News from the July IFRS Conference

The IFRS Foundation Conference in Zurich reaffirmed the role of financial reporting as communication as well as compliance, a theme first articulated by IASB Chairman Hans Hoogervorst in his introductory remarks on the future of financial reporting.  The IASB's emphasis over the next five years will be on the presentation and grouping of information to make the financial report more effective as a means of communication.

This reassessment of focus is reflected first and foremost in the disclosure initiative project which seeks to reduce the amount of unnecessary detail in financial reports.  The disclosure initiative project encourages preparers to make bold decisions and reduce the amount of "boilerplate" material.  For example, now that IFRS have been in wide use for a decade and 83% of jurisdictions are using them, it is no longer necessary to restate the requirements of the accounting standards in an accounting policy; rather the focus should be on what is special about the accounting policies in a particular entity.  The draft guidance on materiality is a key part of the disclosure initiative as it helps preparers to understand the concept of materiality and apply it to the preparation of financial reports.  The IASB representatives stressed that materiality operates in the context of the financial report as a whole and not just in the context of the information disclosed under a particular accounting standards.  They are redrafting the disclosure sections of the standards to reflect this and make it clear that disclosures are only required where they are material to the accounts as a whole.

Other areas that the IASB is concentrating on at the moment include:

• Financial Instruments with the Characteristics of Equity (also called FICE) and the distinction between debt and equity
• Digital reporting, such as XBRL
• The provision of non financial information and the use of non GAAP financial measurements
• Strengthening implementation and post implementation support so that preparers are given as much help as possible to start off on the right foot.

There was general acknowledgement that financial reporting embraces more than the requirements of the accounting standards, with input from the Integrated Reporting Council as well as regulators. XBRL is about to become very important in Europe as the European securities regulators have announced that from 2020 all EU listed companies must file their financial information in the European equivalent of XBRL.  The IASB has realised that if they want to influence the quality of electronic as well as paper-based financial information, it is vital to enhance its IFRS XBRL Taxonomy and the IASB's Trustees have committed funding for this work.  On a survey of the conference, the general level of awareness of XBRL was surprisingly low, and the IASB and regulators have some work ahead of them over the next four years.

Non GAAP measurements were the subject of some debate in the context of financial reporting as communication, with preparers eager to tell their story in the way that suited their business model but regulators cynically suggesting that most of the adjustments seemed to reduce expenses rather than revenue.  There was also a need expressed for agreed definitions of some common measures used in borrowing covenants, such as EBITDA.  It seems likely that the IASB will allow some additional disclosure while maintaining key line items in the primary financial statements.

There were detailed sessions on a number of new standards and current projects, including the new IFRS 15 on Revenue and IFRS 16 on Leases and the work being done following the post implementation review of IFRS 3 Business Combinations on goodwill and impairment.

The discussions on IFRS 15 Revenue provided interesting practical insights into the sometimes complex issues, identifying two areas in particular:

• whether there are separable contracts when an entity delivers product and supplementary services; and
• the identification of whether an intermediary is acting as a principal or agent.

The examples used were derived from two multinational companies where the core transactions (selling products with ancillary or support services through intermediaries) were the subject of different forms of contract in different jurisdictions. Not only were there complexities in the interpretation of the local contracts but there was the consequential issue of what level of accounting uniformity should be achieved in the group accounts where transactions were through different legal arrangements.

Most members of the audience were going to be late adopters but both speakers recommended that the analysis of the facts to determine the accounting should be undertaken soon in part because both speakers found that the act of doing the analysis provided them with interesting commercial insights.

IFRS 16 Leases, as expected, brings all leases onto the balance sheet apart from short term (<12 months) and low value leases.  The IASB is experimenting with a new approach to implementation, publishing guidance at an early stage, rather than waiting for differences in practice in different jurisdictions to emerge down the track.

The post implementation review of IFRS 3 has led to calls for the reintroduction of goodwill amortization due to perceived weaknesses in the impairment test approach.  There is strong resistance from investor community to amortization as it makes no sense in the P&L and they always reverse it out.  A variety of approaches to goodwill is being looked at including one that tries to quarantine the impairment test to the acquisition, by retaining the preacquisition "headroom" in the CGU when testing for impairment.  It remains to be seen how this will play out.