IASB Investor Team: Can you tell us about your professional background? What got you interested in financial statement analysis? Can you share some examples of the type of analysis techniques you use in your current role?
Enitan: I started out in accounting through a combined bachelor’s and master's degree in public accounting. I was not certain about what I was going to do in accountancy before going into my education. Growing up in Nigeria where I enjoyed working with mathematics, I did not know what I would do with it, so by default I fell into accounting. Once I started my accountancy education, I knew that I did not want to work in the finance department of a company. In fact, my professor at that time advised us that the best track to work in finance or to lead the finance function as a CFO is through audit. That is how I started out in my career, and I spent eleven years in public accounting and internal audit. During my time at the Ford Foundation and working in the internal audit function, I became interested in the financial markets. I sat on the same floor as the equity and fixed income analysts, and I worked with them in the audit capacity and got interested in the markets. So, I decided to get my MBA Finance and also pursue the CFA program and use those as means to change my career. I then fell into the role at CFRA through an internship that the founder of the company had posted. So that summer internship in the year 2000 turned out to be a great experience and I fell in love with the work and have been part of the company ever since.
I would like to mention CFRA's approach to financial statements analysis. We have a multi-pronged approach to how we analyse companies, but at the core we help our clients identify downside risks in the companies that they invest in. This involves working with quantitative and qualitative information provided by companies. On the quantitative side, for US listed companies we typically begin our analysis by examining five years of historical financial statements information, which includes quarterly statements. For European companies, we typically rely on half-year interim reports, but some companies disclose financial results on a quarterly basis. We analyse the information provided in all three financial statements and the notes, press releases, investor presentations and earnings transcripts of the companies. A few examples of our multi-pronged approach to company analysis are:
IASB Investor Team: The IASB is looking to conduct post-implementation reviews of IFRS 15 Revenue from Contracts with Customers, IFRS 16 Leases, and IFRS 9 Financial Instruments over the next few months. Can you share your experience with these Standards?
Enitan: Let me pick up on the revenue Standard first. I don’t think I have come across examples where I thought the revenue reported by a company failed to reflect the economics of the business. Instead, I can share examples where companies can improve the disclosures.
On leases, it is helpful when companies disclose the lease repayments on the face of the cash flow statement. While some companies do this, others combine lease payments within other line items. We also like to see companies include lease payments in their free cash flow metrics.
On IFRS 9, we do not see a lot of impact on companies my team reviews, but I did speak with our financial institution’s analyst about it. He expressed generally good feedback and indicated that some banks do a great job by breaking down the gross loan exposures and provisions into the three stages and also by loan asset class. He felt that this practice should be mandated so that more banks provide similar information.
IASB Investor Team: The IASB recently concluded its Third Agenda Consultation and has set its priorities for the 2022-26 work plan. What are your thoughts on some of the projects that the IASB has decided to add to its research and maintenance project pipeline?
Enitan: On intangibles, we are pleased to see that this topic has been added to the agenda, but we would caution on allowing companies leeway to capitalise more internally generated intangibles on the balance sheets (with the exception of software development costs, where we believe the current accounting works well). This is because there could be a great deal of subjectivity in how companies decide to capitalise such intangibles. For those intangibles that are amortised (eg development costs), we would like to see better disclosures of the amounts on the balance sheet and the profit and loss statement (P&L).
In terms of a project on the cash flow statement and disclosures, it is an important topic to address, and we have a few suggestions. Today, there is a lack of transparency on supply chain financing and receivables factoring arrangements. These arrangements can have a material impact on a company’s cash flow and levels of working capital, so the IASB should develop principles that enhance the transparency into the cash flow impact from such arrangements. In particular, we would like to see disclosures for factored receivables include the balance of derecognized receivables sold and outstanding at period end, as well as the amount of cash collected but unremitted on sold receivables that continue to be serviced by the company, if any. The other area that concerns us is the choice of presentation for interest expense on the statement of cash flow, but this is being addressed by the IASB’s Primary Financial Statements project. It would also help analysts a great deal if the changes in balance sheet items neatly reconciled to the same items on the cash flow statement: for example, changes in working capital shown on the cash flow statement prepared using the indirect method should be reconcilable to the changes in the opening and closing balances for working capital items on the balance sheet. Sometimes acquisitions and divestments make the reconciliation challenging and it would be helpful if companies could explain the differences.
