Andreas Barckow, Chair of the International Accounting Standards Board (IASB), spoke at the IFRS Foundation Conference on Monday 26 June 2023 about the role of financial reporting in uncertain times and how the IASB is supporting companies and ensuring investors' information needs are met.
Thank you for the introduction, Fred. Hello everyone, here in London and online. I will start by asking the audience here a question.
How many of you have seen the film Everything Everywhere All at Once?
For those who haven’t, this is the film that won seven awards at this year’s Oscars. It is (at some level) about the filing of a tax return. You may think that is a tenuous link to financial reporting, but bear with me.
The surreal film crosses universes and the lead character is trying hard to juggle completing her tax return―and an aggressive tax auditor―with multiple challenges in her private life and in the multi-verse.
Maybe one reason the film is so acclaimed is that its chaos and challenges resonate with us. We live in uncertain times with a lot of risk and a lot of scrutiny. And―just like the movie character―we make decisions every day. Decisions that will define who we are in the future.
For companies, investors, auditors and regulators, the current uncertainties and the risks associated with them come in many flavours: geopolitical, technological, regulatory, market-related, interest-rate related, climate-related and supply chain-related, you name it.
Economic uncertainty surrounds us. To illustrate, here are some recent article news headlines: ‘Business and markets rattled by uncertainty…’; ‘European markets in red as uncertainty looms…’; and ‘Economic uncertainty is on the rise’.
The last meeting of the Financial Stability Board1 (FSB), where the IASB is a participant, included discussions about yet another uncertainty―that is, possible implications to financial stability from recent developments in the banking sector.
Uncertainty affects us all.
When conditions change, the need for information you can rely on increases. Useful and trustworthy information enables us to make informed decisions.
The IFRS Foundation and its two standard-setting boards are founded on the belief that better information results in better economic decisions, in general, and better investment decisions, in particular. Our purpose is to serve the public interest by developing Standards that give investors the information they need about companies to help them decide where and how to allocate capital.
We have more than two decades’ worth of evidence on the benefits of widespread adoption of IFRS Accounting Standards. Our Standards provide a trusted framework to help companies connect and communicate important information to investors amid uncertainty.
At the IFRS Foundation we are fully aware of the current backdrop to companies’ operations. We recognise that you and your colleagues face many demands on your time. You are juggling all the challenges related to running your companies. In addition, you must cope with new accounting requirements. And you must get ready to apply new sustainability disclosure requirements. And if that wasn’t enough, you also will have to respond to other new regulatory requirements.
We understand that some companies currently may feel overwhelmed. While we can’t relieve you of the uncertainty you may experience, we are doing what we can to help you manage it. We do that while we continuously work to bring about transparency, accountability and trust―and thereby improve the efficiency of capital markets.
As I said: Our job is to serve the public interest. That is why we work hard to consider a range of perspectives and to understand the different environments in which both companies and investors operate.
We carefully monitor developments, we scan the horizon, we talk to regulators, companies, investors and auditors. Our steady dialogue with all the other actors in the financial ecosystem informs our work and our decisions―it informs how we prioritise our projects and how best to address uncertainties.
We design our Standards to meet the needs of our stakeholders. But, more importantly, we design our Standards with our stakeholders. We find compromise without compromising on quality. Engaging with―and listening to―stakeholders, including through public consultations, underpins our standard-setting.
Let me demonstrate how we at the IASB help by giving three examples.
First, we move urgently when we need to do so. A recent example is the amendments to our requirements for accounting for taxes in the financial statements. The Organisation for Economic Co-operation and Development (OECD) recently reformed the international tax regime by introducing new cross-border corporate tax model rules. The rules include a global minimum corporate tax rate which may increase the amount of tax companies pay.
The OECD reform has a knock-on effect on the way companies account for deferred taxes in the financial statements. And because some jurisdictions were quick to enact the reform, we heard an urgent demand for us to help companies with their reporting. We have amended our Standards to provide temporary reliefs for companies―making it easier for them to account for deferred taxes stemming from the new OECD requirements. By doing so we have provided certainty for companies.
At the same time, it is important for investors to understand how the tax reform will affect companies. And companies need to be able to tell their story to the investor community. We are therefore requiring some new disclosures in the notes to the financial statements.
We always consult the public through a transparent process―our due process―before we introduce new Standards or make changes to our Standards. Our stakeholders gave us useful feedback during our consultation on the proposed amendments to the deferred tax accounting requirements. The feedback helped us refine our proposals.
