Philip: I am an accounting specialist in Moody’s Corporate Finance Group based in London. I joined Moody’s in 2005 as part of the agency’s initiative to expand the range and depth of analysis. Prior to joining Moody’s, I spent 10 years working for Ernst & Young in London and Vancouver.
There are both internal and external elements to my role at Moody’s. The internal element involves supporting the credit rating process by assessing the reporting quality of corporates and deepening the insight of analysts into key accounting issues. For example, prior to the implementation of IFRS 16 Leases, Moody’s capitalised operating leases on the balance sheet of lessees. After the Standard was implemented—which was a helpful change—we had to consider the reasons for any differences between our previous estimate and the IFRS 16 numbers that were first reported by companies. Another area I get involved in is the analysis of the financial statements of companies in the emerging markets where the disclosures are generally not as high quality. We have access to companies’ management and accounting teams so we can go beyond the average user to seek clarity on accounting issues.
Since our credit ratings require an in-depth analysis of the financial statements, many different forums are interested in hearing our views on financial reporting. So, the external element of my role involves representing the views of Moody’s at various forums like the International Accounting Standards Board’s (Board) CMAC, as well as regulators and endorsement bodies like the FRC in the UK and EFRAG in Europe.
Philip: Let me first briefly explain a credit rating and how it is assigned. In simple terms, a credit rating is our opinion on the ability of the company to repay its debt in full and on time. It is a relative ranking, so it is paramount that we can compare companies across a peer group and across accounting standards. We have a credit rating methodology for each industry. All methodologies incorporate a number of ratios like cash flow or EBITDA to debt. The methodologies also incorporate qualitative factors relevant to each industry. Many different parts of analysis go into populating a scorecard for each company and the methodology sets out the basis for the scorecard. Analysts can incorporate their judgement as an overlay in the scorecard as well. The final step is the discussion in a rating committee usually comprising five or six individuals.
Next, let me briefly explain how the accounting influences the credit rating process. For the broad universe of companies that we rate, we start with the debt and debt-like liabilities of each company. There is no definition of debt in IFRS Standards, but in addition to obligations to lenders we also consider items like lease and pension liabilities and off-balance sheet securitisations as debt-like. As I’ve already mentioned, prior to IFRS 16 we would also have included operating lease liabilities. As part of assessing the company’s ability to repay, we are also looking for instances where there can be liquidity issues if funding abruptly disappears. Our thinking on supply chain financing is along these lines. These arrangements may be reported on the balance sheet in trade payables but their concentration with one or a handful of financial institutions who could withdraw the facility in an unexpected manner can result in significant risks. We also have our own methodology for the classification of hybrid instruments into debt or equity which may be different from the financial reporting.
We also make certain adjustments to ensure comparability across accounting standards or to remove optionality. For example, the capitalisation of development expenses is required under IFRS but prohibited under US GAAP. Another example is the optionality for the presentation of dividends and interest in an IFRS cash flow statement. These are adjustments we make across companies, so they are referred to as standard adjustments in the rating process. There can be other reasons why we adjust the financial statements based on the facts and circumstances specific to a particular company which we call non-standard adjustments (for example, if we believe the adjustments are needed to improve comparability).
Philip: The pandemic has certainly been a very busy time for credit rating agencies. Unlike previous crises which affected certain sectors like the financial institutions or technology, media, and telecommunications, this crisis has had a broader impact across sectors. The credit rating process hasn’t changed as a result of the pandemic, but we have had to deal with increased uncertainty, largely related to the shape and timing of the recovery.
A few areas of disclosure where we have increased our focus during the pandemic are liquidity and going concern. The issue of going concern is tricky and historically we have observed that companies are reluctant to provide sufficient transparency into uncertainties. Unfortunately, for a company that is in trouble, more transparency about going concern uncertainty can make matters worse (e.g. suppliers may pull out), but there are many examples of good disclosures during the pandemic. In addition to the information provided in the financial statements, we have relied on the audit opinion related to going concern uncertainties to support our assessment of liquidity and solvency risk.