In terms of topics that are not included in the work plan, interim reporting is one that is important for us. At the moment it is not a level playing field with regards to the information available in interim reports across companies. Often, we have to wait till the annual accounts are published to get clarity, and analysts have to work with limited information until then. For example, we sometimes do not get a breakdown of the receivables into trade vs non-trade in the interim period reports, so we don’t know what is driving a large increase. We would like to know how much of the increase in receivables over the interim period is related to sales as opposed to the noise from other receivables. Similarly, we often do not get enough disaggregation on the face of the P&L or the cash flow statement for interim reports.
IASB Investor Team: The IASB has added a few projects to its reserve list in the new work plan. Are any of these topics relevant in your analysis of companies and why?
Enitan: I haven't encountered pollutant pricing in the companies that I analyse, so I don’t have anything to say on the topic.
Operating segments is not a huge priority for us, but it would be helpful if companies could disclose key performance indicators (KPIs) by reporting segment so that it can be reconciled to the consolidated KPI. This is important because the drivers for each segment's KPI can be quite different.
IASB Investor Team: The IASB also decided not to pursue many of the projects in its new work plan given its capacity constraints. Are there any topics on your mind or that are listed in the IASB’s Request for Information Third Agenda Consultation that you think may become critical for your analysis or for investors over the next five years?
Enitan: One topic that is not on the list mentioned in the IASB's Request for Information for the Third Agenda Consultation is the impact of acquisitions on the reported results of companies. In the past, companies would provide information about the book values of the acquiree immediately before the acquisition, the impact of the accounting realignment, and the fair value adjustments under the purchase price allocation. We typically don’t get the acquirees book values with adjustments for accounting alignment and fair value adjustments anymore. Getting companies to provide the book values of the acquiree in particular would be very helpful in improving the transparency into mergers and acquisitions accounting.
IASB Investor Team: We thank Enitan for taking the time to share her views with us and our readers.
Ms Adebonojo is a senior Forensic Equity Analyst and Executive Director at CFRA, an independent equity research firm. Since 2006, she has led CFRA’s Bespoke Research team and the training of junior analysts. Before she joined CFRA, she worked as an internal auditor for the Ford Foundation after spending a few years in public accounting. Ms Adebonojo has a combined bachelor’s and master's degree in business administration in public accounting from Pace University in New York, and an MBA in finance from the University of Maryland. She is CFA charterholder and a certified public accountant in the United States.
In July 2022 the IASB published Feedback Statement Third Agenda Consultation, outlining its priorities for the next five years (including its work plan for 2022 to 2026). For important takeaways, please refer to this Snapshot.
Investors played a key role in this consultation. They submitted 16 comment letters, seven survey responses and participated in 26 outreach events.
In this spotlight article, we briefly explore some of the IASB’s decisions.
While the consultation focused on several areas related to the IASB’s work and its future priorities, the following areas may be of greatest interest to investors:
The IASB asked investors for feedback on the priority—high, medium or low—of each of the 22 potential projects described in the consultation document.
Considering stakeholders’ capacity and its own capacity, the IASB decided:
Unlike research pipeline projects (which usually require a new Accounting Standard or a major amendment to an Accounting Standard to solve the identified problem), maintenance pipeline projects might only require a relatively narrow-scope amendment to improve financial reporting requirements or remedy a deficiency. Such projects can often be conducted more quickly than projects to develop a new Accounting Standard or a major amendment to an Accounting Standard.
