Both the International Accounting Standards Board (IASB) and the U.S.-based Financial Accounting Standards Board (FASB) are working through their due-diligence processes to set their agendas for the next five years. These respective processes seek stakeholder feedback not only for prioritizing the specific projects on the boards’ standard-setting agendas but also for broader insight on stakeholders’ concerns and expectations regarding financial reporting. These processes are occurring amid significant reconsideration of the usefulness of financial reporting for decision making in the modern economy.
In March 2021, the IASB publicly released its Request for Information, Third Agenda Consultation. The comment deadline for responding to this release is September 27, 2021. The IASB will employ this feedback to help shape its work plan and set its high-level objectives for 2022 to 2026.
CONSULTATION RELEASES
As Nili Shah, IASB’s executive technical director noted, “The IASB does much more than set standards, so the agenda consultation starts by first asking more holistic questions about balance of all the Board’s activities. For example, the agenda consultation seeks stakeholder guidance on whether the Board has the right level of focus on supporting the consistent application of IFRS [International Financial Reporting Standards] Standards and how it can support companies that do not have public accountability by increasing its focus on the IFRS for SMEs [small and midsize enterprises].”
Similarly, the FASB initiated its process by meeting with groups of key stakeholders in early 2021 and followed up with a formal release in June 2021. “Since this launch, we’ve spoken with over 200 stakeholders who told us what topics they think the Board should address next,” said Hillary Salo, FASB technical director. “This will give all of our stakeholders an opportunity to share their respective views on priority topics and potential solutions for the Board’s consideration.” The FASB plans to assess comments that it receives in response to the Invitation to Comment during the latter half of 2021. Based on this consultation process, the FASB plans to announce a technical agenda toward the end of 2021 or in early 2022.
As introduced by FASB Chair Richard Jones in a June 3, 2021, speech at the 39th Annual University of Southern California SEC and Financial Reporting Institute Conference, the FASB’s consultation regarding the improvement of standard setting provides four working categories:
- disaggregating reported information,
- attending to evolving areas,
- reducing complexity, and
- identifying improvements in FASB’s standard-setting process.
PROJECT TRADE-OFFS
These four categories implicitly introduce the need to consider trade-offs among addressing open projects, simplifying current requirements, and setting new priorities and timely responding to emerging needs. In fact, the FASB’s current agenda lists more than 30 individual standard-setting and research projects in varying stages of completion. Some of these projects, such as classification debt and distinguishing liabilities from equity (that is, financial instruments with complex terms), have remained on the FASB’s agenda with limited action for years.
Neither board has proposed convergence or major standard-setting projects, such as revenue, leases, and financial instruments, that were prominent over the last two decades. Instead, both organizations are undertaking post-implementation review of these recently released standards to assess the process and cost/benefits of implementing the overhauls of these areas.
REVISING GOODWILL
Both organizations are considering the current requirements regarding the subsequent measurement of goodwill. After issuing respective invitations for stakeholder comment, the FASB seems more likely to act and reinstitute amortization to its current impairment-only model for public companies (under U.S. Generally Accepted Accounting Principles (GAAP), private entities have an election to do so). In interviews, Jones noted a high level of interest in this topic from stakeholders. Yet revising goodwill accounting would be a reversal of an issue that seemed to be settled two decades ago based, in large part, on the general opinion by many analysts and preparers that amortization unnecessarily dilutes earnings.
Despite the focus on improvement, critics cite omissions on the FASB and IASB agendas that relate to the overall relevance of conventional financial reporting and the slow pace and relative attention toward addressing emerging issues robustly and meaningfully.
One example is internally generated intangible assets. Despite the extraordinary value of intangibles, the financial reporting ecosystem devotes minimal attention to unrecognized assets such as internally generated intangibles. Citing statistics on how few users download annual reports, Baruch Lev recently concluded in an Accounting Today article, “accountants are inexplicably stuck in the industrial-era, physical assets environment. "The suggestion is that stakeholders are looking elsewhere for the data and tools they need to respond to current market circumstances.
Shah commented, “Given the continuing increase in the digital consumption of financial information, we are seeking stakeholder direction on how the Board might better support digital financial reporting.” Yet compared to the current pace and scale of change along with the increasing availability of tools and techniques such as machine-readable data, cloud computing, AI, machine learning, business analytics, Big Data, and blockchain, the issue appears a less prominent concern on the IASB’s agenda, and it’s completely absent from the FASB’s consultation.
VARIED AGENDAS
An important difference between the IFRS and GAAP standard-setting agendas is the coverage of the management commentary section of an annual report.
On the international side, the environmental, social, and governance (ESG) agenda is moving forward as a separate initiative under the IASB’s oversight organization, the IFRS Foundation. Garnering much attention about the future of reporting, in fall 2020, the IFRS Foundation issued its own exposure drafts regarding the establishment of a new authoritative body to set reporting guidance for sustainability and value-creation-based reporting. (See “A Baseline for Sustainability Standards” for more.) The IFRS Foundation issued a further proposal to amend its constitution to move forward on setting up an International Sustainability Standards Board. The goal of having two parallel boards is to ascertain, over time, the interconnectedness of financial and sustainable business information.
On the U.S. side, the FASB has issued educational materials regarding how ESG may affect items on the basic financial statements that are under its standard-setting jurisdiction. The FASB’s public statements indicate that the Board is largely looking to the U.S. Securities & Exchange Commission to set any reporting requirements as ESG disclosures largely relate to qualitative assessments of information on cash flows and risk, such as those provided in the Management Discussion & Analysis section. It is likely, however, that the need to account and report on areas such as access and use of carbon resources, the financial risks related to climate change, and customer and talent relationships by entities of all sizes, both public and nonpublic, will require attention and new means of “accounting” over the next five years.
September 2021