Philip: IFRS Standards have held up well during the pandemic in my opinion. The additional guidance from the Board where needed has been timely and helpful. Recent events in the corporate and lending space have resulted in heightened scrutiny of supply chain finance arrangements, although the lack of transparency into these arrangements has been a long-standing issue for us. The IFRS Interpretations Committee has been clear that the Standards don’t need to be changed and that disclosure is already required about the exposure to these arrangements, whether and to what extent is a company extending its working capital, and the concentration of liquidity risk. However, there is a lot of room for improvement in the actual company disclosures that we are seeing. I’m really pleased that the Board has taken onboard this feedback from users and is making improvements to the disclosure requirements which should result in greater comparability and transparency.
Philip: The current work plan and the topics suggested in the Agenda Consultation look very good. We have flagged many topics (like the cash flow statement, foreign exchange, pollutant pricing mechanisms, discontinued operations, supply chain financing, etc.) in the past. One topic that I brought up at a previous CMAC meeting that I will mention again is foreign currency. I think the disclosures in IAS 21 The Effect of Changes in Foreign Exchange Rates can be improved, particularly in relation to gains and losses reported in the income statement and the corresponding cash flow statement impact. What’s sometimes harder to assess is the exposure of companies to foreign exchange movements, for example where the revenues are in one currency and the costs in another, or where the debt is borrowed in a currency that is not the currency in which the company generates its cash flows. More information on such exposures and the extent to which they have been hedged would be useful.
Cash flows are very important to us as a rating agency in assessing the company’s ability to repay its debt, so I’d also highlight that often there is insufficient focus on the cash flow impact of different transactions by companies. There is more information about the income statement or the balance sheet impact, but often the cash flow impact is forgotten. For example, unusual items may be presented in the income statement, but the corresponding cash flow information is not easy to find. The recent improvements to IAS 7 Statement of Cash Flows related to the analysis of changes in liabilities arising from financing activities have been helpful, but there are still many examples of companies that are not disclosing enough information. This may be more of an implementation issue than a Standards issue, but it is another example of how cash flow information is sometimes not given enough focus by companies.
Another area where improvements could be made is discontinued operations. If a company is looking to sell a part of its operations it would already be reflected in our forecasts, so we don’t find the single line presentation in the income statement helpful while the company still owns the operations (or the restatement of prior periods). Coming back to the cash flow statement, there is flexibility for companies to either present cash flow information for the continuing operations only or for the continuing and discontinued operations combined so we need to decipher that.
Philip: We have our own standard definitions, so it isn’t hugely important for us to have a definition in the Standards. That said, it would be helpful if the Management Performance Measures proposal in the Primary Financial Statements (PFS) project is extended to the cash flow statement as well, so that any cash flow measures presented are reconciled back to the financial statements. The proposal to remove the optionality for presentation of dividends and interest paid or received in PFS is welcome. It will improve comparability of the cash flow statement across companies.
Philip: We have a published a cross-sector rating methodology setting out how we factor ESG issues into our analysis, and include the impact of ESG considerations in each of our credit ratings. The principle for analysis of ESG risks is the same as for non-ESG risks, which is to assess the impact on the company’s ability to repay its debt. So, our focus is very much on ESG issues that are material to the credit rating. As ESG disclosures are not currently comparable across peer groups, or quantified, my hope is that the proposed International Sustainability Standards Board (ISSB) can improve this, doing for ESG disclosures what the IASB has done for accounting. There is an urgent need for global ESG standards, so I also hope the ISSB can be up and running very soon!
Going forward, I hope that the two Boards will collaborate and develop standards that are consistent across both areas of corporate reporting. I believe there should be consistency in how forward-looking information is used in the preparation of sustainability reports and the financial reports. Similarly, there should be consistency between management commentary and the reported accounts.
