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Andreas Barckow, Chair of the International Accounting Standards Board (IASB), delivered a keynote address at the European Accounting Association (EAA) Annual Congress on 15 May 2024.

Ladies and gentlemen, it is both an honour and a great pleasure to be invited to deliver the keynote address at this year’s EAA Congress. I would like to thank the European Accounting Association and the current leadership on its behalf for their long-standing support of our work at the IFRS Foundation and for the countless valuable contributions and interactions over the many years. I would also like to thank the organising committee for this conference and Cătălin, in particular, for their persistence in inviting me again after the 2020 Congress had to be cancelled due to the pandemic. Sad as it was then, look to the bright side: you would have received a speech by a national standard-setter, now you got a free upgrade!

Connectivity, an emerging priority

In my speech, I want to talk about one of the hot topics in today’s financial reporting world: ‘connectivity’. When I started my career in standard-setting some 17 years ago, there was no mention of ‘connectivity’. The IASB’s Conceptual Framework for Financial Reporting does not mention ‘connectivity’ either, neither as a core concept nor as a qualitative characteristic; and please be reminded that the Conceptual Framework was only revised in 2018, so not that long ago. Fast forward to today, ‘connectivity’ seems to be everything: 'How does your literature reflect connectivity between ABC and DEF?' 'Have you considered connectivity when discussing and deciding on XYZ?' Connectivity this, connectivity that. One could get the impression that generations of accountants must have completely missed the boat by flying blind on connectivity. What has changed so fundamentally that we cannot spend a single day without having considered connectivity at least once?

Could we have simply used different terminology to describe what nowadays is coined as ‘connectivity’? Well, maybe. There are other words starting with the letter ‘c’ that we use frequently in financial reporting, such as ‘consistency’ or ‘coherence’. We use these terms to remind stakeholders that information that appears in one section of the financial report should not contradict related information that is presented in another section. Entities are required to use the same underlying assumptions when preparing accounts and assessing how to account for different transactions and events. We even explicitly state that information presented in management commentary, so information that is presented elsewhere, should be consistent with information presented in the financial statements[1].

While evolving terminology may play a role, the heightened emphasis on ‘connectivity’ likely stems from a fundamental shift in how we view the purpose and context of financial reporting itself. Traditionally accountants, modest people that we are, view the financial statements as and at the centre of the corporate reporting universe. If you acknowledged that view, then ‘connectivity’ would not have been a key consideration for you, as everything was considered to be connected TO the financial statements, not FROM the financial statements to some other place or reporting—unless that reporting was viewed as a logical extension of the financial statements, such as management commentary or similar narrative reporting I just mentioned.

However, that perspective is changing. Whether at the centre or not, financial statements continue to have their place in the corporate reporting world. Users need information about the resources of an entity, the claims held against it, and changes in both such resources and claims to assess the amount, timing and uncertainty of future cashflows and to hold management to account.[2] The information provided through the financial reporting ecosystem is considered relevant and reliable, as it is safeguarded by robust processes and internal controls, and as significant portions of it are subject to an audit and maybe an enforcement. And even if the content provided in the financial statements is mostly confirmatory in nature, as the information has already been digested and acted on by investors throughout the year, I have yet to meet a primary user who would suggest throwing them into the bin. General purpose financial reporting and the financial statements produced from it continue to form the basis for any fundamental investment analysis and for forecasting future cashflows.

The limit(ation)s of the financial statements

That is not to say that everything in the financial statements is picture-perfect or without limits. Whilst the underlying double book-keeping has a mathematical stringency to it, accounting and financial reporting are more akin to social sciences where requirements are derived based on agreed-upon concepts, principles, norms and conventions. One of these conventions concerns the concept of a ‘reporting period’ that establishes the start and the end date for what gets reported. We only recognise transactions and other events in the financial statements, if they already existed or happened during the reporting period; we do not report on those that may happen in the future, no matter how likely their occurrence. Of course, that does not equate to ignoring everything that is future-related: Entities are regularly required to peek beyond the end of the reporting period for measurement purposes, for instance when carrying out an impairment test or establishing fair value, i.e. when discounting future cashflows. But we only do so for transactions or other events that have already happened. Anyone interested in what could or will happen after the balance sheet date will have to come back next week or turn to other sources of information.

