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Discussions at the fifth IASB Research Forum

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12 Nov 2018

The International Accounting Standards Board (IASB) hosted its fifth Research Forum on 11 and 12 November 2018 in Sydney. The meeting saw the presentation of six academic papers, responses by academics and standard-setters as well as panel discussions.

The first paper Non-GAAP Earnings and the Earnings Quality Trade-off used a large sample of earnings press releases by Australian firms and compared multiple attributes of non-GAAP earnings measures with their closest GAAP equivalent. The results, which other participants found to be "not surprising", were that, on average, non-GAAP earnings are more persistent, smoother, more value-relevant, and have higher predictive power than their closest GAAP equivalent. The tendency was also noted that they tend to be more positive than GAAP numbers. The question of what this research might contribute to the IASB's efforts quickly turned into the question of whether non-GAAP measures really are such a problem (opinions were divided) and whether it is at all possible to suppress them to a certain degree (by requiring more line items/subtotals/a defined management performance measure). Takeaways from the discussion seemed to be that there is no stopping of non-GAAP measures because even if all non-GAAP measures were declared GAAP, new non-GAAP measures would immediately be defined by companies. However, it was also acknowledge that there was simply not just one number that would satisfy all needs.

The second paper Disclosure Overload? An Empirical Analysis of IFRS Disclosure Requirements examined the disclosure overload problem by testing whether the disclosure reduction recommendations of the Excess Baggage Report issued by professional accounting bodies from Scotland and New Zealand in 2011 are associated with companies’ disclosure incentives and are value relevant for a sample of Australian listed companies. The discussion following the presentation seemed to be rather critical of the paper although it was acknowledged that it was important that the paper shows that there is substantial non-compliance with IFRS disclosure requirements in Australia. However, discussants continued to return to the point that while it is interesting to see that there is non-compliance it is more important to find out why. Also, the relevance of 2011 research checked against 2012 data in the year 2018 was questioned. The opinion was voiced that the disclosure overload problem has more or less gone away by itself thanks to technological development. The IASB is now focusing on the quality of disclosure, no longer on the amount of it.

The third paper Equity Financial Assets: A Tool for Earnings Management – A Case Study of Youngor Group was actually a case study illustrating how earnings were managed by a Chinese company by re-classifying its available-for-sale (AFS) assets as long-term equity investments to decrease the volatility of the company’s apparent profits. The paper claimed that China's adoption of IFRS converged standards in 2007 did not improve transparency about fair value. Among the reasons cited by the paper and by the discussants were an immature capital market, the cost of preparation, difficulties in level 3 estimates, generally unreliable numbers, cultural and legal differences (the term "Western standards" was used), and the "special treatment system" in China. Other participants added, however, that the same earnings management had been possible and had been done in other jurisdictions before IFRS 9 replaced IAS 39. Therefore, some of the earnings management might go away with an IFRS 9 equivalent that is being introduced in three stages in China and with the Chinese market maturing.

The fourth paper Accounting for Intangibles: Can Capitalization of R&D Reduce Real Effects and Improve Investment Efficiency?, which was later followed by a panel discussion on the same topic, investigated the potential for accounting rules to mitigate under-investment by requiring the capitalisation of some research and development costs or might such a capitalisation lead to over-investment? Panel members noted that as regards research and development costs, consistency and transparency was more important than the question of expensing vs. capitalisation. However, the investor representative noted, if asked directly, investors would probably prefer expensing. It was also noted that most industries move in unison on the question of whether and what to capitalise. The takeaway from the panel and the paper seemed to be that there is already a framework in place that if properly used and enforced can provide useful information. Participants even went as far as to say that there was no immediate pressing need for the IASB to take a project on intangibles onto its agenda.

The fifth paper Extractive Industries Reporting: A Research Review, again followed by a panel discussion, reviewed international diversity of accounting practices and the challenges facing information users and standard-setting processes and lobbying behaviour to explain why the IASB (and other standard-setters) have so far not succeeded in developing a rigorous standard for extractive activities and ESG factors. It was especially noted that the important aspect of reserves is only dealt with by disclosure although reserve estimates are required to be used in applying other standards. The paper argued that the IASB needs to take a comprehensive approach that also considers current values. The panel was less sure even though it admitted that there was diversity in practice. Nevertheless, panel members stressed the importance of disclosures and also voluntary disclosures. Mining companies needed to be in strong communication with their investors: "The better you disclose, the more the market will reward you." The panel and audience could also not quite conclude that an industry specific standard is needed for extractive activities although there was consensus that IFRS 6 is not satisfactory and consistency and comparability is needed.

The last paper Independently-certified Industry-specific Disclosures to the Capital Market: The JORC Code in the Australian Mining Industry investigate the compliance with the Australian JORC Code for the mining industry, the quality of the disclosure and its impact on the Australian capital market. The paper was very comprehensive, looking at two research questions and a large amount of data from multiple firms with various analyses. While the relevance of the research and its encouraging results (standard-setting can have a positive impact) were noted it was therefore suggested to split the paper actually into two papers. The relevance for standard-setting was then drilled into by asking after the impact of the standard-setting and the reasons for it, after disclosure vs. recognition and measurement, after the presentation inside or outside the financial statements and the user responses. Concluding, the Chair of the Australian standard-setter encouraged all academics in the audience: "Be brave!" She stressed that standard-setters are eager to be in dialogue with the research community and would always welcome the communication of research results when the findings were clear (also clear about definitions, methodologies, and limitations) and also included clear recommendations.

    All links to the papers above are to the IASB website. Final versions of the papers will be included in a special edition of ABACUS early next year.

    The IASB has issued a short press release on the Research Forum.

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