The IASB is currently consulting on its activities and its work plan for the next five years.
Keywords: Mazars, Thailand, IFRS, IASB, IFRS IC
18 June 2021
This is the third agenda consultation; an exercise that began in 2011, at the start of outgoing chairman Hans Hoogervoorst’s first term. It is also an opportunity to reflect on the IASB’s activities over the past decade.
The beginning of the 2000s saw a first wave of standard-setting that laid the foundations for the framework. A second wave of cornerstone standards has completed it in recent years (IFRS 9 – Financial Instruments, IFRS 15 – Revenue from Contracts with Customers, IFRS 16 – Leases and IFRS 17 – Insurance Contracts). Now the framework is almost complete and the focus has shifted to consolidation.
Since 2015, the work plan has focused on three main areas: standard-setting, maintenance and research. Going forward, the Board’s activities will be grouped into four technical work areas (standard-setting, maintenance of standards, digital financial reporting and IFRS for SMEs), which will account for 70% of the IASB’s resources (Board members and technical staff). The remaining capacity is devoted to cross-cutting activities, namely stakeholder engagement (to which the IASB devotes a quarter of its time) and improving the understandability and accessibility of the IFRS framework (5%).
In the current consultation, the three main focal areas of the previous work plan are largely subsumed into a single work area, “New IFRS standards and major amendments to IFRS standards,” which accounts for nearly half of the Board’s time currently. Post-implementation Reviews (PIRs), which shall take place three years after the implementation of a standard, will fall within this work area, meaning that it will continue to account for a significant portion of the Board’s capacity despite the completion of the last major standards.
The proposed changes reflect a shift from a sequential approach (research / standard-setting / application), which is more suited to developing a framework, to a functional approach that distinguishes between standard-setting, development of guidance (which will form the lion’s share of the “maintenance” work area) and communication, and is thus more suited to a mature, established framework of standards.
The document is available here, comment period open until 27 September 2021.
Classic standard-setting activities
The new “standard-setting” work area will focus on (i) finishing current projects; (ii) post-implementation reviews (PIRs); and (iii) potentially, some new projects. In practice, the available capacity for this work area is already mostly taken up by various large ongoing projects.
One of these is the Better Communication in Financial Reporting project, which can be further broken down into three parts:
- the Primary Financial Statements project, which focuses particularly on presentation of financial performance in the statement of profit or loss, and which is currently at the redeliberations stage following the publication of an exposure draft;
- the Disclosure Initiative, which focuses firstly on producing a simplified version of the disclosure requirements for SMEs, and secondly on a proposed new approach to disclosure that would centre on objectives rather than a list of requirements (with an initial pilot phase focusing on two standards, IAS 19 and IFRS 13);
- and, finally, the Management Commentary project. However, management commentaries do not form part of the financial statements and thus do not fall within the IASB’s current remit. Consequently, the project is focused on updating the non-binding guidance and principles set out in the Practice Statement published in 2010. The objective is to improve interconnectivity between financial and non-financial reporting (the latter being a key focal area for the IFRS Foundation currently: see ‘IFRS Highlights’, above).
The other main area of ongoing standard-setting research derives from the post-implementation review of IFRS 3 – Business Combinations; it aims to develop reporting requirements for business combinations under common control (which are currently excluded from the scope of the standard) and to improve the impairment test of goodwill, or even to re-open the debate on its amortisation.
Finally, the proposed new standard on rate-regulated activities, on which an exposure draft was recently published, will form the final building block in the standards framework, which now covers all major areas of activity.
The most recent wave of standard-setting means that there is also a full programme of post-implementation reviews (PIRs) upcoming over the next few years. This will include completing the ongoing PIR of the consolidation package (IFRS 10, IFRS 11 and IFRS 12); continuing with the PIR of IFRS 9 – Financial Instruments, which began this year; and carrying out PIRs for IFRS 15 – Revenue from Contracts with Customers and IFRS 16 – Leases. Each of these reviews is likely to give rise to new research and standard-setting projects.
In this context, the (lack of) capacity for other projects is one of the challenges of the consultation. Most of the planned or suggested projects are not new, but rather (i) new approaches to issues that have been tackled before (e.g. financial instruments with characteristics of equity, macro-hedging, discount rates, operating segments) or (ii) projects that had previously been shelved (e.g. extractive activities, provisions, the equity method, and the PIR of IFRS 5 – Non-current Assets Held for Sale and Discontinued Operations).
Most of these topics currently involve a compromise between conceptual and rules-based approaches, due to conflicting user expectations or low priorities. Is there really a benefit to trying to reopen compromises at this point? If standards were to be rewritten, might any improvement in clarity and comparability be counterbalanced by a loss of relevance? Is it worth devoting more time to subjects that have already been shelved once because they were too niche, showed little hope of reaching compromise, or had a low cost-benefit ratio? These are some of the questions that stakeholders are likely to ask themselves when responding to the consultation. After two decades spent developing a robust framework of key standards, adding these finishing touches and improving overall consistency is likely to come at a high marginal cost, while the benefits are uncertain.
