By Gary Kabureck, Member, International Accounting Standards Board
At the International Accounting Standards Board (Board), developing new IFRS® Standards to improve financial accounting and reporting is our stock in trade. However, no matter how comprehensive the development process is, for a variety of reasons there may be a need to make subsequent amendments.
Mostly these amendments have been either narrow in scope or transaction-specific in nature and come to us from a variety of sources such as recommendations from our IFRS Interpretations Committee. But we also stand back and take a holistic look at an entire Standard after it has been in use for some time. We call this activity a Post-implementation Review (PIR).
These are a relatively new process for us. To date, we have completed PIRs on IFRS 3 Business Combinations and on IFRS 8 Operating Segments. Currently, we are asking stakeholders to provide information to our third PIR, which is on IFRS 13 Fair Value Measurement, with comments and other input due on 22 September.
The Board's Due Process Handbook outlines why, when and how we conduct PIRs. First, let’s be clear: a PIR is not intended to be a cover-to-cover reconsideration of the entire underlying Standard. It starts with an initial assessment of how well the new Standard is performing in practice and includes outreach to the Board's consultative network.
Whilst not reopening the Standard, we look at a number of things, including: have the Standard’s objectives been achieved? Are the Board's requirements on the most difficult or conscientious issues performing as intended? Have new issues emerged since the Standard was issued? Are the compliance costs consistent with expectations?
After the initial assessment, the Board may determine no additional research is necessary. However, if important issues are identified, we then publish a formal Request for Information (RFI), seeking input on specific topics from any interested constituent. After the RFI responses are analysed, the Board then determines the next steps, which could range from standard-setting to a conclusion that no additional work is necessary.
For example, our PIR on IFRS 3 Business Combinations identified important challenges with its definition of a business and in evaluating goodwill for potential impairment. On the first issue, we are near finalisation of a revised definition of a business, and on the second, we are deep into a research project on the subsequent accounting for acquired goodwill, including potential improvements to our impairment testing requirements.
The possible outcomes of the process are summarised as follows:
As noted, a possible outcome—even if potential improvements have been identified—is that we make no changes to the Standard. This is because our constituents also want a stable financial reporting platform and minor changes may not pass the cost-benefit test; processing even minor changes still consumes a significant amount of both constituents' time and the Board's time.
If we choose not to amend the Standard, we will nonetheless have to ask ourselves the question: should we take some other action instead? Although issuing educational materials is not a substitute for standard-setting, maybe it is the most useful outcome of a PIR in some cases—for example, if we conclude that the Standard is clear but perhaps isn’t well understood.
Maintaining the continuing relevance of IFRS Standards is critical and we are committed to keeping existing Standards as current and operational as possible. Historically, standard-setting always had processes to address situational questions but didn't include sunset reviews or an overall look back at how well an entire Standard is operating. Thus, introducing our PIR process was a much-needed development.
The Standards we issue typically involve very complex issues of material importance to sizeable constituencies. When an issue is complex, there are usually a number of reasonably plausible solutions from which the Board needs to choose: for example, deciding between principle versus rule-based guidance; determining which transaction structures are in or out of scope; assessing theoretical purity versus practical application; considering cost versus benefits, etc. A final Standard may contain dozens of individual decisions.
To make the best decisions, we rely on extensive outreach, including input from perhaps hundreds of organisations and individuals through comment letters and meetings, education sessions, fatal-flaw reviews of near-final Standards and more.
One may ask, isn’t this sufficient? Mostly it is, but field-testing during development is not a substitute for real-life-application experience. Rarely do more than a few hundred people and companies actively participate in our standard-setting projects. In contrast, it will be tens of thousands of companies, in more than 125 jurisdictions, which actually apply new IFRS Standards and this is where any unforeseen issues with a Standard usually become apparent.
‘Unforeseen issues’ could include, for example: the Standard isn’t achieving its stated objectives; it is proving more difficult or costly to implement than expected; it isn’t providing sufficient or unambiguous guidance on certain matters; new transaction types have emerged since the Standard was finalised, etc.
Therefore, the goal of a PIR, conducted relatively early in a new Standard's operational life, is to take stock of what is, and what is not, working effectively.
A PIR concludes with a Feedback Statement. With the PIR's findings in hand, the Board will then decide how it wishes to address any issues the PIR has identified: perform additional research, proceed to standard-setting or develop educational material. Of course, if any of the identified issues are not considered sufficiently important, the Board could decide that no further action is necessary.
We know from experience that established practices and procedures become progressively more difficult to change over time and thus the financial statements in which they are reported become less relevant and provide a less faithful representation if our Standards are not working as we had intended.
This is why PIRs are so critical to the long-term effectiveness of IFRS Standards.