Another area where the financial statements remain silent—again, by convention—is by showing impacts and dependencies of what an entity is doing. Financial statements reflect how an entity’s financial position, performance and cash flows were impacted by its own actions and by external events. What we generally do not show in the accounts is how an entity’s doing impacted other parties’ affairs, including wider society, and what relationships an entity’s actions may exhibit in other areas of and within the entity, but beyond financial performance; take the financial impact of expenditure in learning and development on an entity’s human or intellectual capital as an example. People familiar with the Integrated Reporting Framework will no doubt have a déjà-vu here, and entities applying the Framework will often report on exactly these kinds of relationships to the extent that affect the ability of the company to create value for itself—but they do that outside of the financial statements in an integrated report.

Neither boundary I mentioned—that financial statements are not meant to report on the future or to demonstrate impacts or dependencies—are new. If some people are perceiving the financial statements to be limited as they do not deliver any information in that regard, they ought to be reminded of the statements’ purpose, namely: to inform primary users about the existing resources of and claims against an entity and the changes thereof. In other fora, I have repeatedly said that the financial statements are not an entity’s Encyclopaedia Britannica where users can reasonably expect to find an answer to every question they have about the entity. The boundaries of the financial statements are there for a purpose. Of course, that does not mean that the purpose cannot be changed—as said: financial reporting is a set of conventions. The question is, however, whether the conventions need to be changed, or whether the purpose of financial reporting would not be better served by linking the information contained in the financial statements to information provided through other sets of reporting.

The risen significance of other reporting

Last year, Erkki Liikanen, Chair of the IFRS Foundation’s Trustees who oversee our work, addressed you in his speech at the EAA Congress in Espoo.[3] He reminded us of the significant changes that have occurred in the Foundation, i.e. the creation of the International Sustainability Standards Board in November 2021, and the consolidation of the International Integrated Reporting Council (IIRC), the Sustainability Accounting Standards Board (SASB) and the Climate Disclosure Standards Board (CDSB) into it in 2022. Both developments have had a profound impact, and I would hold not only on the Foundation, but even more so for the corporate reporting world more generally.

By consolidating major players in the area of sustainability-related financial disclosures and subjecting the newly established ISSB to the same rigorous due process that governs the work of the IASB, an expectation has been created that investor-focused sustainability disclosures can be brought to the same high level of quality, rigidity and robustness that people associate with financial reporting. And that may finally be the answer to my question in the beginning: the new emphasis on connectivity could be explained by the fact that there are now two reporting regimes that are based on the same fundamental principles and concepts; that follow the same rigid and fully transparent processes; that are committed to the same high degree of engaging with stakeholders and seeking their views. Would it then really be that surprising that stakeholders ask how the information produced by applying IFRS Accounting Standards connects to information that is produced by applying IFRS Sustainability Standards? I do not think so.

Traditional accountants should be prepared to accept and appreciate that the coin we thought we own entirely for ourselves has a flipside, and the flipside deals with issues that are largely outside the boundaries of the financial statements, both subject-matter and timing-wise. However, the two sides of the coin are glued together. In fact, they are needed to convey a complete, consistent and coherent story about the entity’s existing financial position and performance, its strategy and governance, the risks and opportunities it is facing and how it is managing them, etc.

Entities that report under the standards of the ISSB are actually required by IFRS S1 to provide information:

‘in a manner that enables users of general purpose financial reports to understand the following types of connections:

  1. the connections between the items to which the information relates—such as connections between various sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s prospects; and
  2. the connections between disclosures provided by the entity:
    1. within its sustainability-related financial disclosures—such as connections between disclosures on governance, strategy, risk management and metrics and targets; and
    2. across its sustainability-related financial disclosures and other general purpose financial reports published by the entity—such as its related financial statements.’ (para. 21)

So there is an explicit requirement to connect information in the report that houses the sustainability-related financial disclosures TO information provided for in the financial statements. If, over time, we acknowledge that (a) there are indeed two sides of the reporting coin and (b) both sides are equal in size and weight, at least theoretically, then, conceptually, connectivity should not be viewed as a one-way street: we should start thinking about providing for a similar kind of linkage the other way around, where this is both feasible and appropriate.

Conclusion

Ladies and gentlemen, I devoted my opening remarks at this year’s congress to the topic of ‘connectivity’ that receives a lot of attention these days, both in the standard-setting world and in academic circles. I hope that my address provides you with a stimulus for further discussions and exchanges in the coming days. I wish you a rich, thought-provoking, enlightening and successful congress, let’s stay connected!

Thank you very much.

[1] Cf. PS 1.12.

[2] Cf. Conceptual Framework for Financial Reporting (2018), paras. 1.3 and 4.

[3] IFRS—Erkki Liikanen delivers speech at the European Accounting Association Conference.