Standard setters discuss connectivity

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

19 Apr 2023

The International Forum of Accounting Standard Setters (IFASS) is currently holding its spring meeting in Norwalk, Connecticut. The meeting was started with a first discussion of connectivity between financial reporting and sustainability reporting.

IASB Vice-Chair Linda Mezon-Hutter and ISSB Vice-Chair Sue Lloyd opened the discussion by observing that while there have been many calls for connectivity between the work and products of the IASB and ISSB, it is by no means clear what different parties mean when they talk about 'connectivity' - this will always depend on the context and who is speaking. They outlined the understanding the IASB and ISSB have come to so far:

  • Connectivity in process. The IASB and ISSB Chairs have strategic responsibility for connectivity, while the Vice-Chairs have operational responsibility for connectivity. Both Boards have a joint staff team for digital reporting and, when appropriate, share technical staff resources. The integrated reporting team reports to both Boards.
  • Connectivity in product. When developing its first standards, the ISSB built on concepts and requirements in IFRS Accounting Standards, for example the definition of materiality,  the concept of ‘reasonable and supportable information without undue cost or effort', direct incorporation of requirements taken from IAS 1 and IAS 8. The IASB plans to build on ISSB’s work in its new project on climate-related risks in the financial statements.
  • Resulting reports. Entities reporting under both, IASB standards and ISSB standards, would benefit from a common context and a common terminology. Users would benefit from general purpose financial reports that give them a holistic, comprehensive and coherent picture of an entity.

The presenters also pointed out the joint March 2023 article by the IASB and ISSB Chairs Connectivity ― what is it and what does it deliver?.

Voices from the audience showed that there are indeed other understandings of connectivity and also other ideas of what can be done to achieve it. Comments included:

  • Financial reporting and sustainability reporting are two information pillars. Connectivity would require that their boundaries are carefully considered to avoid dangerous gaps or unnecessary overlaps.
  • Connectivity requires that sustainability reporting is supported by a similarly robust framework as is the case for financial reporting. Currently, the framework for sustainability reporting consists of supporting guidance in IFRS S1, which is partially based on the IASB and the SASB frameworks.
  • Connectivity might be difficult to achieve quickly since the two Boards are at very different stages of maturity of standard-setting (the IASB together with its predecessor IASC has been active in standard-setting for 50 years).
  • Working through connectivity in process and connectivity in product is just one way of trying to achieve connectivity. Working from desired connectivity of results might also be a possible approach.
  • There is a difference between integrated reporting and connectivity. Connectivity requires linkages between information provided and disclosure where assumptions or recognition thresholds differ.
  • Terminology is difficult. Even the understanding of "financial reporting" is undergoing changes from "money-related" to "aimed at financial markets".
  • For users to fully benefit from connectivity, the reporting companies themselves need to explain what they understand by connectivity and how their information is linked.
  • Given that companies do not report under ISSB standards yet, given that expectations differ very much between the worlds of sustainability and financial reporting, it may be advisable to wait for practice to evolve before trying to define what connectivity is. The starting point might not be perfection, but constant improving and nudging will help.
  • Connectivity has many different dimensions - while the discussion is currently mainly focused on the E of ESG reporting, the S and G will also be coming up, making connectivity even more complex.

In summing up, the IASB Vice-Chair noted that working on connectivity is still very much at its beginning. The more input, feedback, ideas, concerns the Boards receive, the greater their inventory to draw on in their joint work will be. It was also noted that feedback on the ISSB consultation will provide valuable information as well as work undertaken in the (future) IASB projects on climate-related risks in financial statements, on intangibles, and on provisions, which in turn will also benefit from insights developed in the context of connectivity.

A panel discussion on connectivity between financial and sustainability reporting and presentations on jurisdictional initiatives are scheduled for later in the IFASS meeting.

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