Philip is a London-based accounting specialist in Moody’s Corporate Finance Group. He joined Moody’s in 2005 as part of the agency’s initiative to expand the range and depth of its analysis. His role includes assessing the reporting quality of corporates and deepening the insight of analysts into key accounting issues.
Prior to joining Moody’s, Philip spent 10 years working for Ernst & Young in London and Vancouver. Latterly, he was a Senior Manager in Ernst & Young’s Financial Reporting Group in London, where his responsibilities included advising audit executives on the interpretation of UK and international accounting standards, and providing appropriate training in matters related to financial reporting.
Philip is a chartered accountant and holds an M.A. degree from Clare College, Cambridge.
The Discussion Paper Business Combinations under Common Control addresses mergers and acquisitions (M&As) between companies under common control—transfers of businesses from one company within a group to another. Although such transactions are common around the world, IFRS Standards do not specify how companies should report them, which results in diversity in practice and a lack of useful information for investors.
We are seeking investor views to help the Board decide how these transactions should be reported. A short webcast for investors that explains the issue and the Board’s suggested approach is available to the right or on the project page. To share your views by completing a short online survey or by participating in a one-to-one interview with the project team, please email email@example.com. The comment period for the Discussion Paper ends on 01 September 2021; submit a comment letter here.
In May 2021, the Board published the Exposure Draft Management Commentary. The Exposure Draft seeks feedback on the proposed framework for preparing management commentary that meets global capital markets’ needs.
Management commentary—which is also known as management discussion and analysis in some countries—is a report that complements a company’s financial statements.
The proposed framework builds on innovations in narrative reporting and would enable companies to bring together in one place the information investors need to assess a company’s long-term prospects—such as information about the company’s intangible resources and relationships, and about sustainability matters that affect the company.
Management commentary would thus not only explain a company’s financial statements but also give investors insights into factors that affect a company’s ability to create value and generate cash flows, including in the long term. This commentary would be based on information used to manage the business, including financial and non-financial metrics used to monitor performance.
In this short video, also available from the project page, former IASB Chair Hans Hoogervorst introduces the proposals. We also published a Snapshot and recorded a webinar which provide a more detailed overview of the Exposure Draft. The Board is seeking investors’ views on its proposals for information that should be provided in management commentary. Please email firstname.lastname@example.org to share your views. The consultation period on the Exposure Draft closes on 23 November 2021; submit a comment letter here.
In March 2021, the Board published the Exposure Draft Disclosure Requirements in IFRS Standards—A Pilot Approach. The Exposure Draft seeks feedback on a new approach to developing disclosure requirements in IFRS Standards and new disclosure requirements for IFRS 13 Fair Value Measurement and IAS 19 Employee Benefits (test Standards).
Disclosure requirements developed using the proposed approach are intended to better enable companies, auditors, and others to make more effective materiality judgements and thus provide disclosures that are more useful to investors. Applying the proposed approach, the Board aims to enhance investor engagement to ensure that the Board understands investors’ information needs and clearly explains those needs in the Standards. The proposals place the compliance requirement on disclosure objectives rather than prescriptive requirements, which means companies are required to apply judgement in meeting the objectives and focus on disclosing material information only.
The Board has applied this approach to the two test Standards and is now seeking feedback on whether the proposals accurately reflect investor needs and would enhance companies’ ability to make judgements.
In this short video, which can also be viewed on the project page, Board Member Nick Anderson introduces the proposals. We have also published a Snapshot, which provides a more detailed summary of the Exposure Draft. The Board undertook an investor outreach programme when developing the proposals and will be looking to conduct further outreach with investors during the second half of the consultation period, which ends on 12 January 2022. Please email email@example.com if you wish to participate; comment letters can be submitted here.
