When: 08 December 2020
Sue Lloyd, Vice-Chair of the International Accounting Standards Board (Board), delivered a speech at the AICPA Conference on Current SEC and PCAOB Developments. She spoke about the impact of covid-19 on the Board’s work this year and developments in sustainability reporting. She also discusses some of the Board's priorities for 2021.
Good afternoon. This is my third opportunity to speak at this important conference. It’s one of my favourite events of the year.
I’ll begin today by talking about what we’ve been doing this year at the IFRS Foundation and will then talk about some broader issues for next year and beyond.
Let’s start with this year. Of course, this has been a year like no other—at least, within most of our lifetimes. The covid-19 pandemic has tested us all both personally and in business.
At the IASB, we’ve been mainly working from home since March. The novelty of this has worn off, and I’m really missing meeting people in person—both my colleagues and our stakeholders around the world.
Nonetheless, the pandemic has not stopped the IASB, or indeed the world, from doing what it needs to do. The pandemic is first and foremost a public health crisis. But the resulting economic consequences have also presented challenges for accountants.
Our approach to dealing with the effects of the pandemic has been twofold and similar to the FASB’s approach. First, we’ve taken a proactive approach in supporting the IFRS community around the world in their efforts to apply IFRS Standards. Second, we’ve reconfigured our work plan to allow for the extra demands that have been put on our stakeholders. We can’t do standard-setting without your input.
Let’s take these two initiatives in turn.
First, support for application. When the impact of the pandemic started to crystallise, we used our ongoing engagement with the accounting profession, market and prudential regulators and others to understand any challenges companies may have in applying IFRS Standards as a result of the pandemic. Based on those insights, in March and April this year we published educational materials focused on two topics: financial instruments, because the pandemic created the first real stress test for the new expected credit loss approach, and leases, because it is only a year since the new leasing requirements came into effect and, given the effects of lockdowns around the world, many lease arrangements were affected by the pandemic. These educational materials don’t change our requirements. They explain how to apply the existing requirements in this unusual environment. We then issued targeted amendments, on an expedited basis, to our leasing standard, IFRS 16, in order to simplify the accounting for lessees when they are granted rent concessions because of covid-19.
We’ve also followed up by focusing on a cross-cutting issue that has been a concern for all stakeholders—making estimates under conditions of heightened uncertainty. We haven’t developed any new requirements. But, building on a panel discussion at our own virtual conference in September, we published an article highlighting some of the concerns of preparers, users of financial statements, auditors and regulators, with panel members’ suggestions for how to address these concerns. The suggestions were to update estimates with the best information that is available and make sure there is good governance around the estimation process, and to emphasise that the high level of uncertainty about the effects of the pandemic creates a greater need for clear, transparent and contextual information in the financial statements in order to enable investors to understand the basis for management’s estimates.
I said the second thing we focused on as a consequence of the pandemic is our work plan. The pandemic hit just as we were ramping up to an intense period of consultation on a number of major projects. We have still completed the urgent things quickly—the IFRS 16 amendment that I mentioned is a prime example of that. But, where we can, we have tried to provide breathing space, so we’ve deferred the effective dates of some recent amendments, extended the comment period for existing consultations and pushed back the publication of other proposals we’ll be consulting on.
Whilst the response to covid-19 has been a priority for everyone, we’ve all had to balance this with getting on with the day job. For us, this meant identifying our highest priorities. We focused on five things.
First, insurance. We worked hard to finalise amendments to our insurance contracts Standard, IFRS 17, on time, despite the pandemic. When the IASB overhauled the international standards that it inherited from its predecessor body, it didn’t have time to introduce a fully-fledged Standard for insurance. We plugged that gap in 2017. Now we have a required measurement model for insurance contracts for those applying IFRS Standards. The model results in measurement of insurance liabilities on a current basis and improves the information provided about profitability. Since publishing IFRS 17, we have been working closely with industry and others to help support an orderly transition to the new Standard. This included identifying areas where, by making some targeted amendments to IFRS 17, we could assist those implementing the Standard while still ensuring investors get useful information. That work was completed in June this year and included moving the effective date for the new insurance requirements out by two years to 2023.
