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Standard setters discuss understandability of accounting standards

19 Apr 2024

At the meeting of the International Forum of Accounting Standard Setters (IFASS) currently being held in Seoul, the standard setters discussed research on the understandability of accounting standards.

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.

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New GPF member appointed

18 Apr 2024

The Global Preparers Forum (GPF) has appointed a new member, Emmanuelle Guyomard, to serve an initial five-year term.

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

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AI in standard setting

18 Apr 2024

At the meeting of the International Forum of Accounting Standard Setters (IFASS) currently being held in Seoul, the standard setters discussed whether and how artificial intelligence (AI) can be used in standard setting.

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


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IASB completes project on business combinations under common control by publishing project summary

17 Apr 2024

The International Accounting Standards Board (IASB) has published a project summary regarding its project on business combinations under common controls (BCUCC).

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.

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European Parliament approves delay of certain ESRSs

17 Apr 2024

The European Parliament has voted to postpone the adoption of sector-specific European Sustainability Reporting Standards (ESRSs) and ESRSs for third-country entities by two years, until 30 June 2026

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.

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UKEB introduces research on intangibles at IFASS meeting

17 Apr 2024

The International Forum of Accounting Standard Setters (IFASS) is currently holding its spring meeting in Seoul. During one presentation today, the UK Endorsement Board (UKEB) introduced two forthcoming research reports on accounting for intangibles.

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.

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IPSASB consults on amendments based on IFRIC Interpretations

17 Apr 2024

The International Public Sector Accounting Standards Board (IPSASB) has released an exposure draft (ED) proposing amendments to consider IFRIC Interpretations for public comment. So far the IPSASB had not considerered interpretations issued by the IFRS Interpretations Committee for inclusion in the International Public Sector Accounting Standards (IPSAS).

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.

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Two webinars introducing IFRS 18

16 Apr 2024

EFRAG has announced two webinars introducing IFRS 18 ‘Presentation and Disclosures in Financial Statements' - one with a general focus and one for financial institutions, insurance companies and conglomerates. The IASB will participate in both webinars.

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.

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Brazil consults on sustainability reporting standards based on IFRS S1 and IFRS S2

15 Apr 2024

The Comitê Brasileiro de Pronunciamentos de Sustentabilidade (CBPS), together with the Conselho Federal de Contabilidade (CFC), has published two exposure drafts for sustainability disclosure standards based on the standards of the International Sustainability Standards Board (ISSB). The comment period ends on 13 June 2024.

The exposure drafts are titled CBPS 01 Requisitos Gerais Para Divulgação De Inormações Financeiras Relacionadas À Sustentabilidade ("General Requirements for Disclosure of Sustainability-related Financial Information") and CBPS 02 Divulgações Relacionadas Ao Clima ("Climate-related Disclosures").

Please click to access the exposure drafts via the consultation page on the CBPS website. 

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April 2024 ISSB meeting agenda posted

12 Apr 2024

The International Sustainability Standards Board (ISSB) has posted the agenda for its meeting, which will be held in Frankfurt on 23 April 2024. The ISSB will be assessing projects to add to the work plan.

The full agenda for the meeting can be found here. We will post any updates to the agenda, our com­pre­hen­sive pre-meet­ing summaries, as well as observer notes from the meeting on this page as they become available.

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