Many investors rated this project as high priority. There was mixed feedback about the scope of that project. Some investors expressed support for more recognition of internally generated intangible assets. However, more investors expressed support for better disclosures about unrecognised intangible assets. Some of these investors said that measuring the value of these assets is their task.
The lASB will undertake a comprehensive review of IAS 38, which will be a large and complex project for the IASB and its stakeholders. To make such a large project more manageable and to allow more timely progress, this project could be undertaken in stages (for more details on the potential staging of this project, please see page 27 of the Feedback Statement).
Statement of Cash Flows and Related Matters
Most investors considered this project to be the highest priority of all potential projects. Stakeholders’ concerns relate to both presentation issues and other issues (such as improved disclosures about non-cash financing). Views on the scope of the project were mixed. Some stakeholders suggested a comprehensive review of IAS 7. Others suggested a more targeted approach. The IASB will decide on the scope during the research phase of the project. This project will have interactions with some other projects (for example, the work on Supplier Finance Arrangements).
Climate-related Risks in the Financial Statements
Feedback also indicates that a potential project on Climate-related Risks in the Financial Statements is important to investors, as many rated it as high priority and almost all investors rated it as high or medium priority.
Respondents to the consultation raised concerns about:
This project will:
The IASB also decided to create a reserve list of projects that could be added to the work plan if additional capacity becomes available (for more details, see page 31 of the Feedback Statement). The reserve list comprises two projects:
Consistent with the feedback, the IASB will slightly increase its focus on this activity to help improve the usefulness, quality, accessibility and comparability of digital financial information.
To do so, the IASB plans to:
The IASB sets IFRS Accounting Standards and the ISSB sets IFRS Sustainability Disclosure Standards.
The IASB’s Accounting Standards provide investors with ‘monetary’ amounts in financial statements about historical and current matters (including the effect of future matters on current asset and liability values). The ISSB’s Sustainability Disclosure Standards will require the disclosure of information about sustainability-related risks and opportunities, typically when these risks and opportunities are not recognised as monetary amounts in the financial statements.
The IASB and ISSB will work together to ensure that the two sets of Standards (IFRS Standards) complement each other to provide investors with a connected financial reporting package to meet their information needs.
The IASB plans to work with the ISSB on relevant projects—most likely, on the IASB’s current project on Management Commentary, its new research project on Intangible Assets and its reserve-list project on Pollutant Pricing Mechanisms.
For example, a joint project on Management Commentary may require joint meetings of the two boards, and the IASB’s research project on Intangible Assets will need to consider the relationship between this project and the work of the ISSB on the disclosure of sustainability-related information about intangible resources, such as human capital.
Given the importance of connections between the requirements in Accounting Standards and the requirements to be developed by the ISSB on climate-related financial information and the related reporting, the IASB will also need to coordinate any work on Climate-related Risks in the Financial Statements with the ISSB. The IASB’s project will focus on the effects of climate-related risks on financial statements. While the IASB notes that the ISSB’s proposals in the Exposure Draft Climate-related Disclosures set out disclosure requirements specific to climate-related risks and opportunities, both boards will need to work together to develop consistent terminology and compatible requirements.
The ISSB will consult on its agenda priorities in the first half of next year.
The IASB expects that in the short term most or all of its resources for research and standard-setting projects will be allocated to:
Consequently, the IASB will not start work on the two research pipeline projects (Intangible Assets and the Statement of Cash Flows and Related Matters) immediately. Because both projects are likely to be large and complex, they are not expected to be completed within the next five years.
The IASB and the IASB’s Stakeholder Engagement Team would like to thank all the investors that contributed to the IASB’s Third Agenda Consultation.
The IASB has published proposals to update the IFRS for SMEs Accounting Standard to reflect improvements that have been made in full IFRS Accounting Standards, while keeping the Standard simple for small and medium-sized entities.
Proposed amendments include updating the Standard to:
The proposed updates also include new requirements in IFRS Accounting Standards and other improvements that have been made to full IFRS Accounting Standards since the second edition of IFRS for SMEs Accounting Standard was published in 2015. The proposals respond to feedback from stakeholders on the Request for Information that was published in 2020 and advice of the SME Implementation Group.
