Andreas Barckow, Chair of the International Accounting Standards Board (IASB) spoke at the AICPA & CIMA Conference on ‘Current SEC and PCAOB Developments’. He gave an update on developments in the IASB’s work and its future priorities for the next five years.
Good afternoon, everyone. It is great to be here with you again, to present the IASB’s work and to demonstrate how it matters to you.
US investors are prolific users of IFRS-based financial statements, even though the US does not use IFRS Accounting Standards for domestic reporting. However, the SEC does allow foreign private issuers to report using IFRS Accounting Standards. The US is well represented at all levels of our organisation, and it is in everyone’s interest that the US literature and international financial reporting standards remain closely aligned, especially in areas where our respective standards are substantially converged.
When I addressed you a year ago, the comment period of our most recent agenda consultation had just ended. Today, I want to update you on our key priorities based on the feedback received.
But before I get onto that, I want to talk about an area that has received heightened attention by many stakeholders over the last 12 months—convergence. While a fair amount of that attention was probably due to our respective goodwill projects and the decisions that both boards have taken in recent months, there are further areas where the convergence issue has been raised, implicitly or explicitly. Let me unpick the different strands for you.
The term ‘convergence’ is used in different ways by different people. Many use it with reference to the so-called ‘Norwalk Agreement’ that the IASB and the FASB [Financial Accounting Standards Board] struck in the early 2000s. At the heart of that agreement was a pledge by both boards, and I quote: “to use their best efforts to (a) make their existing financial reporting standards fully compatible as soon as is practicable and (b) to coordinate their future work programs to ensure that once achieved, compatibility is maintained.” The agreement then sets out more detailed measures as to how this may be achieved.
Now: the quote I gave you has two important angles. It talks about the compatibility of standards, and it talks about the maintenance of the compatibility achieved. I may think of the former as a product-related view of convergence and of the latter as a process-related view of convergence.
On the product side, arguably, a lot was achieved. We have converged, or substantially converged, accounting standards on business combinations, fair value measurement, leases, revenue recognition, segment reporting, to name but a few important ones. Of course, there are also some areas where the IASB and the FASB were not able to achieve full compatibility, notwithstanding greater directional alignment. Examples in this camp include our literature on financial instruments and insurance contracts.
So let me turn to the process side of convergence and demonstrate this by looking at the IASB’s discussions in our Goodwill and Impairment project. This project was a consequence of the Post-implementation Review of IFRS 3, our accounting standard on business combinations. In that review, many stakeholders flagged to the IASB that the impairment-only model was not working as intended. The argument floated was the famous ‘too little, too late’. The FASB heard similar views in its review conducted a bit earlier.
Having investigated the issue, we concluded that the current impairment-only model could not be substantially improved without introducing significantly more cost and complexity. Because of that, we tentatively decided to retain the current model, but proposed a comprehensive set of new targeted disclosures to significantly improve the quality in reporting on business combinations, particularly in post-acquisition performance. A discussion paper with these key proposals was issued in 2020, and a specific question about the importance of staying converged with the FASB literature were asked.
Over the course of an 18-months period the IASB reviewed the feedback obtained and further evidence collected in a momentous outreach effort of our staff. Throughout that period, we were in constant contact with our colleagues at the FASB to exchange information about our respective projects. We also benefitted greatly from a joint education session our two boards had in September, where both boards had the opportunity to discuss the reasons that had led the FASB stop investigating an amortisation-based model further.
In the end, the IASB concluded that there was not a compelling case for changing the current accounting model at this time—note that our task was not to opine on whether Board members preferred the impairment-only approach or an amortisation-based model, but whether we have been presented with sufficient evidence to change the existing requirements for all stakeholders. Without such evidence, the desire to stay converged with the FASB became an important factor in our decision-making.
I should also note that our Board decided in September to go ahead with a comprehensive set of new disclosures that I am sure will greatly move the needle in reporting on business combinations. We refined some of our proposals from the Discussion Paper in light of the feedback received. The set represents a good compromise between the needs of investors for more information and the legitimate concerns of preparers regarding commercial sensitivity and legal risks. Our decisions made this autumn will enable us to move the project to standard setting later this week.
Let me return to two strategically important areas where our joint efforts have led to largely converged standards—revenue recognition and lease accounting. I mentioned earlier the Post-implementation Review of IFRS 3. These reviews are similar to the FASB's, although ours are conducted a few years after the effective date whereas the FASB initiates them immediately once the requirements are issued. To help stakeholders with the implementation of major new standards, we may set up so-called Transition Resource Groups that look into specific application issues arising during the implementation phase. For revenue recognition we set up such a group.
The review of our revenue recognition Standard is still in its initial phases. The IASB has discussed the objective, activities, and anticipated timeline for the first phase of this project. We also discussed the project with several of our advisory bodies and made it a topic of a joint academic conference conducted with the FASB in early November. High-level feedback seems to suggest that stakeholders are generally pleased with the new standard.
