Publish What You Pay (PWYP) calls for an international accounting standard to include a requirement that extractive industry companies disclose, in their accounts, all payments that they make to the governments of countries in which they extract resources, and to agencies or representatives of those governments. This country-by-country disclosure should be broken down into benefit streams to governments, costs, production volumes, turnover and profits, the names of key subsidiaries and properties and finally reserves.
Accounting standards set out the rules for accounting in a country and say what should be reported in a company’s accounts in that territory. Their purpose is to ensure that consistent approaches to accounting are adopted nationally. They minimise the risk of misstatement in accounts and help investors make decisions by ensuring they can get comparable information. Accounting standards, as laid down by a country’s law, apply to all companies registered within its territory.
The increased globalisation of corporations and finance has spurred a trend to harmonize accounting standards between countries. This move aims to enhance consistency and in turn ease the process of comparison of performance between companies registered in different territories.
This shift towards harmonization has led to a growth in national accounting regulators adopting international accounting standards produced by the International Accounting Standards Board (IASB). These standards, referred to by the IASB as International Financial Reporting Standards (IFRSs) and International Accounting Standards (IASs), are currently used by many countries including the European Union, Russia, South Africa, Hong Kong and Australia. Many other countries have expressed their desire to move towards ‘convergence’ with these standards. In particular, the US Financial Accounting Standards Board (FASB) is undergoing a formal process of convergence with the IASB.
The devastating impacts of weak transparency, accountability and governance have been demonstrated by the ‘resource curse’. One of the most efficient ways to improve the poverty and conflict common to many natural resource-dependent countries is through increased transparency of company reporting. The creation of an international accounting standard would increase the availability of essential financial information. Citizens can gain in accessing disaggregated company financial reports on agreements with, and payments to, governments in two ways; firstly by accessing the information they need to hold their governments to account for the use of national resources; and, secondly, citizens can judge whether the company payments are appropriate for the resources gained. These are the main drivers for PWYP’s interest in greater transparency of company finances.
Other key groups would also gain from such transparency. Investors would be better able to judge the risks of company exposure in different country contexts. Macro-economic decision-makers and international financial institutions would gain key information that may be unavailable from sources other than company reports. Companies would benefit from a more stable operating environment generated by improved governance and trust. An international accounting standard such that PWYP proposes would provide a ‘level playing field’ for most businesses, protecting ethical companies from ‘under-cutting’ by the less scrupulous. Finally, disruptions that threaten energy security would also be reduced.
PWYP has working been working with an IASB subgroup on extractive activities, which was set up by an IASB decision on 20 September 2006, to deal with PWYP’s case for disclosure requirements.
PWYP has recommended to the subgroup that the future review of IFRS 6: Exploration for and evaluation of Mineral Resources, should require country-specific disclosure of:
PWYP considers that a future IFRS requiring this disclosure offers one of the best mechanisms to create a global standard that will generate comparative information and maintain a ‘level playing field’ for companies.
This is an accounting standard that determines the way in which companies have to break down their financial information (e.g. geographically) and what must be reported (e.g. costs, turnover, profit etc). It affects companies in all sectors, not just extractive industries.
The IASB published the draft of a proposed new standard for ‘Operating Segments’ in February 2006. This proposed a shift to a ‘management approach’ to reporting consistent with that used by US FASB (SFAS 131). In summary:
In response to the draft proposal, PWYP submitted a paper containing recommendations as part of the formal consultation process. PWYP recommended for the inclusion of:
PWYP members sent 80 letters of support to the IASB (54% of submissions) but they rejected all offers to engage directly with us. On 20 July 2006, the IASB adopted the ‘management approach’ of ‘IFRS8 Operating Segments’ in opposition to PWYP’s recommendations. In response, PWYP generated significant press coverage of our concerns over the content and process of the IASB’s decision-making. On 20 September 2006, the IASB discussed PWYP’s concerns and agreed to the following:
Parallel to this, in 2007 the European Union set up a process to consider the adoption of IFRS8. The European Parliament called for a review of the potential impact of the adoption of IFRS8 and the results of this were published in a report by the EU Accounting Unit on 3 September 2007, recommending unreserved endorsement of IFRS8.
In response PWYP members sent numerous letters opposing the recommendations made by the EU Account Unit to Members of the European Parliament (MEPs) sitting on the Economic and Monetary Affairs Committee (ECON).
Largely as a result of PWYP’s work, on November 14 2007, the European Parliament endorsed the concerns raised by PWYP members and voted in a resolution for a new international accounting standard requiring oil, gas and mining companies to report critical information on a country-by-country basis.
For more information please contact Vanessa Herringshaw from the Revenue Watch Institute.