Accounting: IASB shortlist of projects hits a snag

The best laid plans of mice and men often go awry. Or so they say. March was supposed to be the month when the International Accounting Standards Board (IASB) whittled down its shortlist of potential standard-setting projects for a final vote in April. But nothing ever goes to plan.

The shortlist still comprises seven projects: climate-related risks; cryptocurrencies; going concern disclosures; intangible assets; operating segments; pollutant-pricing mechanisms; and the statement of cash flows.

The intention was for board members to decide which of the shortlisted projects would go forward to a vote in April. But when it came to the crunch vote, it dawned on some some of them that they didn’t really know what the projects might entail. 

“[W]e haven’t got all the details,” said IASB member Ann Tarca. “What’s the climate-related risk [project] going to look like? I don’t know. So does my hand go up or down? I think that is really the essence [of the issue].” If only someone had thought of that sooner.

If project leader Rachel Knubley was by now groaning inwardly, she didn’t let it show. This was, she responded, “a really helpful suggestion”. Quick as a flash, she reasoned, staff could “take the feedback, including some of the scepticism”, and use that as the starting point for a package of materials.

Doubts over crypto, going concern

But what was all that scepticism? In terms of specific projects, the two that provoked the most apprehension were almost certainly cryptocurrencies and going concern. 

IASB member Mary Tokar was far from convinced about cryptocurrencies. The problem, she began, was that the board lacked evidence that digital currency holdings are substantial assets with questionable accounting. “It might not be what many people see as the optimal accounting,” she said, “but it’s a question of getting from some informational value to better informational value.”

And while she appreciated the need to be proactive, there were, in fact, more pressing issues to address – a view shared by other members.

But perhaps most telling was her suspicion that “there may be some instances of people saying, ‘I have a product or a market I want to develop and I’ll have a more attractive package if I have a fully blessed accounting framework for that’”.

But perhaps the biggest revelation to emerge was the apparently limitless overlap between International Financial Reporting Standards (IFRS) and whatever standards the International Sustainability Standards Board (ISSB) and the IASB develop in future. 

Climate matters

Nowhere is this more apparent than in climate-related reporting. The legacy board is mulling a standard on the topic, while at the same time the ISSB has just issued its own draft climate-reporting standard. How will they align, not just on content but also on the project timeline? 

IASB member Nick Anderson says: “[W]e would need to connect with the work of the new board in terms of perhaps more intangible items as you describe them in the papers and things that don’t meet the recognition criteria. We know there’s a significant overlap between intangibles and the S in ESG, if you like.” The best way to tackle this, he believes, is through a staged approach with an open dialogue between the two boards. 

But there is also, he warned, the risk of “unforeseen consequences” from making changes to accounting literature in one place and introducing an unintended inconsistency elsewhere. The warning is certainly timely. The staff paper points to potential overlaps between tackling climate-related risks and goodwill and impairment, management commentary, and pollution-pricing mechanisms. 

Cross-cutting issues

Similarly, the staff’s analysis shows that any project to tackle cryptocurrencies and linked transactions would overlap with IAS 38 (Intangible Assets), as well as IFRS 9 (Financial Instruments) and any future workstreams on pollution pricing and commodity transactions. 

One priority that no-one appears to have spotted is the concerns voiced by some asset owners in the UK over the board’s potential unwillingness to tackle going concern – the other problem-child project. 

Under the going-concern assumption, an entity is viewed as “continuing in business for the foreseeable future”. Crucially, it is not the auditors’ assessment of going concern but rather their opinion of management’s assertions about going concern based on the available evidence. Many, particularly in the UK, have been concerned at the number of high-profile corporate failures shortly after auditors had signed off on the accounts. 

Cash(flow) is king

The IASB’s Anderson revealed his preference for “a project on the statement of cash flows”. This is an area where “we’ve seen innovation in financing over the last two years, which has changed the utility of the cash flow statement”. It is also, he says, “the centre of the analytical process for many investors”.

He explained: “[U]nderstanding the cashflow dynamics in the company helps me understand whether they can finance their debt, if they can pay dividends, the opportunity to reinvest in their business.”

At the same time, he would also like to see better information around both non-cashflow activities and changes in a company’s net debt position. Finally, he wants to look again at the utility of the cashflow statement for banks and insurers. 

Going concern, he said, was not ranked highly by users. “And for me it would be much more meaningful, tangible actually, to understand the cashflow dynamics of a business.”  

Going concern and audit

Others disagree. “The decision of companies and auditors to sign off accounts on a going-concern basis should be the issue of most concern for investors,” says Tim Bush from Pensions & Investment Research Consultants. “Getting that right is the acid test of the reliability of audited accounts. If the accounts are wrong, then the company may not merely be worth less, but probably worthless.”

And that argument lands right in the contentious debate in the UK about auditor liability. “Astute investors will also have no doubt picked up that large accounting firms got tied up in knots in Parliamentary enquiries,” says Bush. 

“In attempts to deny responsibility for not finding material fraud, they were tripped up by the fact that the absence of material fraud is a condition of being a real going concern, rather than a false appearance.”

Not that this is an argument in favour of dismissing the cashflow approach out of hand, he says, because companies still need “proper cash-based profits” to function.

“Given that the IFRS cashflow statement doesn’t give any current, or predictive comfort on these matters essential to justifying the going-concern position, then astute investors will inevitably have problems with IFRS profit-and-loss accounts and balance sheets, given that they not only don’t cover these essential issues and can even point people in the wrong direction.”

And no, the board confirmed that pensions accounting remains well and truly off the shortlist.