The Chair of the Australian Accounting Standards Board (AASB) introduced research that was triggered by claims that "accounting standards have become so 'outrageously complex' that it is difficult for investors to understand financial statements". The research objective was to investigate the factors that impact the ability of the users of IFRS Accounting Standards to comprehend their meaning and requirements. The researchers originally concentrated on the Australian environment and in a second study expanded the research globally.

As one factor affecting understandability, the research looked at the readability of standards, the length of sentences, the average number of syllables per word. Findings included that older standards (eg. IAS 39) scored much better on readability than newer standards and that standards with topics that contain long words (eg. IFRS 14) score low on readability. When looking at how the topic of a standard affects the understandability, new standards such as IFRS 9 were considered the most difficult to understand while older standards that deal with less complex transactions scored much higher on understandability.

Overall, the research yielded the following findings:

1. Understandability and application. Lack of understandability impacts the application of a standards, for example the identification of the scope or the application of certain paragraphs. Recommendations included to make the rationale for a certain requirement readily available, maybe in the standard itself.
2. Language. Inconsistent use of language impairs understandability as do complex sentences. Not all users are native speakers. It was suggested to make more translated content available and to include questions on readability and understandability in exposure drafts. 
3. Examples. Examples were considered helpful, to a degree, but flowcharts were considered to be more helpful. It was, therefore, suggested to make more use of flowcharts where the topic described lends itself to that.
4. Access, engagement, education. Less-resourced users have limited access to standards and supporting material, limited resources and language barriers mean less engagement, and limited access to supporting material also hampers adequate education. Suggestions included more open access to primary material and supporting/education material in more languages.

The research also noted that the fact that standards are (perceived to be) difficult to understand leads to users (for example preparers) to rely on experts which in turn leads to even less general understanding of the accounting literature.

The IFASS members then shared observations and ideas on the topic:

• Increased complexity of the standards is also owed to the fact that transactions are becoming increasingly complex. It is not always possible to describe a complex transaction in simple language.
• Examples must strike the right balance between being too simple and too detailed, it must be avoided that they are understood as the requirement itself. 
• The perceived complexity of standards leads to users preferring secondary literature to the standards themselves, which was considered dangerous.
• Even users with no complex transactions have to read and assess the entire standard to determine which parts of it apply to them.
• Making translated content available is considered helpful, however the quality of translations is paramount.
• Standard setters could work with CPA institutes to help them develop better education programmes that lead to a greater understanding of the standards.

Note: The first research article looking at the Australian environment only is freely available here in the Wiley Online Library. The second research article has not been published yet.

For more in­for­ma­tion about her back­ground, please see the press release on the IFRS Foun­da­tion website.

IFASS members first received two presentations on the possibilities and the limits of AI and then discussed how AI might possibly be employed in standard setting.

The first presentation was a general introduction into AI, which also includes machine learning and deep learning, and into generative AI, a subgroup of AI that consists of algorithms that use prompts or existing data to create new content. Of special interest to standard setting seemed to be the generative AI subgroup of large language models (LLMs) trained on high-volume data sets to generate, summarise and translate human-like text. Competencies of generative AI include translation, summarisation and generic content creation, as well as, to a degree, creativity. The competencies do not, however, include critical thinking and complex decision-making. Problems also include the need for (costly) constant training and "hallucination". 

The second presentation introduced the real-live example of an LLM trained to perform disclosure analysis and research on the question whether LLMs can be used to analyse sustainability reports. The results presented of an analysis of 11,000 sustainability reports to see whether the TCFD recommendations had been followed explained the possibility of requiring the LLM to include references to enable a review of the findings produced and the need for/possibility of iterative processes to refine findings. They also underlined the need for a careful review, consideration and evaluation of the results produced. Main conclusion of research across various LLMs was that many statements produced lack support and citations are inaccurate. Fluency often comes at the cost of accuracy.

In the discussion that followed the presentations the following points were raised:

• AI is here to stay, so use it and familiarise yourself with it. Not doing anything is not an option.
• Develop a strategy, governance and responsible practices when you use AI.
• Don't rely on AI without constantly reviewing the results.
• The more human expert input, the more accurate the results.
• LLMs need constant training and updating.
• LLMs can be usefully applied to repetitive, time-consuming tasks.
• LLMs can be used as intelligent search machines.

Regarding the work of standard setters it was suggested that training an LLM would be relatively easy as the literature is low in volume and very specific. It could also be used from an administrative perspective, for example for creating meeting minutes. While comment letter analysis by LLM would seem tempting, the results would always need to be reviewed, however searching for certain comments would be made much easier. Use of several LLMs trained to take different perspectives and then using a mediating model could lead to useful arguments that could trigger own thinking.

A final poll of the audience regarding the tasks the standards setters would consider using AI tools for led to the following results (most supported answers first):

• literature review of standard setting topics
• stakeholder survey results analysis
• stakeholder comment letter analysis
• disclosure and financial statement analysis
• mapping and checking the consistency of accounting or sustainability guidance and requirements
• assessing the pervasiveness of transactions across companies

IFRS 3 Business Combinations currently governs reporting requirements for acquisitions. However, the standard lacks specificity on how to report transactions involving transfers of businesses between companies under common control.

