"For everything to stay the same, everything must change" - news from the IFRS Conference

Hans Hoogeworst, Chair of the IASB, opened this year's IFRS conference with a quote from Lampedusa's novel, The Leopard: "For everything to stay the same, everything must change".  He went on to outline the main themes of the IASB's work program and the conference agenda.  He emphasised how important it was for the board's standards to stay relevant in an ever-changing world.

Better communication is the key in our complex business environment.  The IASB's main projects in this area are:

• The primary financial statements project, with particular emphasis on the income statement, which is still the primary statement for most users; and
• Management commentary, which is the main vehicle for broader developments in reporting.

As part of their work on the income statement, the IASB will address "self-defined subtotals", a.k.a. "management performance measures" or "non-GAAP measurements".  Out of a sample of 60 financial reports, they found 41 reported "operating profit" but across the 41, there were no less than 9 different definitions of what operating profit comprised.  The IASB has adopted an "if you can't beat them, join them" approach, on the basis that non-GAAP is here to stay, but some of the abuses can be curtailed.

The board is going to define several of the commonly used "non-GAAP" measures, such as operating profit, with separate definitions for non-financial and finance industry reporters.  They also plan to require disclosure of profit before finance costs and tax, to enable comparison of entities regardless of their finance structure.  These proposals will bring management performance measures (MPMs) within the scope of audit and the regulators.  MPMs will have to be explained in a note to the financial statements and if an entity choses to give its own measure priority over an IFRS defined measure, they will have to disclose the reason.

The proposals will also address disaggregation and make excessive disaggregation more difficult.  There will be additional guidance on what constitutes unusual items requiring separate disclosure they can only be unusual if they have limited predictive value and should not appear again for several years.

The second big communication project is the update to the Practice Statement on Management Commentary.  Management commentary is seen as the vehicle for communicating information that cannot be captured by the financial statements, but will eventually have a financial impact - the broader context in which the financial statements have to be read and the impact of non-financial factors on long-term value creation.   It embraces issues such as the business model, the nature and role of intangible assets in the business and the impact of climate change and taps into the impetus gathering around integrated reporting.

Simultaneously, the IASB is continuing to work on its disclosure initiative project to help preparers reduce unnecessary disclosures that blur the message and focus on material issues.  It has published a report on how companies have improved communication, showing disclosures before and after and is using IAS 19 Employee Benefits and IFRS 13 Fair Value Measurement as test standards to pilot improvements to disclosure.

The IASB work program

IFRS amendments expected in 2019 are:

• Classification of liabilities as current or non-current; and
• IBOR reform and its effects on financial reporting.

Projects at an earlier stage scheduled to result in discussion papers in 2019 are:

• Comprehensive review of IFRS for SMEs;
• Dynamic risk management;
• Rate regulated activities; and
• Goodwill and impairment.

We can also expect an exposure draft on primary financial statements.

In 2020 we can expect discussion papers on:

• Business combinations under common control;
• Review of disclosures; and
• Management commentary.

Initial feedback on new standards

A panel of preparers and users commented on how they had found the experience of implementing IFRS 9 on financial instruments and IFRS 15 on revenue.  Surprisingly, corporates experienced less volatility as a result of applying IFRS 9 than they had expected.  Benefits included more information about fair value and better alignment of accounting with credit risk management. 

IFRS 15 had resulted in greater disclosure even when the accounting was unchanged, which has given entities and their users a better understanding of how they derive their revenue.

One of the analysts however commented that much investing now was done by computers tracking indices and the enhanced disclosures were only any use when human beings were reviewing the accounts!

Goodwill and impairment

Hot off the press after the IASB's June meeting was an update on their project on goodwill and impairment arising from the Post Implementation Review of IFRS 3.  The project is a response to criticism that impairment losses are being recognised too late and simply confirm something the market already knows and that the mandatory annual test is costly and complex. The Board is aiming to publish a discussion paper in the second half of 2019. 

The IASB's own voting was so close on key issues, will contain some radical proposals for comment by the wider community.  They will be asking:

• Whether the amortisation of goodwill should be reinstated (narrowly rejected by the IASB); and
• Whether the annual impairment test should be replaced by an impairment test only when indicators of impairment are present (narrowly approved by the IASB).

As part of the proposals the IASB will be advocating better disclosure of information on acquisitions what was the strategic rationale and what drove the acquisition price? This would be supplemented by disclosures about the subsequent performance of acquisitions over the acqyisition accounting period and the two subsequent years did the acquisition generate the synergies or other benefits that management anticipated when they bought the business? 

In our experience an unwillingness to acknowledge impairment of recently acquired assets is a factor in many of the matters we are briefed in.  These additional disclosures have the potential to make businesses and auditors focus on what the entity bought and how the acquisition has worked out and can counteract the danger presented by making the current annual impairment test that only takes place when indicators are present.