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.