The International Accounting Standards Board (IASB) will soon be marking their 20th anniversary. Formed in 2001 under the then-chair Sir David Tweedie, the IASB was established to continue the work of its predecessor, the International Accounting Standards Committee. It took on responsibility for developing a single-set of high-quality global accounting standards (IFRS) and since then, IFRS have become the global language for financial reporting.
Just under four years later, listed companies in the UK, as part of the EU became required to use IFRS to prepare their consolidated financial statements. Today, publicly accountable companies across 144 different jurisdictions are required to prepare their financial statements under IFRS, and a further 12 jurisdictions permit their use.
“We need to remember to take a step back and recognise what a huge success IFRS has been and in a relatively short space of time,” says Nick Anderson, one of today’s 14 Board members of the international standard-setter. “To have the consistency and comparability in measurement and recognition in financial statements is a fantastic achievement.”
2020 may be the year that the UK leaves the EU but there doesn’t seem to be any appetite to depart from the use of international accounting standards. Quite the opposite in fact says Nick: “One of the first things we heard once the result of 2016’s referendum was known, was from large UK companies saying, ‘We’ll be sticking with international standards. Now more than ever we need to remain international and be seen to remain international.’ We should remember that the use of IFRS within a particular jurisdiction is entirely voluntary, so jurisdictions must feel they bring certain benefits. Having said that though, the continued success of IFRS is reliant on the support of our stakeholders, and part of that is to involve and engage with them along the way.’
Engaging investors
As Nick knows only too well, a key group within those stakeholders is the investor community. Nick joined the IASB in 2017 with over 30 years of practical experience primarily as a buy-side investor and is one of two board members that are not qualified accountants – the other being the current chair, Hans Hoogervost. “I have learnt my accounting through using the end product, the annual report and accounts. It was transformational, when after a few years as an investor, somebody started to show me how the primary financial statements fit together and the interplay between the balance sheet, cash flows and the profit and loss account (P&L). I started to be able to use the numbers to build a picture of the economics of the business. Not only did it transform my understanding of accounts, but how I invested too.”
As the primary users of financial statements, are investors engaged with the standard-setting process we asked? “The setting of accounting standards is important for investors, but there are lots of other important things for them as well. We have many stakeholder groups that perhaps have more of a vested interest in being part of the consultation process and it would be easy for us to focus on those that are more engaged. We need to view investors as a customer and work hard to satisfy their needs and so ultimately help the effective allocation of capital.”
How can the IASB facilitate that happening? “I think there are some lessons that can be learnt from the work we’ve been doing on disclosures recently. We’ve been reviewing disclosures in two particular standards – IAS 19 Employee Benefits and IFRS 13 Fair Value Measurement – and considering how the requirements might be written differently. Instead of an approach of presenting proposals and asking for feedback, we’ve started with a blank sheet of paper and asked investors, ‘What information do you need? Why do you need it? And how are you going to use it?’ It’s a process that really helps to differentiate between the must haves and the nice to haves. Then we can consider what’s plausible from a cost perspective, by consulting with preparers to determine how easy or otherwise it is to provide the information. I’m a firm believer in evidence based standard-setting. We need to avoid second guessing the needs of investors. But it’s a two-way dialogue and we need their participation. Time will tell what the impact of this project ends up being and whether investors are rewarded for the time they have put into it. But I hope they’ll be pleased with the outcomes.”
The pipeline
We turn our attention to discussing other IASB projects that are in the pipeline. “We have some really quite meaningful consultations coming up,” explains Nick, “Primary financial statements is expected before the end of 2019 and goodwill and impairment will be coming early in 2020 plus the disclosure initiative with improvements to targeted standards that I’ve already mentioned. Management commentary is planned for the second half of the year. There’ll also be the IASB’s Agenda Consultation later in the year – the five-yearly consultation seeking input to inform our future work plan. In addition, there are a number of specialised consultations lined up. So 2020 looks set to be a busy year for both us and our stakeholders.
“The Primary Financial Statements project has the potential to impact every single company that uses IFRS,” Nick continues. “Introducing defined subtotals will improve the structure of the P&L. We know there are at least nine different variations of operating profit used by companies today. The efficiency advantage for investors that would come from knowing that something is being calculated in a common manner would be huge. Another frustration when moving between companies’ reports is not knowing where to find the reconciliation from management measures of financial performance to the IFRS numbers. We propose, going forward, it will always be in the notes to the accounts.”
Although the Primary Financial Statements project looks set to have a wide-reaching impact, it is arguably not as controversial as the other big issue the IASB have been working on in recent years – goodwill and impairment. Work has been happening on this project since the post-implementation review of IFRS 3 Business Combinations in 2015, but the project has taken on more prominence recently, particularly of a political nature, in the light of certain corporate collapses. “Everyone’s very passionate and people have strong views about goodwill. But ultimately, it’s not the goodwill figure that is behind these corporate failures – it’s too much debt.”
“Investors are most interested in how resources have been deployed in a business combination and whether they’re going to earn a return on their investment,” says Nick. “They are less interested in the allocation of those resources between different assets and the residual balance of goodwill, which can represent any number of things.
“While we need an accounting solution for goodwill, the Board has also been looking at how we can improve disclosures of the transaction itself. A good example is that there’s currently no precise requirement to disclose the amount of debt acquired in a transaction.
“Another example is the requirement to disclose pro forma information about profit in the year that the transaction takes places, but the standard doesn’t specify what type of profit; we need more precision in these requirements. We’ve also considered the need to provide more information about the subsequent performance of the transaction in its entirety.”
What about the impairment only versus amortisation and impairment debate and the criticism that the recognition of impairment losses isn’t timely enough?
“Most of the time, the markets already know the situation. Impairment is a confirmatory signal and in my view, a better signal than amortisation,” says Nick. “Equity investors, by and large, accept the impairment model and through the disclosures, we’re trying to help them have better information ahead of this confirmatory signal.
“In terms of creditors and other lenders, my research shows that it doesn’t influence their lending decisions at all. They’re focused on cash flows and whether they’re going to be repaid. When they calculate a net asset measure to assist with their decision, they’ve probably discarded the goodwill figure already. The Board have tentatively agreed to retain an impairment only model, but the decision was very close and our forthcoming consultation will reflect both this view and the reintroduction of amortisation.”
Climate change
Another topic high on the political agenda is climate change. It’s an area Nick is familiar with from his time as an investor. In his last role before joining the IASB, he was asked to manage a global equity sustainability fund. “We had to learn very quickly about the implications of climate change at a time when there was limited awareness in the City. Some of the World Bank reports at the time were the most terrifying documents I’ve ever read in terms of the implications of climate change. Particularly that we live in a global supply chain and that the impacts will reverberate around the world, especially in low income countries. The change will be enormous and I think it’s already being felt today.”
Does he envisage a time when there will be an accounting standard specifically dealing with the impact of climate change? “There’s a perception that our standards are silent on climate change. Although it may be the case that the exact words ‘climate change’ do not appear in the standards, they still apply to climate risk,” says Nick. “Practice Statement 2 Making materiality judgements also provides guidance around disclosing information that might be expected to influence investors’ decisions.” Towards the end of last year Nick wrote an article, published on the IFRS Foundation’s website, to help investors better understand the Board’s existing requirements and how these can be applied to climate-related and other emerging risks.
On that note, we returned to our offices knowing that the faculty has a busy year ahead as ICAEW prepares to respond to the IASB’s forthcoming consultations, representing the views of members as well as serving the public interest. The festive break is well and truly over, time to get back to work!
