Vice-Chair Sue Lloyd speaks at the annual AICPA conference
When: 5 December 2017
Where: AICPA's Conference on Current SEC and PCAOB Developments, Washington DC, US
Speaking at the annual conference on current developments at the US
Securities and Exchange Commission (SEC) and the Public Company
Accounting Oversight Board (PCAOB) in Washington DC, Vice-Chair of the
International Accounting Standards Board (Board) Sue Lloyd discusses the
impact on companies of new IFRS Standards and how the Board supports
implementation. She also talks about the Board's focus on making
financial reports better communication tools between companies and
investors.
Content and packaging of financial reporting
Sue Lloyd, Vice-Chair, International Accounting Standards Board
Introduction
Ladies and gentlemen,
My name is Sue Lloyd and I am Vice-Chair of the International Accounting
Standards Board (Board). This is the first time I have attended this
conference. I am very pleased to have the opportunity to represent the
Board here today.
This morning, I'd like to give you my perspectives on how the Board's
standard-setting and focus are evolving. It's an exciting time for us. I
hope that you agree that what we are doing is interesting and important
enough to contribute to our work. Even if IFRS Standards are not used
for reporting by US domestic companies, they are an important part of
the US capital markets and we value the experience and insight of US
investors, companies and auditors. So let me tell you what is ahead for
us and for you.
Accounting standards can be complex, but their purpose is simple. They
set what needs to be recognised and measured in the financial
information communicated to the market—essentially setting the content
of the financial statements—and then the format of that
information.
During the last decade, we have focused largely on the
‘content'—improving the quality, completeness and comparability of
financial information by creating major new Standards. I'll begin by
bringing you up to speed on these developments and our ongoing work to
support those who use our Standards, as well as those implementing new
Standards in this period before they come into effect.
Then, I'll explain how our focus is shifting to the ‘format' part of the
equation, which involves improving the communication effectiveness of
financial statements. We call this our ‘Better Communication in
Financial Reporting' initiative. Our objective in this work is to keep
financial statements relevant, so that they are communication tools and
not just a compliance exercise.
Finally, I'll say a few words about developments in wider corporate reporting and how they fit into our own work plan.
Quality and consistency of financial information
Over the past few years, we have finalised and issued the ‘big four'
accounting Standards: IFRS 9 Financial Instruments, IFRS 15 Revenue from
Contracts with Customers, IFRS 16 Leases and, most recently, in May
this year, IFRS 17 Insurance Contracts. We know that we have put
companies—the preparers of financial statements—under a lot of pressure
with these big accounting changes and that this crunch period is not
over. These changes will affect the users of financial statements as we
head into 2018 and beyond. We absolutely recognise the work required of
companies, their auditors, investors and others, caused by almost a
decade of change in our reporting requirements.
However, we also firmly believe that these new Standards will bring
significant benefits. To name some of the key improvements, information
about important metrics—such as revenue recognised by companies and
expected credit losses for lenders—will be better. Bringing operating
leases onto the balance sheet plugs a major hole in the representation
of an entity's leverage. And international comparability will be
significantly enhanced for insurance companies when IFRS 17 is
implemented.
As you know, we worked closely with the Financial Accounting Standards
Board on many of these new Standards. And while the two boards have not
always ended up with identical Standards, we have moved in the same
direction. We were pleased to achieve this. Both boards have moved from
incurred loss to expected credit loss accounting for financial assets.
We have also both put former operating leases onto the balance sheet for
lessees. And the new IFRS and US GAAP revenue recognition requirements
are virtually identical, meaning that the top line—which is a key
performance metric—should be directly comparable around the world.
As I said earlier, we know implementing the new Standards is challenging
for companies and their auditors. The Board is therefore putting a huge
amount of effort into supporting the implementation of these new
Standards. This ‘after-sales service' includes establishing transition
resource groups—TRGs for short—for the Revenue, Insurance Contracts and
Financial Instruments Standards. The TRGs bring companies and auditors
together in the period between when we issue a Standard and when it
becomes effective to discuss implementation questions in a public forum.
For all the new Standards, whether we have a TRG or not, implementation
questions can be submitted to us via our website. These questions are a
really important source of information for us about questions coming up
during implementation. For example, they have helped us to work out
when to provide additional educational support for companies applying
the new Leases Standard.
Our Interpretations Committee also has an important role to play in
maintaining our Standards and dealing with application questions. I
chair this Committee. Having me in this role provides a direct link
between the Committee and the Board that enhances coordination between
the two groups.
When necessary, the Committee responds with what we call
‘standard-setting activity': it develops Interpretations or narrow-scope
amendments to our Standards. But even when it decides that such
activity is not necessary, the Committee contributes to the application
of IFRS Standards with its agenda decisions. These set out why the
Committee reached the decision that standard-setting is not necessary.
But in addition they usually include a recap of the Committee's analysis
about how to apply IFRS Standards to the question submitted. So they
are a source of additional information for companies applying our
Standards.
Agenda decisions are exposed for comment, so the Committee has a way to
‘sanity check' the decision. The agenda decisions are published online
and in the annotated version of the bound volume of our Standards,
making them accessible to all. This can help someone coming along later
with a similar question.
