pace of change in boardrooms before the COVID-19 crisis could best be described as glacial, with very little change over many decades in how board directors were recruited and how they functioned. For most boards, COVID-19 has been an acid test of their effectiveness, leadership, and resilience at a time of extreme crisis. It also asks fundamental questions about their core purpose and values in terms of how they treat their customers and employees, how they balance the interests of their shareholders and stakeholders, and their overall contribution to – and impact on – society. While several forward-looking boards are seizing the opportunity to fundamentally transform how they operate and who sits around the table, many boards are still clinging to an outdated model. In short, their composition and functioning are no longer fit-for-purpose. Organisations and their boards face fundamental challenges to their long-term future: how they navigate through a maelstrom of economic headwinds, sector disruption, and rapidly changing customer requirements. Then, there are the existential challenges such as climate change and employees embracing a new flexible work paradigm and who want to work for organisations with genuine purpose and values. Board composition and diversity: breaking the legacy mould The day will come when we will no longer require trojan efforts by initiatives such as The 30% Club and both government and institutional investors to persuade and cajole boards on the value of board diversity (gender, age, sector, ethnic, thinking style and customer demographics). The COVID-19 crisis accelerated this transition. Many boards struggled to demonstrate a diverse mix of non-executive directors (NEDs) who could bring value in the form of creative solutions to severe strategy and business model challenges; an understanding of the impact on customers and employees; and a vibrant range of thinking styles to enable the board – in partnership with the executive team – to imagine a very different future for the organisation. Progressive boards are now assembling “the best board team we can find” where diversity is celebrated. One’s gender, age, sector, ethnic or geographic background no longer matters, provided the end product is an exceptional board team. An exceptional team can be described as one with strategic fire-power, independence of mind, understanding of customers and sectoral trends, and the capability to combine high-quality challenge, debate and oversight with support and value-add to the executive team. In the COVID-19 era, many boards ‘got religion’ regarding the gaping hole in their board composition. There is a dearth of younger NEDs who have digital DNA and truly understand what it means to embrace environmental, social and governance (ESG) criteria and embed it into the fabric of the organisation. I have evaluated and supported some exceptional NEDs in their 60s and 70s who do not understand the evolving digital world, the danger of cybersecurity threats, the mindsets of customers in their 20s and 30s, the values and aspirations of younger purpose-driven employees, and the need in some cases for transformational business models. What boards need is a vibrant mix whereby you get the best of both sets of NEDs, combining the deep experience, leadership and wisdom of the older NED with the dynamic, fresh perspectives and current expertise of younger NEDs. ESG: a defining moment for boards As the dust settles on COP26 in Glasgow, it has dawned on the boards of many organisations that they have a compelling responsibility to tackle climate change and reassess how their organisation contributes to society. There have been some critical foundation stones for ESG. These include the introduction of triple-bottom-line economic thinking, the growth of corporate social responsibility (CSR), and milestones such as the Business Roundtable statement in 2019 that companies need to serve not only their shareholders but all key stakeholders. ESG has become the hottest topic in boardrooms worldwide as institutional investors, customers, employees, governments, and society redefine the role of companies. While the seriousness of the climate change crisis has correctly focused attention on the ‘E’ in ESG, the spotlight on the ‘S’ and ‘G’ has also grown considerably. In the coming decade, ESG could become the single most significant change catalyst for boards of directors. Purpose-driven: an opportunity for servant leadership by the board In evaluating and supporting boards week-to-week across the world, those that impress me most have a triple-helix in their DNA of customer-centricity, employee engagement, and a deep commitment to ESG and ‘doing the right thing’. These boards also have a diverse mix of high-calibre board members, generalists, and sector specialists with a great balance of robust intelligent oversight and outstanding support to their CEO and executive team. However, at the core of these boards is a profound clarity of purpose, a vibrant and healthy culture, and the highest standards of behaviours, ethics and values. In addition, modern progressive boards have a core modus operandi of servant leadership and the most profound respect not only for their shareholders but their employees, customers, and broader partners in society. I believe that purpose-driven servant leadership by the board will become the defining paradigm of