Thursday 10 February 2022
We are nearing mid-February already and here in the UK it feels as if Spring is just around the corner. The mornings are, on-balance, becoming warmer, the evenings longer, the sun making more regular appearances. Notably, this all means that within a few short weeks IASeminars will once again be opening its physical and virtual doors to a new season of training.
Before we look forward…looking back, 2021 was an interesting year. An understatement of course, in the same way as suggesting “it’s been an interesting couple of years”. About this time, or thereabouts, two years ago, the phrase ‘Covid 19’ was only just starting to make a regular appearance. One year on from that and different words - Environmental, Social, Governance – were starting to grab the headlines, at least for the accounting and reporting community. Now, as we move along 2022, these two subjects – Covid and ESG - are strangers to us no more.
It’s difficult to imagine a time when Covid/Coronavirus will not feature as a business and accounting issue. We’ve discussed previously the inextricable link between the pandemic and idle business assets, as reflected in obligatory impairment reviews. On that, the most accessed IASeminars articles continue to be those focused on the challenges of the IAS 36 Impairment of Assets test, specifically the value-in-use calculation. You may be interested in reading the relevant article.
In terms of ESG there are a number of established reporting frameworks and now the new reporting board, the ISSB, devoted to developing high quality reporting standards on climate, environmental, social and governance matters. ESG is here to stay.
No doubt the impact of Covid and impairments (along with a lot else!) will be discussed at length during the first in-person course of the year, IFRS Fundamentals - a five-day comprehensive study of IFRS to be held in warm and wonderful Miami this March. In terms of matters ESG the new season kicks off on 14th March with our virtual introduction to ESG – ESG Reporting, Why You Need to Care.
With these two issues continuing to take centre stage we might be thinking that for the IASB all other work has either been completed, or put on hold. And we’d be mistaken. In a dynamic global economy, the Board’s work is never done. A quick look at the Work Plan shows an agenda full of ongoing projects, small and large, many completely unrelated to Covid and ESG issues. As new Chair, Andreas Barckow alluded to the Board’s direction of travel during a speech made at the end of 2021. For him the list of ongoing projects for 2022 is headed by three key initiatives, the first of which is the Primary Financial Statements project, which itself consists of three elements;
- Reshaping the structure for the statement of profit or loss, introducing an operating, investing, and financing category of income and expenses. In effect this will eventually lead to new and revised IAS 1 Presentation of Financial Statements. The statement of cash flows (IAS 7 Cash Flow Statements) will also see some changes to cash flow classifications to improve comparability between entities.
- Introducing improvements to the way companies aggregate and disaggregate information;
- The introduction of defined disclosures for some management performance measures. These measures, currently not specified by IFRS and sometimes called Alternative Performance Measures, or Management Performance Indicators, can be numerous and sometimes difficult to understand. Arguably, over the years their importance to users has increased, whilst the ability to compare between entities has become diluted. Some of these measures would now be subject to IFRS regulation and guidance.
Second on the list relates to an element of the IASB’s due process known as the Post-Implementation Review or PIR. The Board is required to conduct a review of any new Standard or major amendment two / three years after the pronouncement has become effective; this to assess whether all is working as intended. Two major PIR’s are currently active. The first of these is a review of the consolidation standards, namely IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements and IFRS 12 Disclosure of Interests in Other Entities. So far, according to Barckow, it appears these three very important standards (along with the previously PIR’d IFRS 3 Business Combinations) are ‘working well’ and therefore any changes would be very limited in scope. Perhaps of more interest and more importance therefore is the newest PIR, the review of IFRS 9 Financial Instruments. Although it might seem that IFRS 9 has been with us for a decade or more, it only became effective in 2018, hence the time now for review. In fact, the Board decided to postpone part of the PIR relating to IFRS 9’s impairment provisions to allow time to gather more evidence of how the Standard has responded to the challenges posed by the pandemic. Covid cannot be ignored. Thus, at present the PIR will focus on the classification and measurement requirements of the financial instruments standard. Barckow highlighted that an area of particular interest to the Board relates to financial instruments with ESG features. In his words, “these are becoming increasingly popular, so we want to make sure that our existing requirements can be applied to them and produce meaningful results”. ESG cannot be ignored.
The PIR on IFRS 3 Business Combinations was alluded to above and forms the basis for the Board’s third major project slated for 2022. In 2020 the Board published a discussion paper - Business Combinations—Disclosures, Goodwill and Impairment which considered the following topics identified during the review of IFRS 3:
- disclosing information about acquisitions;
- testing goodwill for impairment—effectiveness and cost;
- whether to reintroduce amortisation of goodwill; and
- recognising intangible assets separately from goodwill.
In the current year it appears the focus will largely be on a) above. With respect to the carrying amount of goodwill (post acquisition) after receiving much feedback on the pros and cons of the impairment model compared to the previous amortisation approach it appears that respondents are equally split as to their preference, a situation unaltered by different jurisdiction or industry. Currently the IASB’s preliminary view is that it the existing impairment approach should be maintained. However, the IASB has been exploring whether it can make the impairment test more effective whilst at the same time less complex. Work will continue progressing that idea.
Regarding the disclosure of acquisition information, the Board is keen that a) investors are provided with more useful information about acquisitions so that b) they can more easily assess whether the acquisition has been a success. In this area the IASB’s preliminary view is that a company should be required to disclose information about its objectives for an acquisition and, in later periods, information about how that acquisition is performing against those objectives. In the eyes of the Board such information would help investors to hold management to account (more easily) for its acquisition decisions.
This all sounds well and good, and investor useful. In reality though this initiative might be more of a challenge for the Board than at first it appears. Concerns have already been raised, especially by preparers. Some argue of an inability to track the performance of the acquired business (an argument which looks a little tenuous), others to having to provide potentially company-sensitive and forward-looking information (arguably a more genuine concern). From a user’s viewpoint there’s always the concern that the desire for more disclosure must be balanced against a desire for less!
It will be interesting to see what happens with each of these projects as the year progresses.
In any event what we do know for sure is that as each one is completed a new one will take its place on the Board’s work plan. Their work never ends. Our need for knowledge likewise.
As ever, any new initiatives will be highlighted in these pages, and from a more practical viewpoint illustrated on one of our IFRS Update and Application courses, the first of which is running in Amsterdam this April.