By: George M. Wilson & Carol A. Stacey

In two prior posts, we began making the case that as we get ready for year-end, it’s time to begin or continue learning about sustainability reporting issues. We also explored how the SASB is beginning to build a set of standards for disclosing sustainability information.

With that as background, our next step is to review a few actual sustainability disclosures made by companies. This will help us build an understanding of why standards in this arena are necessary. In their extensive report, “The State of Disclosure 2016”, the SASB reviewed the latest annual reports on Form 10-K and Form 20-F for the top ten companies in 79 industries. While these were large companies, the sample used was substantial. The executive summary of the SASB report revealed the following findings:

“Overwhelmingly, companies have recognized the existence of, or the potential for, material impacts related to the sustainability topics included in SASB standards. Indeed, 69 percent of companies in the analysis reported on at least three-quarters of the sustainability topics included in their industry standard, and 38 percent provided disclosure on every SASB topic.

In all, 81 percent of entries analyzed, across all sectors and topics, included some form of disclosure; this is a clear indication that companies acknowledge the majority of the sustainability factors identified in SASB standards are currently having—or are reasonably expected to have—material impacts on their business.

The most common form of disclosure—across the majority of industries and topics—was generic boilerplate language, which is inadequate for investment decision-making.
Such vague, non-specific information was used 53 percent of the time when companies addressed a SASB topic.

Companies used metrics—obviously more useful to investment analysis—in less than 24 percent of the cases where disclosure occurred. Importantly, even in these cases the metrics were non-standardized, and therefore lacked comparability from one industry firm to the next.”

Clearly companies are seeing investor demand for sustainability information. Even with no current requirements for such disclosure in place many companies are making sustainability disclosures. Investors are obviously asking for or demanding this information. That said, as the last point above discusses, the lack of formal standards can result in challenges when trying to compare companies in the same industry.

As an example, consider Coca Cola and PepsiCo. Both companies bottle soda and other beverages and hence use substantial amounts of water. Availability of water in these quantities can be an issue in many parts of the world, and obviously water comes with a cost. And these are simple examples of the ESG issues surrounding water. Use of water, not surprisingly then, is an important part of the sustainability disclosures for both Coca Cola and PepsiCo. In the context of ESG disclosures there are clearly financial issues, as more efficient use of water will result in cost savings, as well as environmental and long-term performance issues, based on reducing water use over time, that will be relevant to many investors.

Here are a few excerpts from the water related section of Coca Cola’s sustainability report.

WATER STEWARDSHIP

For every drop of water we use, we aim to give one back.

Water quality and availability are key to our business. As we work to establish a more water-sustainable business on a global scale, we have focused water stewardship efforts on the areas where we can have the greatest impact, including improving water-use efficiency and reuse, managing waste water, mitigating water risk and replenishing the water we use in our finished beverages.

221B LITERS

Projects implemented by end of 2016 provide a replenish benefit of 221 billion liters per year through community and watershed projects across the globe

3M PEOPLE

Projects helping communities gain sustained access to safe drinking water alone are estimated to have benefited nearly 3 million people as of end of 2016.

USING WATER MORE EFFICIENTLY

In 2004, we were using 2.7 liters of water to make 1 liter of product. At the end of 2016, we were using 1.96 liters of water to make 1 liter of product. And we’re working to potentially reduce it to 1.7 liters of water by 2020.

Meanwhile, here are PepsiCo’s disclosures surrounding water use:

15% improvement in water-use efficiency among our direct agricultural suppliers in high-water-risk sourcing areas

Helped protect and conserve global water supplies, especially in water-stressed areas, and provided access to safe water

OPERATIONAL WATER-USE EFFICIENCY +25.8%

We are pleased to report that we met or exceeded all of our water-related goals set for 2015. By year-end, we had reduced our water use per unit of production by 25.8 percent since 2006, exceeding our goal of 20 percent, while saving approximately $80 million in costs over five years.