organisations that thrive in the coming years. Re-shaping the relationship between the board and its employees One of the not-unexpected consequences of the COVID-19 crisis for many boards was the realisation of the fundamental role and importance of the organisation’s employees. In a recent survey by the Chartered Governance Institute of FTSE 350 companies in the UK, 53% changed their approach to “workforce voice” during the pandemic. In addition, 68% of the boards surveyed now believe that they are more aware of “employee opinion”. But why has it taken a pandemic crisis for these boards to realise that an organisation’s employees are a critical stakeholder, deserving of the utmost respect and support from the board and their voice incorporated into the major decision-making of the company? In reality, many CEOs are culpable for wanting to separate the board from the organisation’s employees to control the narrative and deflect attention away from a poor organisational culture, avoidable turnover of employees, and serious operational or customer problems. In Ireland and the UK, there has been severe resistance to employee representation at the board table. This is understandable when you consider the challenges of finding an employee board member who can bring the employee voice to the table but balance the overall needs of the organisation as well as the complexities of industrial relations. The resistance by boards to genuinely partnering with their employees is also a stubborn hangover from the traditional elitist ivory-tower paradigm where employees did not figure as critical stakeholders. One of the most practical methods to ensure that the employee voice is heard at the board table is a strong non-executive director who understands the employees’ perspectives, with solid support from the board chair. This approach ensures that the employee voice is factored into the overall decision-making of the board. It is another area where improvements in board diversity can help modernise its mindset and attitude toward employees. Customers: the most important stakeholder of all? Ireland has been blighted by some terrible examples of customers being mistreated by companies and organisations for many years. Whether it is the misselling of financial services products, appalling levels of customer care, or the cover-up of negligence in the health sector, we have had – and continue to have – boards with simply appalling attitudes to their customers and the people they serve. In the company sector, the tide is turning. The oft-rolled-out excuse by boards that “we simply didn’t know that our customers were being treated so badly” simply doesn’t cut it anymore. When evaluating boards, I always seek to understand how the voice of the customer or service user is heard and prioritised in the boardroom. Which non-executive directors will stand up to a CEO to say that poor customer treatment is simply unacceptable? Does the board realise what the customer experience actually is? This is what servant leadership at the board level means: putting customers at the heart of the organisation’s functioning. Culture, ethics, and a commitment to do the right thing Despite the continual strengthening of corporate governance codes and company laws, there continues to be a never-ending cycle of boardroom scandals in Ireland and internationally. The introduction of the Companies (Corporate Enforcement Authority) Bill 2021 paves the way for a new independent statutory authority, the Corporate Enforcement Authority (CEA), to investigate and prosecute economic and white-collar crime in Ireland. This is an important stepping stone, building on the solid work of the ODCE. However, unless the right culture and standards of ethics exist in an organisation and you have a sharp board and committees such as audit and risk on its toes, you will always have the potential for boardroom scandals – irrespective of how experienced board directors are. We are slowly starting to move away from some of the worst attributes of the elitist board model in terms of arrogance and disrespect by board directors for their responsibilities – not to mention the shareholders and stakeholders they serve. This is one area that has changed significantly in recent years in terms of the board chair’s critical responsibility to set a very high bar for the organisation’s behaviours, ethics, and values. The board chair has a critical responsibility to set the board’s moral compass, conscience, and commitment to do the right thing. With ESG and society in general setting the bar higher for boardroom standards, today’s boards are under no illusions regarding the high standards expected of them in discharging their legal and fiduciary responsibilities. Resilience, strategic agility, and a new paradigm for risk management From the outset of the COVID-19 crisis, I found it striking to see the difference in the quality of crisis management by highly effective boards compared to ineffective boards. One of the hallmarks of high-performing boards is resilience and the ability to cope with a significant crisis. As we look forward to 2022, most sectors will continue to experience significant headwinds and volatility, requiring continual strategy and business model evolution. Progressive boards are now adopting a far more agile mindset on these issues and have a greater appreciation for risk management. I now