Adam Deller looks at how financial reporting professionals and experts have responded to the IASB’s ongoing disclosure and primary financial statements projects
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This article was first published in the May 2018 international edition of Accounting and Business magazine.
Last month’s article (‘Built on sand?’) tenuously linked financial reporting to football, and we’ll stick with that link this month by looking at punditry.
On retirement, many of the most successful football players turn to careers in the media. Doing this keeps them connected to the football world, often in a much more secure position than if they were to go into management. It is, after all, often easier to talk a good game than be involved in the action on the pitch.
Having people who have achieved at the highest level in the sport allows the audience to understand what is going on in greater depth, while putting players and managers under more intensive scrutiny than in previous generations. Ultimately, these are the experts, so people are willing to tune in to hear their opinions and analysis.
Such commentary is a key part of developments in the financial reporting community. As part of the lengthy process of issuing new or updated IFRS Standards, the International Accounting Standards Board (IASB) invites comments from a wide variety of sources. When it issues a discussion paper or exposure draft, it gets feedback from preparers, national standard-setters and accounting institutes, among others.
One of the key bodies involved in this discussion is the Global Preparers Forum (GPF), an IFRS consultative group whose members have considerable practical experience in financial reporting. Its members give valuable feedback into concepts and proposals that the IASB is developing and offer advice on the practical implications of the intended proposals for the preparers of financial statements. The individuals involved in the forum come from a variety of industries across many nations. This means that they are not simply commentators; they are also on the field of play.
The forum meets three times a year, with the most recent meeting taking place in London in March. The discussions centred on three IASB projects: disclosure, primary financial statements, and goodwill and impairment. We looked at the goodwill and impairment project in last month’s AB; this month we will focus on the IASB’s other two projects.
The IASB began by bringing feedback gathered prior to the meeting. The principal feeling among preparers of financial statements is that the volume and prescriptive nature of requirements in IFRS Standards is too onerous. Conversely, it was noted that investors and report users are most concerned about a lack of relevant information, and less concerned about having too much irrelevant information. Clearly this is a difficult balance to strike.
As part of moving towards striking that balance, many members of the forum believe that the language used in many accounting standards is unhelpful. It was noted that the inclusion of terms such as ‘shall’ and ‘as a minimum’ mean that preparers and auditors feel they must include these disclosures, whether they are material or not. Preparers said they feel unable to apply judgment as to which are relevant and which aren’t, and that it was unlikely that auditors would agree with this exercise of judgment.
No consensus was reached over the most appropriate language to be used, but most felt that allowing preparers to exercise judgment was crucial to finding a solution. A review of all the disclosures under each standard was not a universally popular approach, but preparers did feel that where language such as ‘shall’ or ‘should’ are used, an explanation around considering whether such disclosures were material or not would be helpful.
Some felt that a measured approach would be useful, outlining which things must be disclosed by all entities, which should be disclosed if material, and which could be disclosed if it is felt helpful to the users. It is likely that this would lead to a clearer picture, but more management time would be taken up in applying judgment about what should be applied, in addition to discussions with auditors.
The question was raised about whether information needs to be repeated each year if no changes have been made. Some of the forum felt that technology could be used to enable this – for example, placing accounting policies on the company‘s website and providing links to them in the annual reports. This would mean that only changes to accounting policies would be included in the actual information, with unchanged and prior-year information held elsewhere.
As technology moves on, a blended approach along these lines feels sensible. One of the causes of overdisclosure in the financial statements stems from the traditional position that paper financial statements are the only available document that people can access. As this is no longer the case, surely it is the time to consider how the financial statements can be linked to other sources of information, rather than being a catch-all document that attempts to be all things to all men.
Part of the discussion on the primary financial statements centred on the inclusion of a management performance measure, which would be the key performance measure used by management. That measure may be an existing metric, such as operating profit, or an adjusted figure, such as a measure of profit after stripping out share-based payments, for example.
The belief of the IASB is that if these metrics are key to management’s decisions, they should be reflected somewhere in the financial statements. The discussion was then over whether they should be recorded in the statement of financial performance itself or disclosed in the notes.
The general preference of forum members was for the information to be reported in the financial statements rather than the notes, in case disclosure overload led to it being overlooked or missed. One problem noted is that many of these management performance measures are figures that take a measure of profit and subject it to numerous adjustments, which makes simple presentation on the face of the statement of financial performance difficult. In this case, a reconciliation of a profit subtotal to this management performance measure would be proposed for inclusion, either under the statement of profit or loss or in the notes.
The forum discussed what could be done about entities calculating an adjusted earnings per share (EPS) figure and whether it would be useful to require an EPS figure to be shown using a management performance measure. Commentators said it would depend on whether the entity actually used adjusted EPS in its own internal reporting, otherwise it would be a pointless exercise.
A number of forum members agreed with the principle that if preparers are required to show a management performance measure in their financial statements, this should be consistent all the way through and therefore the effect on EPS should be shown.
For those who do calculate adjusted EPS figures, producing these in the financial statements was deemed not to be a particularly arduous exercise, as all the information would already be available to preparers.
Some questioned whether investors would really find this useful. If adopted, an adjusted diluted EPS would also be prepared, although not many management performance measures are expected to affect diluted EPS.
Associates and joint ventures
The final discussion in the primary financial statements project was on where to show the share of profit from associates and joint ventures. Different entities put this figure in different places.
The IASB’s preference is to identify which associates and joint ventures are regarded as integral to the business, and which are not, showing the former separately from the latter. The proposal is that integral results would be reflected above the income/expenses from investments category (where the non-integral results would be shown).
The main reaction from the forum was that classifying associates as integral and non-integral would not be helpful, or even possible in many cases. Preparers felt clearer guidance on where to reflect this profit would be useful, but they disagreed with the classification split of integral and non-integral associates.
The discussion process
As with a collection of football pundits, getting full agreement around the forum table is probably impossible. Yet the whole forum discussion is a healthy part of the standards development process. By not making decisions itself in a closed discussion, the IASB intends to ensure that its new standards are more robust and fit for purpose. It may not be the easiest course of action, but it does allow a key conversation in setting and amending standards to take place.
Adam Deller is a financial reporting specialist and lecturer
CPD technical article
"Many members of the forum believe that the language used in many accounting standards is unhelpful"