Thinking back to 2007, pensions was the spectre at just about every feast when it came to the work of the International Accounting Standards Board (IASB), not least because of the push to persuade the US to adopt International Financial Reporting Standards (IFRS).
• A substantial overlap exists between the IASB’s work and that of the new ISSB
• The boards are unlikely to work on joint projects in the immediate future
• Pressure is growing for the IASB to tackle digital financial reporting
But time does indeed move on, as do priorities and investor demands. Just as accounting convergence with the US is no longer a priority, neither is pensions accounting. Other issues such as intangibles and goodwill have forced their way to the top of the agenda. In fact, when it comes to pensions accounting, the intervening 15 years or so have taught the board two salient lessons.
One is that unless the IASB reconsidered IAS 19’s definitions of defined benefit and defined contribution plans, it was unlikely to make progress tackling the measurement challenges posed by so-called hybrid plans, which share the characteristics of DB and DC plans. The second is that any model for measuring pensions obligations will produce not only winners and losers – probably more of the latter – but will almost certainly face heavy political opposition. After a decade of tinkering around the edges to little effect, pensions simply are not worth the time and effort.
“It is hard to ignore the fact that the ISSB has yet to set any standards. Aligning its output with the IASB’s work on financial reporting will involve hitting not only a moving target but one that is largely undefined”
All of this segues neatly into the latest IFRS Foundation agenda consultation. The process began in March last year, when it was unknown whether the foundation would tackle sustainability standard setting. In many ways, the IFRS Foundation might have benefited from delaying the whole exercise until this year or even next.
With the responses analysed and the numbers crunched, the staff have identified two important themes.
The first theme to emerge from their analysis is the clear overlap between the board’s financial reporting standards and the future work of the newly formed International Sustainability Standards Board (ISSB). Financial reporting no longer exists in a vacuum. The second theme concerns partnerships with national standard setters. These issues potentially have major implications not only for the IASB’s strategic decisions on its future work but also for the priority it allocates to individual items on its technical work plan.
But now that the foundation has appointed Emmanuel Faber to chair the ISSB, the IASB has a new reality to plan around as it fixes its priorities for the next five years. That said, it is hard to ignore the fact that the ISSB has yet to set any standards. Aligning its output with the IASB’s work on financial reporting will involve hitting not only a moving target but one that is largely undefined – at least in the immediate future.
As if that weren’t complicated enough, two additional factors weigh on the landscape. First, the IFRS Foundation’s constitution requires the two boards to “establish procedures for working with [each other] to develop [IFRS Accounting Standards and IFRS Sustainability Disclosure Standards] that are compatible, and avoid inconsistencies and conflicts”. Second, this co-operation is subject to annual review by the foundation’s trustees. In other words, this is not an issue to which they can merely pay lip service.
Perhaps the easiest way to navigate the choppy waters of standard setting is to consider what the IASB does at present. There are few better places to start than a presentation prepared by the board’s staff for the January 2022 meeting of the IFRS Advisory Council. The IASB’s activities could potentially be split across four principal areas of activity: developing new IFRS and major amendment projects; maintaining existing standards – together with work to ensure consistent application; the board’s IFRS for small and medium-sized entities; and digital financial reporting.
The biggest area for potential connectivity across the two standard-setting activities – staff put it at between 40% and 45% – lies in developing new IFRS and overhauling existing ones.
Coincidentally, this connectivity or overlap itself breaks down into two broad areas of cooperation between the two: potential joint projects – management commentary and the conceptual framework; possible related projects – such as climate-related risks, pollution pricing mechanisms and intangibles. Beyond that scoping exercise lies everything else, amounting to unlinked projects.
Indeed, as IASB member Mary Tokar observed during a 15 November discussion, connectivity with the ISSB is “the elephant in the room”. She also noted that stakeholder capacity was limited to take on the burden of responding to a broader IASB work plan, with these capacity constraints driven at least in part by the rise in sustainability reporting.
She said: “I think that when we are talking about capacity and the constraints on capacity, which I think are very real, we should be saying it isn’t just ‘woe is me’. It’s our problem …. it’s a systemic issue, and our stakeholders have the same capacity [issues as we do].
“[I]n some ways, our stakeholders could have more of [those] capacity problems, because one of the other messages I’ve picked up is that, at least in the early days, a lot of the increase in sustainability reporting demands is falling on the people who handle financial reporting – not only and solely, but at least in part.”
At the same time, constituents are clear that “any interaction with the ISSB should not affect the board’s capacity to deliver timely improvements to financial reporting”, staff say. In short: don’t forget the day job.
There is a further complication: digital reporting. As Baruch Lev and Feng Gu argued in their ground-breaking The End of Accounting, financial reporting is becoming less and less relevant to investors. After all, who would invest in Tesla or Uber or Amazon based on the financials alone? In fact, in the opening chapter of their work, they observe the striking similarities between financial statements released by the United States Steel Corporation in 1902 and those produced in 2012.
At the moment, the IASB’s main work in digital reporting is concerned with supporting the IFRS taxonomy. But that is likely to change. IASB member Zach Gast says: “Today people are asking for charts and illustrations in accounting standards. Tomorrow, they may be asking for something else. And I think what I saw was a call for a process that gets to where we need to be in five years versus what we should do today.” All of which sounds a lot like another of those hard-to-hit targets.
Perhaps the best indication of the board’s agenda comes from its chairman, Andreas Barckow.
He was, he said, happy to amend or review the board’s existing literature where appropriate but was not prepared to tackle a project – he name-checked cryptocurrencies – just because it was “hip and trendy” and the board lacks a standard.
“I wouldn’t be prepared to say just because we don’t have a standard, we should develop one because if we do go down that path, I think that will just end in an endless stream of standard development.”