see progressive boards take a far more pragmatic approach to risk management, making more use of scenario analysis and learning the lessons from COVID-19 in terms of cascading risks (i.e. how the pandemic and the resulting public health restrictions completely turned the world of work upside down and disrupted the world’s complex but fragile supply chains). Walking the talk on the board’s performance and re-thinking board director tenure I am continually taken aback by the number of boards that put in place the most elaborate performance assessment structures for their CEO, executive team, and employees, but when it comes to their own annual assessment of their performance, both individually and collectively as a board, they either have inadequate basic processes or undertake pointless tick-the-box exercises that add no value. In many cases, I see large companies and organisations where each board chair and director’s performance are not assessed annually. However, there is a strong trend emerging of shareholders, institutional investors and broader stakeholders asking far more searching questions about the effectiveness and performance of the board, the level of value added by the board, and whether the board is walking the talk on assessing and improving its own performance – as well as replacing board directors who are not performing. In the best boards, every board director must continually justify their presence at the board table irrespective of their profile and past glories. One characteristic of many ineffective boards is the bad habit of leaving in place under-performing board directors. This has seriously impacted many boards’ ability to improve diversity and bring in critical new skillsets. However, this is starting to change. You will soon see a greater degree of refreshing the board of directors, with under-performing directors replaced and a more robust performance culture instilled to ensure that the board truly excels for shareholders, employees, customers and stakeholders. Summary One of the unexpected impacts of the COVID-19 crisis is the opportunity presented to boards to reflect on their purpose, how they function, and the value they add. It has also allowed them to consider how they partner with the CEO and executive team, their ability to handle major crises, and the agility required in terms of strategy and business models. There has never been a greater spotlight on the role of the board of directors, the critical leadership it provides to the organisation, and its broader set of responsibilities to shareholders, employees, customers and stakeholders. The boards that will thrive in the years to come will be highly diverse with a great mix of general and sector-specific skillsets. They will also place employees, customers, and the critical needs of society at their core. The current ESG momentum is vital as it is finally breaking the shareholder primacy and profitability-at-all-costs paradigm that has, to be honest, not served society well. Shareholders and institutional investors now understand that you can still drive long-term, sustainable profit and success while simultaneously being a highly ethical and respectful organisation that truly excels for all stakeholders. This enlightened model of servant leadership-centred and highly diverse boards with a solid moral compass and conscience underpinned by a high-performance culture is also key to significantly reducing board failures and scandals. There has never been a better opportunity for boards of directors to look in the mirror and ask searching questions about becoming a modern, progressive and diverse board that is purpose-driven and deeply committed to excelling for shareholders, employees, customers, and stakeholders. Kieran Moynihan is Managing Partner of Board Excellence, which supports boards and directors in Ireland, the UK, and internationally to excel in effectiveness, performance and corporate governance.

The Irish Corporate Governance (Gender Balance) Bill 2021 was presented to Dáil Éireann during the week. Proposals in the Bill include a mandatory 33 per cent of a company’s board must be female after the first year of enactment, rising to 40 per cent after three years. The targets reflect the ambitions of many groups seeking to improve gender diversity on boards, including Balance for Better Business who have set targets of 33 per cent for boards of listed companies and 30 per cent for boards of large private companies by end of 2023. The Bill, due to be debated in the Dáil, proposes to apply the requirements to corporate bodies including: limited and unlimited companies, charities, funds (including UCITS), and all state sponsored bodies and their subsidiaries. Exemptions from the requirements will apply to: unincorporated associations, partnerships, limited liability partnerships, single director companies, micro company, or, other corporate body that has an annual turnover of less than €750,000 or that employs fewer than 20 employees, or both. The Bill proposes a statutory declaration to be made by the chairperson of the governing body, e.g., board, in the Annual Return or annual financial statements that the the gender balance requirements have been complied with. If they are unable to comply then they will be required to disclose the reasons why. Níall Fitzgerald FCA Head of Corporate Governance & Ethics at Chartered Accountants Ireland