In response to this reporting gap, the IASB released a discussion paper in November 2020, presenting its preliminary views on addressing the issue with the goal of enhancing transparency and comparability in reporting these transactions while reducing practice diversity.

The project summary clarifies the reasoning behind the board’s decision, made in November 2023, not to proceed with developing reporting requirements for BCUCCs.

Acknowledging the existing diversity in reporting practices surrounding BCUCCs, the IASB noted feedback from investors indicating their ability to navigate this diversity effectively. The information sought by investors varies significantly across jurisdictions, posing a challenge to the development of globally applicable reporting standards tailored to meet diverse user needs.

Moreover, the IASB’s research indicated that while potential enhancements to financial reporting could arise from the development of BCUCC reporting requirements, the associated costs of implementing such changes would likely outweigh the benefits.

The project summary published today, therefore, concludes the project. Please see the press release and the project summary on the IFRS Foun­da­tion website.

The vote follows political agreement between the Council of the EU and the EU Parliament in February 2024.

The Parliament vote does not affect the reporting timelines as agreed under the Corporate Sustainability Reporting Directive (CSRD). As a next step, the legal text needs to be formally approved by the Council of the European Union before becoming effective.

More information is available in the press release on the European Parliament website.

The reports are an outcome of the UKEB’s comprehensive research project on accounting for intangibles that explored UK stakeholders’ views on the accounting for intangibles under international accounting standards, reviewed the nature and extent of current reporting practices for intangibles, and engaged with investors. An earlier report resulting from the project was the March 2023 Accounting for Intangibles: UK Stakeholders’ Views.

The first report Accounting for Intangibles: A survey of users’ views builds on a survey of users that was carried out in September 2023. The main message was that intangibles are economically important. While specific concerns were voiced regarding limited disclosure/connectivity, inconsistent categorisation, lack of comparability, and the subjectivity of measurement, users wanted no radical changes to recognition and measurement requirements, but rather more granular disclosures - preferably in the financial statements or the notes rather than narrative. Interestingly, while users noted that current accounting is not particularly useful for their investing and lending decisions and could be improved, they also indicated that they are utilising narrative information and making their own calculations, which in some cases would even give them a "competitive edge".

The second report Accounting for Intangibles: A quantitative review of UK Listed Entities was compiled following an examination of financial statement data on intangible assets reported by UK listed companies, a review of intangibles financial statement data of a sample of companies for, an investigation of M&A transactions, and an estimate of the value of unrecognised intangible assets in UK listed companies. The report notes that while intangible assets are widespread and increasing in value, they still only represent ~3% of the balance sheet, a few companies, particularly those that have grown through acquisition, hold most of the value of recognised intangibles, differences in accounting treatment for internally generated and acquired intangibles hamper comparisons of companies, and differences between recognised and estimated unrecognised intangible assets could indicate the existence of an intangible assets’ recognition gap.

Questions and reactions from the audience included that there is a difference between intangible assets and intangibles that don't meet the definition of an asset. In essence, it was agreed that there are three classes of intangibles: those that meet the definition of an asset and are recognised, those that would meet the definition, but are currently not recognised, and those that will never meet the definition. It was noted that it will be crucial for the IASB, that will commence its project on intangibles at the IASB meeting next week, to consider very carefully what sort of items will come under the project scope. It was also noted that it would be beneficial for the IASB to have similar research from other jurisdictions.

The reports will be published later this month. They will be available on this subsite of the UKEB website.

The interpretations now considered are:

• IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities
• IFRIC 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds
• IFRIC 7 Applying the Restatement Approach under IAS 29 'Financial Reporting in Hyperinflationary Economies'
• IFRIC 14 IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction
• IFRIC 21 Levies

Going forward, the IPSASB will consider the applicability of future IFRIC Interpretations as they are issued.

Please click to access ED 89 Amendments to Consider IFRIC Interpretations through the press release on the IPSASB website. Comments are requested by 17 June 2024.

In its final comment letter, EFRAG welcomes the exposure draft and agrees with many of the proposed amendments. 

However, EFRAG suggests that the IASB should:

• discuss further measurement issues of financial liabilities with contingent settlement provisions under the scope of IAS 32; 
• allow reclassification if the terms and conditions become, or stop being, effective with the passage of time; and 
• ensure that proposed disclosure requirements are clear, can be implemented by entities and ensuring an adequate cost-benefit balance, particularly on disclosures of terms and conditions related to priority on liquidation. 

The update reports on the EFRAG Financial Reporting Board (EFRAG FRB) meeting on 22 March 2024, EFRAG Financial Reporting Technical Expert Group (EFRAG FR TEG) meetings on 06 March, 14 March and 20 March, EFRAG FR TEG and EFRAG Consultative Forum of Standard Setters (EFRAG CFSS) joint meeting on 13 March 2024.

The update also lists EFRAG publications issued in March-April including:

• EFRAG's final comment letter on IASB's exposure draft 'Financial Instruments with Characteristics of Equity'

The update also covers EFRAG's sustainability reporting and related activities.

Please click to download the March 2024 EFRAG Update from the EFRAG website.

The webinars will be held on 7 and 11 June, respectively. Please click for more information and registration in the press release on the EFRAG website.