We’ve decided to postpone the review of the lease accounting Standard until the second half of next year—to avoid overburdening our stakeholders with a flurry of concurrent consultations, and to allow for further evidence to be obtained in light of the amendment regarding rent concessions issued during the COVID pandemic. In both projects we will share any information obtained with the FASB to help us staying converged.
The way forward
Let me conclude this section by saying that convergence is still an important consideration for our Board, even though the formal convergence programme has concluded. Over the years, our focus has shifted from jointly developing solutions to keeping converged standards converged. We achieve that by bringing the two boards together for education and information-sharing sessions, by talking regularly to our colleagues at FASB at all levels, and by alerting each other of new information and developments arising. I hope that you all agree with me in seeing the great benefit this brings to global capital markets.
Let me now update you on what the IASB will prioritise over the next five years.
Focus areas and finalisation of current projects
In July, we published the stakeholder feedback received on our recent Agenda Consultation.
Whilst stakeholders seem to be fine generally with how we spend our resources over the different tasks we pursue, we were asked to increase the time and effort we put into the development of digital financial reporting and into the understandability and accessibility of our literature.
We also heard loud and clear that stakeholders want us to prioritise finalising the roughly 20 existing projects on our work plan before starting any big new projects, which seems sensible. To be clear: we still have capacity to deal with matters arising unexpectedly and requiring our attention, and we don’t need to wait until the last project is finished before starting a new one; but it does mean that we will remain diligent in what else to focus on, as we cannot switch projects on and off all the time.
Working with the ISSB
Our stakeholders also told us that they want to see communication, collaboration and coordination between the IASB and our new sister board, the International Sustainability Standards Board (ISSB). The requirements from both boards must be connected to meet investors’ needs. In line with this, we have identified possible areas of collaboration with the ISSB. For instance, Management Commentary, currently a stand-alone IASB project, is an obvious candidate for a cross-cutting project between both sides.
Three new projects: intangible assets, statement of cash flows, and climate-related risks
Of the 70 or so suggestions for new projects, we whittled that list down to a shortlist of seven by reference to a list of indicators we had included in the consultation and which stakeholders agreed with. From the shortlist, we selected three projects to add to our agenda: intangible assets, the statement of cash flows, and climate-related risks in financial reporting.
Our standard on intangible assets is more than 20 years old and was written with a different objective in mind. Business models have evolved considerably, and in many sectors investors have little to no insight into what drives the value of those companies. So, it is high time to take a fresh look. We will begin with research to determine the scope of the project and the sequencing its stages. And there will certainly be areas in which collaboration with the ISSB will be essential when thinking of intellectual capital more broadly.
Our literature on the statement of cash flows, while converged with the FASB’s, will also need an overhaul. Investors have told us that certain information about non-cash transactions, such as those coming out of supplier finance arrangements, is lacking. The existing layout does not seem to make much sense for many financial institutions, so may require reconsideration, too. As with the intangibles project, we will first have to decide on the scope.
The third project will be devoted to climate-related risks in the financial statements. In contrast to the former two projects, this one will not be a fully-fledged project on climate, as we believe the ISSB is better placed to address the issue—and has, in fact, been doing so with their Exposure Draft IFRS S2 Climate-related Disclosures. Nonetheless, we want to review whether the requirements in a final S2 standard link neatly with our general reporting requirements in IAS 1, or whether any clarification is warranted to supplement the already existing educational material on climate risk.
You may wonder why the IASB did not add a project on cryptocurrencies, one of the areas making a lot of headlines at the moment. We have had this area on watch for a couple of years, and it was, in fact, on the shortlist of seven for final consideration. However, compared to the ones I just mentioned, it fell short on two criteria we considered: (a) is there a gap in the literature and are investors not getting the information they need, and (b) is the issue significant and prevalent across jurisdictions and industries?
In relation to the first point, in 2018/19 the IFRS Interpretations Committee was asked to provide a view on the accounting treatment for cryptocurrencies. They concluded that cryptocurrencies should either be accounted for as an intangible asset at cost, with an option to measure at fair value if the item is traded on a liquid market, or as inventory at fair value, for broker dealers. So even though there is no specific standard on cryptos under IFRS, that does not mean that our existing literature would not provide for an accounting treatment.
On the second criteria point, at this stage, there is little evidence that the accounting for cryptocurrencies is of global significance or prevalence for companies reporting under IFRS Accounting Standards—therefore, the topic was not added to our work plan for now. We will keep it on our radar screen, horizon-scan for any developments, and liaise closely with our colleagues at FASB on their project.
Let me conclude. I have spoken to you on convergence between IASB and FASB standards, put it into perspective historically, shared with you why it still matters, and demonstrated it by looking at our respective goodwill projects. The essence of this is that we should all work hard to maintain convergence where it exists today.
And I have given you an update on the outcome of our third agenda consultation and what we will be focusing our work on in the next five years. By adding only three new projects to our agenda, we have listened to stakeholders in that less is more.
I hope to have given you once again food for thought and wish you all an interesting conference. Thank you for listening.