Second, we also completed important changes to our Standards in response to the reform of inter-bank offered rates, or IBOR, and other interest rate benchmarks. Like our counterparts at the FASB, we have been considering how the transition away from benchmark interest rates like LIBOR affects financial reporting. We undertook work on an urgent basis to amend IFRS Standards. This was to ease the transition to the new interest rates for companies and to ensure that investors have the information they need about the progress a company has made in transitioning to the new rates and the effect on the company of that transition. We broke this work down into two phases and completed the final phase of our project this August. I would like to note that we have really appreciated the support of our stakeholders. Despite the difficult environment and shorter comment periods than usual, people took the time to give us thoughtful input on this project and the IFRS 16 amendment.
We’ve also had two very important consultations out for comment this year. One of them is on improvements to the Primary Financial Statements, or what we call our PFS project for short.
Over recent years, the IASB has substantially enhanced Standards dealing with recognition and measurement, but presentation has perhaps been the poor relation. Our PFS project presents an opportunity to rectify this situation. Our Chair Hans Hoogervorst calls PFS a game-changer in financial reporting, and for good reason.
Importantly, the Exposure Draft we published at the end of last year proposed more structured formatting for the income statement. The aim is to facilitate comparability for investors by introducing new required subtotals in the income statement. The Exposure Draft also proposes mandating disclosures in the notes to the financial statements about some management performance measures, which are similar to what are more commonly known as non-GAAP measures. This proposed non-GAAP disclosure reflects the IASB’s view that such measures can be a really useful source of information. However, we also believe the market would benefit from more rigour, discipline and transparency about such measures by explaining more clearly the relationship between them and the closest measures in IFRS Standards and by bringing the note within the scope of the (audited) financial statements. The comment period for these proposals finished at the end of September, and shortly we will start discussing the feedback that we have received.
The other important consultation we undertook this year relates to the information provided about acquisitions of businesses (or business combinations) and the subsequent accounting for goodwill. In March we issued a Discussion Paper as part of our Goodwill and Impairment project. Due to covid-19, the comment period has been extended to the end of December. We talked to a lot of users of financial statements as we prepared for this Discussion Paper, and they expressed a range of views about the usefulness of information provided by the different approaches to the subsequent accounting for goodwill. But, they told us consistently that they would benefit from better information in the financial statements about business combinations. In particular, they expressed the need for better information about the subsequent performance of acquisitions relative to the targets that were set at the time of acquisition and that underpinned the purchase price. To address this, the Discussion Paper sets out proposals for new disclosures from the perspective of the Chief Operating Decision Maker about post-acquisition performance.
The Discussion Paper also looks at the question of the subsequent accounting for goodwill. The IASB, by the very slimmest of majorities, voted to retain an impairment-only approach to accounting for goodwill. Given the slim majority, the Discussion Paper sets out the pros and cons of both the impairment-only approach and amortisation. This is a long-debated issue in accounting, as you all know, not just in the US but internationally. We are particularly interested in any new information stakeholders have that we should be aware of. This project is still in the early stages. Once the comment period closes at the end of the year, the IASB will consider the feedback, redeliberate, and publish an exposure draft before we finalise any potential amendments. We are also monitoring the FASB’s work, and at the joint IASB-FASB education session in November we learned more about each other’s current thinking on this topic.
Before moving on to our priorities for next year, I should also say a few words about our ongoing work to support consistent application of our Standards. Having true comparability globally between IFRS financial statements is a key strategic priority for us so we spend a lot of time on this. As well as serving as Vice-Chair of the IASB, I also chair our Interpretations Committee (Committee), which currently benefits from having two members from the US, a preparer and an auditor. The Committee responds to questions about the application of IFRS Standards, particularly where divergence in practice exists. The Committee considers feedback from comment letters to decide what to do. In some cases, the Committee will decide that narrow-scope standard-setting is needed to address an issue. But in other cases, the Committee may decide that standard-setting is not required. In the latter case, it explains why in an agenda decision.
