An exhaustive post-implementation review process means a financial reporting standard is anything but done and dusted when it is issued, as Adam Deller explains
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This article was first published in the November/December 2019 international edition of Accounting and Business magazine.
Making a significant change is a long and slow operation. Even the UK’s departure from the EU is a quicker process than the issue of a new IFRS Standard. Issuing a new standard is a long and arduous affair, requiring many stages of discussion and comment, and involving a vast range of stakeholders. There is rarely full agreement when the standard is issued, which means that the process does not simply stop then.
The standard-setter, the International Accounting Standards Board (IASB), conducts a post-implementation review (PIR) of each new standard. This is a mandatory step, and the objective is to assess whether the standard is working as intended. The PIR considers the impact of the standard on preparers, investors and auditors. It also looks at any issues that may arise after the publication of the standard, as well as those that were important or contentious during its development.
The first phase of a PIR identifies the matters to be examined, which are then the subject of a public consultation, where the IASB invites comments on an exposure draft of the standard. The second phase considers the comments and presents the findings. Just as the creation of a new standard can take a long time, so can the PIR.
To date, the IASB has completed three PIRs – on IFRS 8, Operating Segments, IFRS 13, Fair Value Measurement, and IFRS 3, Business Combinations. With IFRS 8 and IFRS 13, the IASB decided not to make any changes. IFRS 8 got as far as an exposure draft with proposed amendments, but the IASB decided not to proceed with these. IFRS 13 was an even simpler process, with the IASB concluding that the information required by the standard has been useful with no particularly unexpected increases in costs from its application.
The result of the PIR on IFRS 3 was less simple, as is often the case for group accounting issues. At the end of the second PIR phase for IFRS 3, several areas were identified that warranted further research. This led to amendments in the definition of a business, and work is ongoing in relation to the accounting for goodwill and impairment – the subject of major discussion, with the debate taking numerous twists and turns.
There is a belief that under IFRS 3 impairment is recognised too late and often not enough. This column has followed the discussion around proposed changes to the impairment test, including how to deal with the effect of shielding in the initial calculation of goodwill. The IASB’s current view is that it is not feasible to make the impairment test significantly more effective at recognising impairment losses of goodwill. The only currently proposed change is to amend the way that value in use is estimated, simplifying some of the requirements for the impairment test.
Instead of improving the impairment test, the IASB is currently considering the removal of the mandatory annual goodwill impairment test. The present proposal is that companies would need to perform quantitative tests only when there is an indication that impairment may have occurred.
Another discussion has been about whether more intangible assets should be recognised separately from goodwill to provide more useful information. Based on the feedback to date, the IASB has not found persuasive evidence that this would be useful, so no changes are proposed.
The question of the reintroduction of the amortisation model continues. The IASB’s preliminary view is that it should not be reintroduced – but with only a slender majority for that decision (eight of the IASB’s 14 members), the board is very interested in what stakeholders think, further reinforcing the importance of feedback during the PIR process. As the IFRS 3 experience shows, a PIR can be a long and difficult process, but it is also a vital one in trying to produce robust standards that lead to better financial reporting.
The current research pipeline includes a PIR of IFRS 10, Consolidated Financial Statements, IFRS 11, Joint Arrangements, and IFRS 12, Disclosure of Interests in Other Entities. These three standards were issued together in May 2011 and became effective for annual periods beginning on or after 1 January 2013. They were issued partly as a response to the financial crisis of 2008, with one of the major aims being to ensure that enterprises were no longer able to hide the true underlying position by excluding particularly risky companies from their balance sheets.
IFRS 10 provides a single consolidation model applicable to all entities based on the principle of control, addressing divergence in practice in applying IAS 27, Consolidated and Separate Financial Statements, and SIC-12, Consolidation – Special Purpose Entities.
IFRS 11 replaced IAS 31, Interests in Joint Ventures. The major change was a requirement for joint ventures to be accounted for using the equity method, removing the option of the proportionate consolidation method.
IFRS 12 is a disclosure standard that includes revised disclosure requirements for interests in subsidiaries, joint arrangements and associates, in addition to disclosures about unconsolidated structured entities.
So far, there have been only limited amendments to the three standards, which is consistent with the approach prior to a PIR. The IASB changed IFRS 10 to define an ‘investment entity’ as one whose business purpose is to invest funds solely for returns from capital appreciation and/or investment income. Once defined, the changes to IFRS 10 require an investment entity not to consolidate entities it controls but to measure those investments at fair value through profit or loss.
The amendment to IFRS 11 requires an acquirer of an interest in a joint operation in which the activities constitute a business to apply all of the principles in business combinations accounting in IFRS 3.
IFRS 10 is the most likely of the three standards to attract attention. One of the aims of IFRS 10 is to prevent entities being able to avoid the consolidation of special purpose vehicles (SPVs) that they simply don’t want to consolidate. There was potential uncertainty over the application from IAS 27 and SIC-12, and IFRS 10 really looked to provide a stronger, clearer definition of control. The standard now also provides detailed guidance on assessing control in addition to numerous examples of when entities will qualify for consolidation.
This has improved the situation but there is the risk that some entities may adopt a narrow, legalistic interpretation of the standard and illustrative examples to the point that if the SPV is not identical to an example, they can avoid consolidation. It may well be that additional situations arise during the PIR that lead to further illustrative examples. It is unlikely that there will be significant revisions to the definition of control, but further guidance on specific arrangements is a distinct possibility.
The current project relating to businesses under common control could also form part of the PIR. Currently no standard exists for businesses under common control, and there is a possibility that some guidance could be folded into one of these three standards when the guidance is finalised.
The accounting for joint ventures under IFRS 11 is now very close to the treatment adopted by the US standard-setter, the Financial Accounting Standards Board, meaning that there are unlikely to be significant revisions to the standard, if any at all. While the removal of proportionate consolidation was one of the more controversial aspects of the new standards, it is extremely unlikely there will be a return to it, especially as it is now in line with the approach in the US. There appears to be little appetite to return to having the option of proportionate consolidation, so the major aspects of this are likely to remain.
In the final quarter of 2019, the IASB is seeking input from its consultative groups and the IFRS Interpretations Committee, with the PIR featuring in meetings in October, November and December. It will also hold meetings with other stakeholders before bringing out a summary of these findings in the first quarter of 2020.
With group accounts forming a number of the research projects on the IASB’s agenda, it will be interesting to see if some of those projects are folded into the PIR of these standards, or if they form separate pieces of work. Either way, it is likely that the spotlight will remain on group accounting well into 2020, and possibly beyond.
Adam Deller is a financial reporting specialist and lecturer.
CPD technical article
"There is rarely full agreement when a standard is issued, which means that the process does not simply stop then"