Complexity in focus—keynote address by the IASB Chair

Andreas Barckow, Chair of the International Accounting Standards Board (IASB), delivered a keynote address at the IFRS Foundation Conference on 24 June 2024.

Introduction

A very warm welcome to everyone. It is a great pleasure to see so many of you joining us at this year’s conference, whether you are here in person or participating virtually from around the world.

I want to take a moment to acknowledge the role that your engagement and your expertise play in improving financial reporting. Every one of us here is a member of the financial reporting ecosystem. We value and respect your efforts to achieve our shared mission to bring transparency, accountability and efficiency to financial markets around the world. Thank you for your participation. And thank you in advance for the insights you will be bringing to all the discussions taking place today and tomorrow.

From uncertainty to complexity

At last year’s conference, I spoke to you about the role of financial reporting in uncertain times. As we come together at this year’s conference, I want to explore a related but distinct issue that we face in our service of the public interest—complexity.

Complexity and uncertainty might not be twins, but they are definitely relatives. They often coexist and influence each other, but they also present distinct obstacles to the financial reporting environment.

Complexity is not a new phenomenon in human history. But modern complexity is very much rooted in today’s economic world. At the heart of the matter is the growing complexity of business transactions. The evolving complexity of the business environment has led to increasingly complex business transactions, which ultimately end up being reflected in financial reporting.

But it is not just transactions that are more complex. The business world has plenty of evidence of companies having to operate with more complexity in their supply chains, for example. We also face a multitude of other risk factors that, when coupled with the rapid pace of change, introduce an additional layer of complexity. All these factors continuously shape and reshape our business environment, compelling all of us to adapt to new realities.

The effect of complexity is felt throughout the entire financial reporting landscape—by companies, investors, auditors and standard-setters alike. The layers of complexity can be a barrier to effective decision-making. They have the potential to make it harder for companies to effectively communicate their story to investors, and for investors to understand and properly use financial information. Complexity also poses challenges for auditors in exercising their professional judgement when auditing financial statements and providing assurance to financial reports more widely.

Larger institutions may have the resources to navigate complexity, but smaller players might struggle to keep up, particularly when they are grappling with several layers of complexity at the same time.

Now, some might argue that we at the IASB are also a source of complexity, both from the perspective of those who apply IFRS Accounting Standards to prepare financial information and those who use the financial reporting outcomes produced by the Standards. That—in our efforts to faithfully represent the economic realities of today and tomorrow—our Accounting Standards have become more elaborate. And there is some truth to this argument.

However, it is important to recognise that unpicking complex transactions does not mean isolating a single issue and treating it as an individual problem to be solved. Instead, we must acknowledge the inherent complexity of the economic landscape.

In our desire to be helpful, we often provide additional guidance and clarity. However, every line we write to supplement our core principles and requirements runs the risk of inadvertently creating complexity. In this regard, the IASB is in the same boat as you, navigating the choppy waters of complexity, striving to chart a course that balances the need for better information with the desire for simplicity and understandability.

Our approach

So how are we, as the IASB, approaching this challenge?

We need to strike a balance between overreacting and underreacting to complexity. Although complexity can be daunting, I believe we can also use it as an opportunity to develop effective solutions and drive positive changes. The fact remains that even though we face complexities, investors remain committed to allocating capital to companies and economies that offer growth potential. The global capital flows remain remarkably resilient, even in the midst of complexity.

As an international organisation serving a global audience in almost 150 jurisdictions, we recognise that embracing complexity is an integral part of our reality. Our stakeholders have diverse needs and varying levels of familiarity with our work. Central to our approach is the need to balance their diverse requirements by carefully weighing up the costs and benefits of our actions.

In line with this commitment, we recently published two new Accounting Standards, IFRS 18 Presentation and Disclosure in Financial Statements and IFRS 19 Subsidiaries without Public Accountability: Disclosures. IFRS 18 is a real-world example that enhances the comparability of financial statements. IFRS 19 is an IASB initiative that simplifies accounting for eligible subsidiaries, thereby saving time and reducing costs for companies.

Tangible steps

Let me highlight six additional areas in which we are taking tangible steps to manage complexity.

First, we are striving to master the complexity in our own work. As I mentioned, some complexity in Accounting Standards is inevitable if we are to remain relevant and reflective of the real world.