In July 2021, the Board published the Exposure Draft Subsidiaries without Public Accountability: Disclosures. The Board is proposing a new IFRS Standard that would permit eligible subsidiaries to apply IFRS Standards with reduced disclosure requirements.
The new Standard would be available to subsidiaries without public accountability—including subsidiaries that are not financial institutions or listed on a stock exchange—whose parent company prepares consolidated financial statements applying IFRS Standards.
The Board’s proposals will simplify and reduce the costs of financial reporting for eligible subsidiaries while still maintaining the usefulness of their financial statements.
The Board developed the reduced disclosure requirements by focusing on the information needs of users of financial statements relating to companies without public accountability, for example, by requiring disclosures that provide information about short-term cash flows, obligations, liquidity and solvency.
To find out more about the Board’s proposals, read the Exposure Draft Subsidiaries without Public Accountability: Disclosures. For an overview of the Exposure Draft, see the Snapshot.
The Board invites investors’ views on the Exposure Draft. Comments can be submitted here. The deadline for comments is 31 January 2022.
Andreas Barckow is no stranger to the IFRS Foundation, and on 1 July 2021 he began his first term as Chair of the Board. Here, he talks about his career, his experience at the Foundation so far and his priorities for the next few years. For the first time in his new role, Andreas will address delegates at the World Standard-setters Virtual Conference, taking place on 27–28 September, to share his first impressions upon joining the Board from the perspective of a former national standard-setter. Read the latest newsletter for national standard-setters.
Hans Hoogervorst stepped down as IASB Chair at the end of June. In his farewell speech at the IFRS Foundation Virtual Conference 2021, he reflected on his 10-year tenure, on how IFRS Standards have evolved during that time and on the importance of independent standard-setting.
In July the Trustees hosted two webinars providing similar updates on their work on sustainability—watch the recordings here. You can also read a summary of the Trustees’ meeting held virtually on 26 July 2021 during which they discussed arrangements for seed capital for the new board. The Foundation also responded to a communiqué from the G20 Finance Ministers and Central Bank Governors that welcomed the Trustees’ work programme to develop a baseline global reporting standard under robust governance and public oversight. Finally, you can see the recording of Trustee Chair Erkki Liikanen taking part in a panel debate on regulations, disclosures, financial risk and private financing for the green economy at the recent International Conference on Climate Change.
Erkki Liikanen, Chair of the IFRS Foundation Trustees, delivered a keynote speech at the CFA Institute’s Global Financial Regulatory Symposium on 29 June 2021. He talked about the Foundation’s work to meet the information needs of investors and other capital market participants by creating a proposed new board that would develop a global baseline of sustainability-related disclosures focused on enterprise value.
The proposed narrow-scope amendment to the transition requirements in IFRS 17 Insurance Contracts affects no other requirements in IFRS 17.
The Board has also proposed a new IFRS Standard that would permit eligible subsidiaries to apply IFRS Standards with a reduced set of disclosure requirements. The proposals are designed to ease financial reporting for eligible subsidiaries while meeting the needs of the users of their financial statements.
The Board decided at its 21 July 2021 meeting to extend the comment period for the Exposure Draft Disclosure Requirements in IFRS Standards—A Pilot Approach to January 2022 because of the unique nature of, and significant new thinking in, the proposals. The comment period will allow more time for preparers to conduct fieldwork and provide feedback on the practical application of the proposals. You can watch a recording of the virtual workshop on this consultation held by the Board, the European Accounting Association (EAA) and EFRAG.
The Trustees of the IFRS Foundation met virtually on 16 June 2021. Read the meeting summary and a report on the Due Process Oversight Committee session.
Masamichi Kono has been appointed as a trustee, effective 1 July 2021. His distinguished career has spanned more than four decades, and he has a wealth of regulatory, supervisory and policy experience in national authorities and international organisations, overseeing global financial institutions and markets.
Webinars were held in June and July to update stakeholders on some projects in the Board’s current work plan. Recordings are now available for: