National standard-setters discuss wider corporate reporting and the way forward for the IASB

  • IFASS (International Forum of Accounting Standard Setters) (dark green) Image

27 Sep, 2017

The International Forum of Accounting Standard Setters (IFASS) met in London on 26 and 27 September 2017. Among the topics discussed was also wider corporate reporting. Aspects considered were the dimensions of wider corporate reporting, the individual standard-setters’ experience, and ways forward for the IASB.

Current situation

IFASS members all agreed that wider corporate reporting has been gaining momentum, that non-financial information growing wild is a problem in many jurisdictions, yet that there clearly is a need for some non-financial information (also from the investors’ view), and that sometimes it is difficult to distinguish between financial information and non-financial information. Disclosure of non-financial information results from a wide range of reasons including regulators’ requirements, peer pressure in certain industries, and demands from society at large. There is currently no coordinated approach to dealing with this; there are many organisations active in the field without any clearly recognised leadership, and frameworks, standards or simply lists of requirements often overlap or even compete with each other. It was also added that in some IFASS member jurisdictions guidance is not observed as long as it is non-authoritative.

It was also pointed out that the objective behind the different reporting and disclosure requirements differs as some aim at providing unbiased decision-useful information while some can also be traced to the wish to change behaviour of preparers and/or users – which seemed to contradict the claim that the information produced is neutral. In this context members also noted the tension between reporting on the reasons for developments and their financial consequences.

Current IASB role and criticisms of this role

Members acknowledged that, currently, the IASB’s remit extends to the financial statements and the notes only. Its objective is to provide investors with decision-useful information. Members agreed that financial statements have their limitations and that some information that is relevant to investors is not captured. An example cited were intangibles. The IASB’s Practice Statement on Management Commentary contains additional guidance that reaches into the field of wider corporate reporting, however, this is non-authoritative guidance. On wider corporate reporting as such the IASB has so far chosen to take a monitoring stance, although there have been thoughts to potentially update the Practice Statement to incorporate more guidance on non-financial information recently.

Members maintained that financial statements in themselves cannot be understood without additional information and users therefore rely on other sources in addition to the financial statements. Some members feared that this might undermine the relevance of financial statements, especially with the range of non-financial information available continuing to grow. Others believed that financial statements still had a competitive advantage over information from other sources and that both kinds of information would supplement each other. Consequently, some members felt that the IASB should give up its monitoring stance and actively engage – before non-financial reporting without clear guidance gained even more ground. The longer the IASB waited the more other frameworks/standard-setters would emerge. The IASB might contribute to reducing the number of organisations active in the field and the resulting amount of different guidance. However, some members also felt that the IASB should stick to its monitoring stance as the field is still developing. They also cited a lack of resources and expertise. However, these members also agreed that there might be a trigger soon that would then require the IASB to change its role.

Suggested approaches

Those IFASS members who had expressed the conviction that the IASB should become more active offered views on different approaches that could be taken:

  • It was noted that the IASB cannot start empty-handed and has to offer something. It should also make sure it gets everybody on board.
  • It was suggested that the IASB should change the status of the Practice Statement on Management Commentary to authoritative rather than non-mandatory.
  • Most members noted that a more active role in this field requires strategical thinking and an objective – simply updating the Practice Statement wouldn’t do.
  • Members were also convinced that the IASB should focus on principles, not subject matters.
  • It was also felt that the IASB should restrict itself to information that relates to financial information.
  • A single member also suggested that the IFRS Foundation should create an additional Board that is dedicated to wider corporate reporting.
  • Generally, IFASS members felt that the IASB should not support a single organisation as there was currently no logical candidate for taking the lead in the field.

A suggested approach that received some attention was the suggestion that the IASB with its expertise in international standard-setting should develop a framework for wider corporate reporting that has all the characteristics of a framework: The resulting information should be complete and neutral and offer a faithful representation. It should also have an objective and be principles-based – similar to the existing Framework of the IASB. Such a framework would then allow for a “plug and play” approach so that additional reports could be added by and by. This way, not every subject would need to be addressed at the same time, and yet a consistent framework would later connect them all. It was noted that the TCFD recommendations were actually a good example of how this might work as they seemed to closely follow the IASB Framework and yet applied it to a different subject matter.

First preliminary reaction by IASB Chairman Hans Hoogervorst

IASB Chairman Hans Hoogervorst was present at the meeting and greeted the “good discussion without a clear conclusion”.

He admitted that financial statements in the narrow sense do not capture some financially relevant information that in some case could even be extremely relevant. And yet he noted that this information must be captured somewhere. In this context he entered a new term into the discussion – “broader financial reporting” –, which he believed to be in the remit of the IASB. Mr Hoogervorst noted that all information that is relevant for the long-term development of companies will sooner or later impact the financial statements of a company and is therefore financially relevant. He stated that he strongly believes that the IASB must provide good linkage between the narrow financial statements and broader financial reporting. However, he also stressed that the IASB will neither change its audience nor its remit. He also stated that any guidance the IASB issued would remain non-mandatory as it cannot overrule all the requirements, standards and frameworks that are already out there.

In a similar vein, Mr Hoogervorst had already commented on wider corporate reporting at an Accountancy Europe event earlier this month where he noted that the IASB has always been aware that financial reporting in the narrow sense has its limitations and tried to explain what the IASB can and cannot do to contribute to a bit more clarity.

The above summary is based on our observer notes from the meeting. The IFASS secretariat will provide a summary of all topics discussed at the meeting in due course.

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