In 2015, we also continued to pursue integrated watershed management, prioritizing PepsiCo sites in water-stressed or water-scarce areas and supporting growers in our value chain in better managing their water use (see “50 in 5” on page 21). And the PepsiCo Foundation and its partners successfully worked to provide access to safe water for more than 9 million people globally since 2006, significantly exceeding our goal of 6 million by 2015.

Having recently exceeded all of our first‐decade Performance with Purpose water goals, PepsiCo will work to address the world’s largest user of freshwater — agriculture — by working to improve water‐use efficiency among our direct agricultural suppliers by 15 percent, and to deliver an additional 25 percent increase
in water‐use efficiency in our direct manufacturing operations.

As you can see in comparing these two disclosures, it is challenging to assess the relative performance of these two companies in water use issues. For example, it would be helpful t have information about the amount of water each company uses and from where the water is sourced. Both companies tout significant decreases in water use, but only one priovides a financial perspective. In addition both companies present qualitative information, but again assessing relative performance is difficult.

Clearly some form of standards to provide consistent and comparable information would be helpful. And just as clearly, the SASB, in taking on this challenge, has a lot of work ahead of them before investors can meaningful compare this information for companies in the same industry. With the development of their provisional standads the SASB is well into this process to help the market access consistent and comparable information. You can learn more about the provisional standards and the SASB’s process at SASB.org.

As always your thoughts and comments are welcome!

By: George M. Wilson & Carol A. Stacey

In a recent post we discussed reasons why now is an opportune moment to begin learning about sustainability standards. Likely most of us have heard discussion or mention of how this reporting area is becoming important and that investors are beginning to ask for sustainability information.

When you embark on the sustainability reporting learning journey a number of questions arise. What exactly does sustainability reporting entail? Are there certain areas that should be included? Are there standards to follow? It turns out, through the Sustainability Accounting Standards Board (“SASB”), that there is a substantial amount of industry specific guidance.

A Starting Point

Our current reporting model focuses on historical financial information and related non-financial information that helps us build context to understand financial performance. In addition to history, public companies also make disclosures about what is “out there” that might hurt financial performance in the future. (For example, MD&A known-trend disclosures.)

Sustainability information goes well beyond our current model. Here is a quote from a report prepared by the SASB titled “The State of Disclosure 2016: An analysis of the effectiveness of sustainability disclosure in SEC filings”:

“Investors and their portfolio companies have become increasingly aware of the link between sustainability factors and business outcomes. For example, increased energy efficiency can lead to operational cost savings; effective resource management can reduce input price volatility and the risk of supply disruptions; and stronger data security practices can mitigate the risk of fines, litigation, and reputational harm, while also lowering a firm’s cost of capital. As a result, the investment community—in particular, investors with longer term views—are increasingly asking for improved disclosure around financial risks based on non-financial statement information, while companies have begun to disclose more information about how they manage key sustainability issues but provide little in the way of information on financial impact.” (Emphasis added.)

This goes well beyond our historical reporting model. For example, our current disclosures about environmental matters focus on where we may have problems with a state or federal regulator and how much of our capital expenditures are related to environmental compliance. Sustainability reporting is an extension of this thought process and looks at whether a long-term investor might also want to know about whether a company is committed to investing in technology that focuses on reducing such costs on an overall basis, and how much cost savings are expected.

A simple example would be a company with a large fleet of vehicles. If all the company’s current vehicles are powered by internal combustion engines and all burn regular gas or diesel fuel, an investor might be interested to know whether the company plans to replace vehicles as they are retired with vehicles that burn alternative fuels or even electric vehicles. The economics of such issues are not simple. Electric vehicles may have larger original costs, but they have dramatically fewer moving parts and are expected to have lower maintenance costs. If a company commits to such a strategy an investor might look at that company differently than one that plans to replace its fleet with regular internal combustion powered vehicles. The differences in future financial performance between companies pursuing these different strategies could be a very relevant issue for investors.

Here is a quote from the SASB’s web page:

Investors increasingly acknowledge that environmental, social and governance (ESG) factors impact a company’s ability to manage risk and deliver financial performance over the long-term. As such, many investors use ESG information to develop a comprehensive view of company performance and to evaluate a company’s long-term value. However, to do so in a rigorous and scalable way, investors need data that is relevant, reliable, and comparable. This is the need SASB was created to address.