You can also read the November 2022 IFRS for SMEs Accounting Standard Update that details how the IASB has responded to feedback from users of SMEs’ financial statements and describes the proposals the IASB published in the Exposure Draft.
The OECD’s Pillar Two Model rules published in 2021 are designed to ensure large multinational companies pay a minimum level of tax on income arising in each jurisdiction of operation. The model rules are expected to become part of tax legislation in various countries during 2023 and as early as Q1 2023.
The IASB is looking into the implications of the aforementioned rules on deferred tax accounting applying IAS 12 Income Taxes. Initial considerations indicate that the deferred tax accounting resulting from the rules is likely to be highly complex and it may be difficult to measure deferred tax amounts reliably. The IASB will therefore consider whether standard-setting may be needed. Because IAS 12 requires entities to reflect in their accounting the effects of tax legislation from when the legislation is ‘substantively enacted’, any standard-setting would have to be completed as soon as possible.
Staff are still exploring options for standard-setting, but may suggest some disclosure requirements about the effects of new legislation (for example, an entity’s exposure to additional tax if it operates in low-tax jurisdictions).
Staff are keen to understand what information would be useful for investors with respect to the Pillar Two Model rules.
We can schedule meetings up to the mid/end of November 2022.
This newsletter explains how the IASB has responded to feedback from users of SMEs’ financial statements and describes the proposals the IASB published in the Exposure Draft.
The Capital Markets Advisory Committee (CMAC) and the Global Preparers Forum (GPF) held a hybrid meeting on 16-17 June 2022, broadcast from the London offices of the IASB. A summary of that meeting is now available on the meeting page.
IASB Chair Andreas Barckow and ISSB Chair Emmanuel Faber communicated plans for the future role, governance and development of the VRF’s Integrated Reporting Framework and Integrated Thinking Principles.
The G7 welcomed the inauguration of the ISSB and its progress of work on the global baseline of sustainability reporting standards. They welcomed the ISSB’s 'path to global baseline' statement of 18 May 2022 and called on all relevant stakeholders to participate in the ongoing consultation on the proposed standards.
The IFRS Foundation’s sixth Compilation of Agenda Decisions brings together agenda decisions published by the IFRS Interpretations Committee from November 2021 to April 2022.
The IASB has published a Project Report and Feedback Statement concluding its Post-implementation Review of these accounting standards: IFRS 10 Consolidate Financial Statements, IFRS 11 Joint Arrangements and IFRS 12 Disclosures of Interests in Other Entities.
The International Accounting Standards Board has published its Third Agenda Consultation Feedback Statement and Snapshot, outlining the IASB's priorities for the next five years.
The Trustees of the IFRS Foundations have announced the appointment of Yanli Liu and the reappointments of Lisa Bomba, Jens Freiberg, Karsten Ganssauge and Brian O’Donovan to the Interpretations Committee.
In its October meeting, the ISSB unanimously voted to require company disclosures on Scope 1, 2 and 3 greenhouse gas emissions applying the current version of the GHG Protocol Corporate Standard.
The ISSB unanimously confirmed that companies will be required to use climate-related scenario analysis to inform resilience analysis.
The IASB has issued amendments to IAS 1 Presentation of Financial Statements that aim to improve the information companies provide about long-term debt with covenants.
IFRS Foundation Staff provide an overview of the Staff Request for Feedback on the IFRS Sustainability Disclosure Taxonomy to inform the development of an IFRS Sustainability Disclosure Taxonomy for digital reporting.
Technical staff from the IASB have produced a series of eight webcasts to explain the Dynamic Risk Management project based on the IASB’s tentative decisions to date.
The IFRS Foundation held a webinar on Friday 14 October to give the latest updates on the Primary Financial Statements project, including on IASB's tentative decisions up to September 2022.