Finally, it is necessary to set aside some capacity for dealing with unexpected urgent issues that arise. Relatedly, the IASB is monitoring emerging issues, including: cryptocurrencies and related transactions; climate-related risks; emission allowances (although this topic emerged a long time ago); and updating IAS 38, given the increase and change in types of intangible assets over the past 20 years. Some of these topics could be boosted up the priority list by the IFRS Foundation’s plan to create a standard-setter for non-financial information.
To ensure that decisions are made as objectively as possible, the IASB has proposed seven criteria for determining priority: (1) The importance of the matter to investors; (2) Whether there is any deficiency in the existing presentation of the financial information; (3) The type of companies/jurisdictions affected; (4) How pervasive or acute the matter is likely to be for companies; (5) The potential project’s interaction with other projects on the work plan; (6) The complexity and feasibility of the potential project and its solutions; (7) The capacity of the Board and its stakeholders to make timely progress on the potential project.
As noted above, the “standard-setting” work area already has a lot of capacity taken up by ongoing projects and scheduled post-implementation reviews, which leaves little scope to take on other projects if the allocation of resources to each area remains the same, as the IASB has proposed. As Board member Zach Gast writes here, the consultation is as much about the balance of the IASB’s activities (question 1) and the criteria for prioritising reporting issues (question 2) as it is about the choice of specific projects (question 3). Input from stakeholders on the priority criteria will perhaps be the most useful of all.
Assisting the IFRS IC with developing supporting documentation
The second work area, “Maintenance and consistent application of IFRS standards” is devoted to the increasing amount (20%) of interpretation work that the IASB does alongside the IFRS Interpretations Committee (IFRS IC). For the past few years, the outcomes of this work have tended not to take the form of interpretations, but rather agenda decisions, educational materials, articles, webinars, and so on. Thus, the decisions published by the Committee, and the Bases for Conclusions and other materials produced by the Board, are contributing to a rapidly-growing guidance that is theoretically non-binding but that is closely followed by enforcers, particularly market regulators.
The attention that the Foundation pays to the application of its standards helps to ensure their internal coherence and their relevance to real-world situations. But does this application support address the same objectives of consistency and uniformity as standard-setting itself? If so, this raises some important questions. Currently there is no mechanism for European endorsement of this guidance, despite its significance. But for how long can it continue to slip under EFRAG’s radar? We may see new life breathed into the debate that was opened in 2018 by a proposed amendment to IAS 8 on the status and scope of agenda decisions. That amendment was shelved in 2020, but the debate may not be over and raises questions about the need for the Board to step up its activity in this area.
Currently, the Board has oversight over the Committee’s agenda decisions, and contributes to the guidance by producing educational materials and articles. The consultation raises the question of the expanded role that the Board could play in helping the Committee to produce guidance. The recent consultation review of the Due Process Handbook suggested that the Board could also issue agenda decisions. Ultimately, this suggestion was not taken forward. Hence how might the Board provide greater support to the Committee in the future?
Should other activities be expanded?
The last two work areas – the IFRS Taxonomy and the simplified set of standards for SMEs – account for only a tenth of the Board’s capacity. Are these emerging areas, or does this betray a certain hesitancy?
The digitalisation of financial reporting is a key focal area for market regulators. The European Single Electronic Format (ESEF, which becomes mandatory for issuers from the financial period to 31 December 2021) is based on the IFRS Taxonomy. At the moment, this taxonomy is still largely based on current practice rather than standards, but it will improve thanks to the project on the format of primary financial statements.
As for the IFRS for SMEs, they have just been reviewed and will be updated with recently-published standards. It should be noted that this simplified set of standards, which is not strongly promoted in Europe, is proving attractive to new markets: the IFR4NPO initiative has just launched a consultation (available here) on potentially using the IFRS for SMEs as the basis for an international accounting framework for the non-profit sector.
To give a complete overview of the IASB’s activities, we must also mention its work on understandability and accessibility of the standards. Some issuers feel IFRSs are too complicated and expensive to implement and prefer to raise capital on unregulated markets. It is not certain that the IFRS for SMEs would meet their expectations any better.
In any case, these issues raise a number of challenges: how is it possible to make IFRSs the single framework for all countries and sectors without having an overwhelming amount of documentation? The increasing volume of guidance militates against concision, and the efforts to improve accessibility seem to focus on support rather than simplification. More generally, the IASB endeavours to influence practice through its deliberations (notably through the practice statement on ‘materiality’, the quality of disclosures in the notes, and so on). However, we must ask whether it is really possible to modify behaviour through standard-setting?
Your input is important!
While a significant amount of the IASB’s work plan for the next five years already seems to be set, with relatively little scope for new projects, the consultation is still important. In the past, it has been obvious which topics were the most important and urgent, but this time round, it is perhaps more important than ever for stakeholders to express (i) their needs in terms of supporting documentation (ii) their priorities in terms of ensuring consistency of practice and (iii) their criteria for assessing costs and benefits for effect analyses of future projects (as now required by the new Due Process Handbook, updated in 2020).