Standard Setting by Industry

Building guidance for these kinds of disclosures is a massive task. The issues and relevant information vary by industry. An industry based approach is actually hard-wired into the SASB’s mission:

The Sustainability Accounting Standards Board sets industry-specific standards for corporate sustainability disclosure, with a view towards ensuring that disclosure is material, comparable, and decision-useful for investors.

The SASB has initially built their standard-setting process to tailor standards based on this sector breakdown:

Health Care

Financials

Technology & Communications

Non-Renewable Resources

Transportation

Services

Resource Transformation

Consumption I

Consumption II

Renewable Resources & Alternative Energy

Infrastructure

To begin learning about the guidance for sustainability standards in your industry you start with your sector. Each sector is then divided into industries. For example, the Consumption/Sector includes the following industries:

Agricultural Products

Alcoholic Beverages

Meat, Poultry and Dairy

Tobacco

Processed Foods

Household and Personal Products

Non-Alcoholic Beverages

A tailored set of standards is then built for each of these industries within the sector. The volume of information, not to mention the amount of work behind this process is substantial. Here for example, for Consumption I, is a summary of areas addressed:

As you might expect, how to build and codify a set of standards dealing with such a variety of issues is constantly evolving process. You can read about the SASB’s plans to codify their standards and how this will change their topical organization in their technical agenda.

In our next post we will look at some of the detailed standards and actual disclosures in a few industries.

As always, your thoughts and comments are welcome!

With the financial reporting world in a constant state of change, it’s challenging to keep up with new and evolving accounting standards, as well as regulations and policy shifts from the new administration. Attend SECI’s live program, 33^rd Annual SEC Reporting & FASB Forum being held November 13-14 in Dallas, December 11-12 in San Francisco and December 18-19 in New York City with an accompanying webcast. Get the latest information on emerging issues and the regulatory landscape.

http://www.pli.edu/Content/33rd_Annual_SEC_Reporting_FASB_Forum/_/N-1z10lpuZ4k?ID=298605&t=LBK7_DPADD

By: George M. Wilson & Carol A. Stacey

More than a quarter in advance of the effective date of the FASB’s new revenue recognition guidance the SEC has made necessary changes in their own revenue recognition guidance. As you can read here, the Commission and Staff have addressed three areas:

1. SAB Topic 13 and other Staff revenue recognition guidance
2. Bill-and-hold guidance
3. Vaccines for Government Stockpiles

SAB 116 rescinds SAB Topic 13, which contained much of the Staff’s legacy GAAP revenue recognition guidance. In addition, SAB Topic 8, Retail Companies, and Section A, Operating-Differential Subsidies of SAB Topic 11, Miscellaneous Disclosure, have been updated to conform with the new FASB revenue recognition model.

To update bill-and-hold guidance, this Commission Release rescinds existing bill-and-hold guidance, which interestingly was from an Accounting and Auditing Enforcement Release (AAER No. 108, In the Matter of Stewart Parness). Upon adoption of ASC 606 companies will instead use the guidance in ASC 606-10-55 paragraphs 81 to 84.

The third update relates to vaccines sold into government stockpiles under the Vaccines for Children Program or the Strategic National Stockpile. The new guidance replaces a 2005 release and continues the practice of recognizing revenue at the time a vaccine is placed in a stockpile program. In this release the commission states that in such arrangements revenue should be recognized at the time of the transfer of the vaccine to the stockpile because the customer will have obtained control of the vaccine and the criteria for revenue recognition under the new bill-and-hold guidance will be met.

As always, your thoughts and comments are welcome!

By: George M. Wilson & Carol A. Stacey

Sustainability disclosures are being mentioned more and more in the news, in company reporting and in regulatory discussions. While it may seem like it is “early days” for this information, it may not be as early as we all think. Here are summaries of a few of the things going on now.