However, I also believe that we at the IASB must carefully consider where and how we can do more to reduce complexity and improve the accessibility of our Standards. We need to be ever more judicious in where we focus our efforts and resources. To this end, we are encouraging greater collaboration and consistency among our technical project teams to avoid redundancies and contradictions in our Accounting Standards.

Second, we are prioritising. Our agenda consultation process—in which you participate—gives us a clear direction in which to focus our efforts to benefit all our stakeholders. It helps to keep our literature relevant and tuned to your needs.

However, it is important to note that prioritisation is an ongoing process, not just limited to agenda consultations. We make prioritisation and de-prioritisation decisions throughout the five-year cycle. In all these decisions, we strive to balance urgency with cost to the system, aiming to be mindful of complexity. This approach means that we remain responsive to emerging needs while managing resources effectively.

Third, we are focusing on how we can help you to address complexity. Our goal, in fact the very DNA of the IFRS Foundation, is to help stakeholders make better-informed decisions by providing them with the tools to cut through complexity. Whether through clearer standards, more consistent application guidance or more accessible communications, everything we do is aimed at this fundamental objective. We are committed to making our educational materials available to our global stakeholders in several languages and formats to increase understandability.

Fourth, we know that the way stakeholders access and use information has evolved significantly. Companies, investors and regulators are looking for efficient ways to search, extract and compare financial disclosures among companies and jurisdictions. To address this need, we have long had the IFRS Accounting Taxonomy to facilitate the reporting of information in a computer-readable format.

Recently, we have significantly increased our efforts to explain the IFRS Accounting Taxonomy and its benefits to a wider audience. We have been actively working to bring more parties into the taxonomy ecosystem. This work has involved close collaboration with regulators to foster wider adoption and use of the IFRS Accounting Taxonomy. Our efforts are yielding positive results, as evidenced by the recent acknowledgement from IOSCO.

The fifth area in which we are striving to address complexity is in our work with the ISSB. The IASB is working closely with the ISSB to address the growing demand for connectivity. There has been a shift in perspective on the role of financial statements within the broader corporate reporting system. Although financial statements have traditionally been viewed as the central focus of corporate reporting, the rise of sustainability reporting and the formation of the ISSB have created new expectations for reporting that connects financial and sustainability-related information to meet investor needs.

This collaborative effort aims to promote an approach to corporate reporting that seamlessly connects both sides of the ‘reporting coin’. Later today, the Vice-Chairs of both boards, Linda Mezon-Hutter and Sue Lloyd, will illustrate how this connectivity is being achieved and will discuss the practical consequences of this connectivity for you.

Sixth, our commitment to impartiality means that we carefully examine the evidence and follow where it leads. This approach ensures that our decisions are as objective and as well informed as possible.

One example is our recent handling of the Pollutant Pricing Mechanisms project. During our Third Agenda Consultation, this project received attention from respondents, but it was not rated as highly as projects on Intangibles or the Statement of Cash Flows. Consequently, we placed it on our reserve list, to be initiated only if resources became available before the next Agenda Consultation.

Since that decision, we have received calls from stakeholders to prioritise this project. However, true to our principles, we are carrying out an evidence-based assessment to determine objectively whether the situation has indeed changed enough to warrant reprioritisation.

This methodical approach reflects our professionalism and intellectual integrity. Through careful analysis and evidence-based decision-making, all carried out transparently in public meetings, we navigate complexity and deliver high-quality Standards that serve the capital markets.

Working together

In conclusion, we can all play a part in managing complexity. At the IASB, we are committed to doing our part—to develop International Financial Reporting Standards that lead to better decision-making. But we cannot and, indeed, should not do so alone. Managing complexity for better decision-making requires a collaborative effort. It requires all of us to work together.

I urge you to stay engaged with us and with our work. Keep sharing your perspectives and the challenges you face. When we begin consultations, respond to them with your full expertise. As we move forward, I want the IASB to remain agile and responsive and to work with you to ultimately serve the public interest.

But we are asking for more than just feedback. We want a true dialogue. Contact us proactively, just as we do to you. If you disagree with our proposals, help us by telling us what alternative solutions we should consider to solve complex problems.

And there is no better time to start this dialogue than right now. You will be hearing from my fellow IASB members and technical staff throughout this conference. Let’s use this time together to have meaningful discussions about how we can collectively address complexity and improve financial reporting.

Thank you very much for listening.