Sue Lloyd, Vice-Chair of the International Accounting Standards Board (Board) and Chair of the IFRS Interpretations Committee, explains the Board's position on agenda decisions.
In December 2018 the Board confirmed its view1 that it expects companies to be entitled to sufficient time to implement changes in accounting policy that result from an agenda decision published by the IFRS Interpretations Committee (Committee). The Board also agreed to ensure that this view is visible to stakeholders, including by proposing that it be added to the Due Process Handbook2.
Since then I have received questions about why we have done this and what exactly we mean by ‘sufficient’ time. For example, does this mean that entities don’t have to do anything about agenda decisions for a number of years?
Why have we commented?
The Committee publishes agenda decisions when, following consultation, it has decided that standard-setting is not required to deal with a question from stakeholders. This usually means that the Committee has concluded that existing IFRS requirements are adequate to answer the question. When that’s the case, the agenda decision explains how IFRS Standards apply.
Because explanatory material set out in an agenda decision reflects existing requirements, two questions are often raised. First, does that mean that companies that have applied IFRS Standards in a manner inconsistent with an agenda decision necessarily have a prior period error? And secondly, does that mean that companies have to reflect the agenda decision in their next set of IFRS financial statements no matter how soon that might be? For example, if the Committee were to publish a final agenda decision in March 2019, do financial statements for a period ending 31 March 2019 have to reflect that agenda decision a matter of weeks later?
In relation to the first question, the Board has acknowledged that agenda decisions often provide new information that should be seen as helpful and persuasive (for example, by integrating requirements in the Standards with material in the Basis for Conclusions and Illustrative Examples). This means that a company does not have an error simply because its application of IFRS Standards was inconsistent with an agenda decision.
In relation to the second question, until now we have had nothing on record regarding how quickly companies are expected to implement an accounting policy change that results from an agenda decision. The Board therefore decided to formally acknowledge that it may take time to implement such an accounting policy change. The Board has done this to reflect its expectations of what is reasonable for preparers, to assist companies in implementing any such change and, ultimately, to support consistent application of IFRS Standards by facilitating accounting policy changes.
But how long is ‘sufficient’?
The short answer is that it depends on the particular facts and circumstances. It will depend on the accounting policy change and the reporting entity. Preparers, auditors and regulators will need to apply judgement to determine what is sufficient. But as a rule of thumb I think it is fair to say that we had in mind a matter of months rather than years.
The Board’s comments on timing relate to the time needed to implement accounting policy changes that result from an agenda decision. Once an agenda decision is finalised it becomes a relevant piece of information in applying IFRS Standards. Explanatory material set out in agenda decisions, in essence, affirms the application of existing requirements. Therefore, companies need to consider agenda decisions and implement any necessary accounting policy changes on a timely basis—in other words, as soon and as quickly as possible.
Sometimes, assessing that an agenda decision necessitates an accounting policy change and implementing that change may be straightforward, and implementation may be quick. In other circumstances, effecting an accounting policy change may require companies to undertake a number of steps, such as collecting additional information to apply the new policy or to provide disclosures, or changing processes or systems. If necessary, companies should be in a position to explain their implementation process and, if material, consideration should be given to whether disclosure related to the accounting policy change is required.
Given that agenda decisions typically consider specific transactions or narrow fact patterns, reflect existing requirements and the Committee has determined that standard-setting is not required, the Board does not anticipate that companies would require extensive periods of time.
Some have asked whether sufficient time includes the time needed to undertake related steps, such as changing affected covenants in documents. Or whether companies should be allowed to wait to see whether any of the Board’s projects could remove the need to make an accounting policy change (to avoid two changes in accounting in a short period of time). To my mind, such considerations go beyond what the Board intended.
Judgement and cooperation
In closing, I reiterate that consistent with the application of IFRS Standards more generally, the application of judgement is required. The Board has sought to provide a mechanism that is reasonable to enable accounting policy changes to be effected on a timely basis and in an orderly manner. For this to work well, everyone involved in financial reporting needs to work together to ensure that an appropriate outcome is achieved and that collectively we work towards the goal of high-quality, consistent application of IFRS Standards.
Our comments on timeliness do not change the fact that companies need to be diligent in considering agenda decisions and implementing any resulting accounting policy changes. We expect a good faith effort to consider and address any effects of agenda decisions on a timely basis.
1The Board confirmed this view at its December 2018 meeting when redeliberating proposals in the Exposure Draft Accounting Policy Changes (Proposed amendments to IAS 8).
2The Due Process Handbook sets out the procedural requirements for the Board and the Committee.