Sustainability information has been touched on by the SEC in their disclosures effectiveness project. In the voluminous 2016 Regulation S-K Concept release the SEC included this language:

We are interested in receiving feedback on the importance of sustainability and public policy matters to informed investment and voting decisions. In particular, we seek feedback on which, if any, sustainability and public policy disclosures are important to an understanding of a registrant’s business and financial condition and whether there are other considerations that make these disclosures important to investment and voting decisions. We also seek feedback on the potential challenges and costs associated with compiling and disclosing this information.

Enough companies are already disclosing sustainability information that the AICPA has published a Guide for Attestation Engagements on Sustainability Information. The AICPA also has a very informative web page about sustainability disclosures in general.

Standard setters in other parts of the world have also begun discussion about sustainability information. Here is an excerpt from a speech Hans Hoogervorst, Chair of the IASB, delivered in April 2017 at the IIRC Council Meeting in New York:

In their latest review of structure and effectiveness, from 2015 to 2016, the Trustees of the IFRS Foundation confirmed the current approach of the International Accounting Standards Board (the Board) to wider corporate reporting. Broadly, this approach is to cooperate with organisations like the Corporate Reporting Dialogue (CRD) and the International Integrated Reporting Council (IIRC).

The Board was also asked to study further what its future role should be in the wider corporate reporting landscape. The Board is examining this question now. During the Board meeting of March 2017, we devoted public discussion to this issue for the first time.

As we wind down from second-quarter reporting (or whenever your fiscal-year has a less busy period!), this might be an opportune moment to learn a bit about these disclosures. There are several sources of information you can begin with:

The Sustainability Standards Board (SASB) maintains industry specific sustainability accounting standards that help public corporations disclose material, decision-useful information to investors. The members of the SASB are appointed by the SASB Foundation, a structure similar to that of the FASB and the FAF. The SASB Foundation is chaired by Michael Bloomberg and both the Foundation Board and the SASB itself have members with deep capital markets, business and academic experience.

The International Integrated Reporting Council defines integrated reporting as “a process founded on integrated thinking that results in a periodic integrated report by an organization about value creation over time and related communications regarding aspects of value creation. An integrated report is a concise communication about how an organization’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value in the short, medium and long term.”

Both of these organizations are focused on providing information beyond our existing financial reporting and SEC reporting models. And, interestingly, many companies are already responding to demand for such information. In a report from the SASB titled “The State of Disclosure – An Analysis of the Effectiveness of Sustainability Disclosures in SEC Filing – 2016,” the SASB reviewed the reports of up to the top 10 companies in 79 industries. Among their findings were:

Overwhelmingly, companies have recognized the existence of, or the potential for, material impacts related to the sustainability topics included in SASB standards. Indeed, 69 percent of companies in the analysis reported on at least three-quarters of the sustainability topics included in their industry standard, and 38 percent provided disclosure on every SASB topic.

With this background, our next few posts will help you build an understanding of the state of these disclosures in current reporting, the nature of investor demand for these disclosures, and the standards that the SASB is developing to help investors get the information that they believe they need.

As always, your thoughts and comments are welcome!

How do the latest SEC, EITF, PCAOB and FASB updates affect your reporting? Attend FASB, SEC and PCAOB Update for SEC Reporting Professionals Workshop being held August 23^rd in Grapevine, TX. Get up to date in-depth information on all the latest developments and practical tips on applying existing financial reporting requirements, including pushdown accounting, debt issuance costs and commitment fees, discontinued operations and dispositions, segment reporting and goodwill impairment.

http://www.pli.edu/Content/FASB_SEC_and_PCAOB_Update_for_SEC_Reporting/_/N-1z10odqZ4k?ID=290526

Auditors and Financial Officers of companies who raise capital with complex financial instruments often find themselves drowning in convoluted accounting issues and restatements. Avoid the confusion by attending the live workshop, Debt vs. Equity Accounting for Complex Financial Instruments being held September 13th in Las Vegas. Through a detailed review of the accounting literature and numerous examples and case studies this Workshop will help you build the knowledge and experience to appropriately recognize, initially record and subsequently account for these complex financing tools

http://www.pli.edu/Content/Debt_vs_Equity_Accounting_for_Complex_Financial/_/N-1z10odmZ4k?ID=290522