The outcome is revised requirements that benefit both investors and companies. Standard-setting is always a balancing act. We act as the convener of different views to find the best solution possible―one that meets the information needs of investors without undue cost and complexity to companies preparing their financial statements.
Second, we focus our resources on the projects that we rank most important, based on stakeholder feedback. Last year at this conference, I spoke to you about our agenda consultation that was then about to close. The feedback to that consultation helped us create our work plan for the current five-year period until 2026.
We carefully considered your views on possible projects and on balancing different priorities, namely: to put our focus where it really matters while being mindful of the resources of all those affected by our requirements as well as our own. As a consequence, we were judicious and only added three new projects to our work plan, including work on intangibles and cash flow statements.
Those projects are important to investors and will likely affect a lot of companies. However, before we begin work on those two projects, we will first complete or significantly advance some of the projects we are already working on. We can’t solve all problems immediately even when they fall within our remit. So, we signal what is coming and what we plan to leave untouched to help you plan.
We are also removing uncertainty by making smaller but important improvements to our requirements. Consider our new disclosure requirements for supply chain financing arrangements, also referred to as reverse factoring.
Investors were concerned that such finance arrangements were invisible, hindering their analysis. So, we are bringing transparency ―removing uncertainty for investors. From next year, companies will be required to provide information about the terms and conditions of such arrangements and related liabilities, payment due dates and liquidity risks.
Third, we are helping companies tell a clear story to the capital markets and to communicate with the investor community.
Markets rely on trust. Investors need to trust the markets, to trust companies. And trust, in turn, depends on all players communicating transparent and useful information. That is particularly true and important in times of heightened uncertainty.
Having well-functioning capital markets matters to us all. And we need to work together to make the markets well-functioning. The markets provide finance to the economy, allocate risk, connect economies, support growth and contribute to financial stability. Having the confidence and trust of investors is fundamental to ensuring companies can tap into the capital markets for finance at the lowest possible cost. Access to capital in turn affects companies’ ability to grow and innovate, to do what their business is all about.
Because our Standards are required in more than 140 jurisdictions, global investors can track and compare financial statements―they trust and rely on the information companies provide about their financial health. The ultimate outcome of companies globally using our Standards is that investors can compare companies on a like-for-like basis.
We know that if investors don’t have information, they may assume the worst, and such assumptions increase the cost of capital. Investors appreciate transparency even when companies tell them ‘the bad stuff’. That’s why our Standards require companies to tell it as it is.
Ensuring companies 'tell it as it is' is the purpose of our work to improve companies’ performance reporting―the Primary Financial Statements project. The project is expected to result in the birth of a new IFRS Accounting Standard next year affecting all companies that report using our Standards.
The Standard will require companies to report operating profit―a measure that really matters to investors, who want to know how profitable a company is when you strip away its investing and financing activities.
The Standard will also allow companies to report some of their own performance measures in the financial statements. Some liken these to an ‘Instagram filtered’ presentation of performance. However, for companies it is important to present their own measures. And for investors they offer another data point. We will require companies to make the connection clear between those numbers and numbers required by our Standards. Or, to continue the Instagram analogy: they need to disclose the filter settings they used to show management’s view of performance and how that differs from the Standard’s filter for reporting performance.
If companies are using subtotals of income and expenses―such as adjusted operating profit―to communicate with market participants, they will be required to disclose and reconcile these management performance measures to the nearest required by our Standards. Companies that are making use of such management performance measures may want to start considering already now which measures they use today will require disclosures in the financial statements.
‘Starting to consider now’ does not mean that the requirement will become effective tomorrow; the IASB always gives companies time to implement new requirements. That will also be the case for this new Standard when it gets issued. We are yet to set the effective date―that's a discussion the IASB has on its agenda for next month so stay tuned!
In closing, I would like to say again that we are aware of the uncertainties our stakeholders are experiencing, and we try to address them as best as we can. Stormy markets affect everybody. When conditions change, investors need numbers they can trust. IFRS Accounting Standards can be an anchor in the storm.
I think we can all agree that better information enables better decisions. We are collectively and collaboratively developing accounting solutions that improve the ways companies and investors exchange information―improve the way they communicate. Good communication is especially important when dealing with challenges.
We are committed to dialogue with our stakeholders. Several IASB members and staff are here today. Come and talk to us. Thank you for listening to me, enjoy the conference!
I now hand over to my colleague Emmanuel Faber, Chair of the ISSB. His Board also focuses on better information for better decisions. He’s got some exciting news to share. Over to you, Emmanuel!