If the Committee decides that standard-setting isn’t necessary because sufficient guidance already exists in our Standards, the agenda decision explains how the Standards should be applied to answer the question that was submitted, so useful information about how to apply our Standards is included in agenda decisions. The updated Due Process Handbook, which sets out the requirements for how we undertake our technical activities, confirms that companies applying IFRS Standards must apply relevant agenda decisions.
Let me now turn to our priorities for the coming year. And when I say ‘our’, I mean the work of the IASB—the accounting standard-setting body of which I am Vice-Chair—but also the work of our oversight body, the IFRS Foundation. What happens next year is of course caveated by the uncertainty resulting from the ongoing pandemic; however, there are a couple of key developments that I would like to flag.
In the first quarter of 2021, the IASB will be consulting on its future agenda. This is an important exercise. We are now in our 20th year. Our first decade was largely focused on growing the IFRS family, and in the second decade we have introduced some major upgrades to our Standards and have focused on consistent application. Now we are looking forward to our third decade, and our agenda consultation is an important opportunity for us to ask our stakeholders to tell us what they think we should work on—both which standard-setting projects our stakeholders think are important for the IASB to consider, but also how much time we should spend on developing new Standards relative to our other activities, such as supporting consistent application and working on our Taxonomy. We will use this feedback to shape our priorities for the next five years. IFRS Standards are not required in the US for domestic use, but you remain an important stakeholder in our work. Many US-based investors use IFRS information. I urge you to get involved in this consultation.
Covid-19 has made the importance of digitalisation clear. As an international body we have really seen some of the benefits of technology that we had perhaps underutilised in the past—this has enabled us not only to stay in contact with our stakeholders during the pandemic, but in some instances has allowed us to reach more stakeholders than ever before. We will reflect on this experience to shape how we work going forward.
We are also looking at how we as a standard-setter can use new technology more effectively. This includes looking at ways to improve the accessibility of IFRS Standards and related information for companies, auditors and regulators through our digital offerings. And, as digital reporting increasingly becomes the norm across jurisdictions, we are also continuing to invest in and further develop the IFRS Taxonomy. This reflects the importance of ensuring that global comparability extends to digital reporting.
Finally, let me say a few words about another topic that will continue to be big in 2021—climate-related and sustainability reporting. Although the term ‘climate change’ is not explicitly mentioned in IFRS Standards, climate-related matters that are material to a company’s financial statements are already required to be considered when applying IFRS Standards. We have recently published educational materials to highlight this important point by using references to specific IFRS requirements as a means of illustration.
We also have a project underway to revise our guidance on management commentary, which is our version of Management Discussion & Analysis. This revision will address developments in the last decade, including developments in environmental, social and governance (ESG) reporting. Our guidance would still be principle-based. So, the upcoming exposure draft won’t propose specific disclosures; rather, it will provide guidance to enable a company to identify the matters that are material to its investors and the types of information to provide about those matters. A company could meet some of those information needs by providing specific disclosures set out in industry or topic-specific guidance published by other bodies. In other words, the management commentary could be a docking station, so to speak, for disclosures specified by others if that information is material for an entity’s investors and creditors.
Whilst all of this is important, many are calling for greater standardisation and comparability of reporting on sustainability and climate-change issues, with demand continuing to grow as these matters become increasingly important to capital markets. Like the IASB, the Trustees, who oversee the IFRS Foundation, conduct reviews every five years. Their review focuses on the strategic direction of the IFRS Foundation.
As part of their upcoming strategy review, the Trustees of the IFRS Foundation have published a Consultation Paper to assess demand for global sustainability standards and, if demand is strong, to assess whether and to what extent the IFRS Foundation might contribute to the development of such standards.
One possible option outlined in the paper is for the Foundation to establish a new sustainability standards board. The new board could operate alongside the IASB—essentially as a sister standard-setting board—under the same governance structure, building on existing market developments in sustainability reporting and collaborating with other bodies and initiatives in sustainability. It is suggested the initial focus would be on climate-related matters.
This is a demand-led consultation, so I encourage all of you to read the Consultation Paper and respond. The consultation closes at the end of this month, so time is short.
I hope this has given you a good overview of what we have been doing in the past year, what is coming up and how this is relevant to you in the US. I wish you all the best. Stay safe and well.