The importance of supporting those applying our Standards is reflected
in our resource allocation. There are a lot more staff working to
support those applying our Standards now than there were a few years
ago, when we were sometimes seen as ‘setting and forgetting'. In fact,
the number of staff undertaking this work is roughly equal to the number
of staff working on the development of new Standards. This emphasis
also reflects the importance we place on fostering consistent
application of our Standards around the world.
Better communication
Now, turning to our programme of new work.
We've completed the main improvements we needed to make to the content
of the financial information, and we've put in place programmes to
support the implementation of the major new Standards. So our attention
has turned to our work plan for the coming years.
Commercial companies spend a lot of time and effort getting their
products right so they can give their customers what they want. If you
compare the Board with a commercial company, our product is accounting
standards. Some might argue that we differ quite significantly from
commercial companies, because some of our customers are not always very
keen on our new products! But we have been working hard to make sure we
deliver what the capital markets' ultimate customers, the investors,
want.
Standards development is about us working with you—companies and
auditors—to get the financial reporting product right for the investor
customers. That means spending time with investors to understand what
information they want and how they use financial information. And it
means spending time with companies, regulators, standard-setters and
others to understand the costs and challenges of proposed requirements
so they work for all parties. The new Standards that companies all over
the world are working hard to implement will give investors much better
information than they previously had. As I said before, I believe we
have got those products right.
Having done our own market research, in the form of our 2016 agenda
consultation, we decided that our focus for the next five years should
be on encouraging and enabling the use of financial statements as a
means of communication rather than as a compliance exercise. We want
companies to view financial statements as important communication tools
between themselves and investors rather than resorting to other means of
communication. We have spent years working on improving how items are
recognised and measured in financial statements. Our focus has now
shifted to considering how that information is communicated. To return
to my commercial company analogy: we know we have a good product, so we
are now making sure the packaging and the delivery methods work.
There are essentially three parts to our work in this area. First, we
have our Primary Financial Statement project, which is largely focused
on improving performance reporting - deciding what performance metrics
we should allow or require on the face of the income statement.
Second, we are looking at ways of improving the effectiveness of the
disclosures included in financial statements. As part of this, we have
recently published two documents. One of these was a case study report
that describes the improvements some companies have made in
communicating information in the notes to their IFRS financial
statements. The aim of this publication was to show the improvements
possible using our existing Standards and to inspire companies to take a
step back and think about how they can make their financial statements
easier to consume for their investor customers. We also published a
non-mandatory practice statement that contains practical information
about the application of the concept of materiality in preparing
financial statements. This is because we often hear that one of the
barriers to good disclosure is poor application of the concept of
materiality.
The third part of work in this area is enabling companies to tag their
financial statements electronically by continuing to develop our IFRS
Taxonomy. Electronic tagging is something you have been familiar with
for a while here in the United States. From next year, the Securities
and Exchange Commission is requiring foreign companies listed here using
IFRS Standards to tag their financial statements using our Taxonomy.
And in Europe, the European Securities and Markets Authority is moving
in the same direction.
Finally, I want to say a few words about wider corporate reporting. We
decided very recently to add a project to our work plan that will look
at some aspects of wider corporate reporting. This is an exciting new
area for us. Many have asked questions about which role, if any, the
Board should play beyond setting requirements for the traditional
financial statements. Wider corporate reporting is described in many
different ways. It can be quite a confusing field. There are numerous
organisations already doing work in this space, including the
International Integrated Reporting Council, the Sustainability
Accounting Standards Board here in the United States and the Financial
Stability Board's Task Force on Climate-Related Financial Disclosures,
to mention but a few.
We all know that investors look beyond the financial statements when
making buy, sell and hold decisions. They have always taken into account
as much information as possible that might be relevant to their
decision making.
So how do we think that we, as accounting standard-setters, fit into this crowded field?
Our core business, as set out in our Conceptual Framework, is the
provision of information that is useful for investors and other
providers of capital when they make investment decisions. This will also
be the case with our work on wider corporate reporting.
We are venturing beyond the traditional financial statements, but not
very far. We have decided to update our version of the MD&A—our
non-mandatory Practice Statement on Management Commentary. We are trying
to illustrate how management commentary can clearly communicate the
sources of a company's long-term value creation, and link the
traditional financial statements with other information included within
the financial report. Because we have decided to keep our focus on
investors, we are not looking at information needs that come from a
broader group of stakeholders—or that may be relevant from a broader
public policy perspective, such as metrics for measuring sustainability
and climate reporting.
Close
In closing, I would like to emphasise the point I began with: the United
States has a great deal invested in IFRS Standards. As I know our Chair
has said at this conference before, we are in the market for good ideas
and are more than happy to steal good ones from others if they can make
IFRS Standards better. Given our focus on ‘the packaging' of financial
information, there is even more opportunity than ever for you to be part
of the debate. This topic is largely GAAP-neutral. It is about how to
package and deliver financial information after having concluded what to
recognise and how to measure it.
A final message from me to you today: please do share your views with us. We really want to hear from you.
Thank you.
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