Accounting: Connectivity between ISSB and IASB on accounting standards

If you think we all agreed on what connectivity is, you are probably wrong. At least that is what the International Accounting Standards Board’s vice-chair Linda Mezon-Hutter seemed to imply at a recent meeting of the IFRS Foundation’s Accounting Standards Advisory Forum (ASAF).

She said: “There are different understandings of just what connectivity is or perhaps what it needs to be. And so Sue [Lloyd, vice-chair of the ISSB] and I decided that we’d like to start a dialogue about what connectivity is today and.… have an open dialogue on what connectivity might be going forward.” 

The conversation is likely to be about the linkage between financial and sustainability reporting. 

Three pillars of connectivity

We gained some insight into connectivity from an article by ISSB chairman Emmanuel Faber and his counterpart at the IASB, Andreas Barckow. First, they identify three pillars of connectivity: reports, products and processes. 

Connectivity in reports is about giving investors, as users of financial and non-financial reporting, “a holistic, comprehensive and coherent picture of a company” through general-purpose financial reports. With unerring circularity, the article explains that “connectivity in our products and connectivity in our processes are important components of achieving that goal”.

Nonetheless, their interpretation is that the two boards’ outputs are supposed to give investors sufficient basis for deciding whether to invest in a company. 

To reach this brave new world in corporate reporting, the boards must also achieve connectivity within their products, which means aligning standards, concepts and digital taxonomies. They write: “Together, we can ensure that there is compatibility of concepts and that there are no gaps or unintended overlaps between IASB and ISSB standards and our digital taxonomies.” 

Finally, there is connectivity in processes. Here, the pair continues, the boards have “established practices to facilitate knowledge sharing and coordination between the IASB and the ISSB”. We learn, for example, that both organisations and their staff “regularly update each other on their activities during and between public board meetings”.

Sharing concepts and learning

There is some evidence that the boards influence each other. For example, both IFRS S-1 and S-2 have borrowed concepts from the IASB’s conceptual framework. 

Just how much was clear from a slide presentation accompanying Lloyd and Mezon-Hutter at the March ASAF meeting. One slide of their meeting paper outlines five areas where the two boards have achieved some degree of connectivity – in product. 

For example, the two boards share a common definition of materiality. Then there is the ISSB’s use of “reasonable and supportable information without undue cost or effort”, which some might recognise from IFRS 9’s expected credit loss model, while S-1 has borrowed wholesale from IAS 1 & IAS 8.

This overlap is likely to gather pace with the IASB’s decision to launch a project dealing with climate change-related risk, which will almost certainly draw on the work already done by the ISSB with S-1 and S-2.

The IASB also published an update on climate-related risk, penned by Barckow. “This project and the work of our sister board the ISSB complement each other and illustrate how the work of the two boards is connected,” he writes.

The rationale for the project is straightforward enough. The board is aware that climate-related risk is often understated and of interest to investors. From there, however, it all becomes a little vague. For example, the project will not result in a new standard on climate-related risk. Nor will it lead to changes in the board’s conceptual framework.

But if you were hoping that it will halt runaway global warming in its tracks, think again. It is, in fact, a “maintenance project”, which means that “any outcomes will be narrow in scope”. So the board could make minor amendments to its standards, bring in limited guidance or new illustrative examples, or publish further educational materials. 

What can we expect?

Possible outcomes include covering climate-related opportunities as well as risks, addressing “sustainability-related risks and opportunities beyond those related to climate”, or even looking at “how scenario analyses provided when applying ISSB Standards could inform the measurement of assets and liabilities in the financial statements”.

All of this hinges on the IASB’s eventual decision about the scope of the project. Little wonder that IASB member Bruce Mackenzie warned during a board meeting on 20 March that: “[W]e all know we could explode this into a massive project, [and] that this could definitely be a main project and take us years and years to complete.” 

This new project is not the IASB’s first tilt at sustainability. In 2020, it issued educational materials on the effects of climate-related matters on financial statements, having published in 2019 an in-house article dealing with International Financial Reporting Standards (IFRSs) and climate-related disclosures. Additionally, the board already has a related project addressing pollutant-pricing mechanisms on its list of potential projects.

How well IFRSs address sustainability will become perhaps clearer once the outcome of the sustainability board’s agenda consultation is known. The board decided at its 20 March meeting to canvas views on whether it should launch a project to look at “integration in reporting to support integrated disclosures beyond [IFRS] S-1 and S-2”.

A shift in emphasis

This marks something of an about-turn by the ISSB, as Lloyd admitted in March: “We changed our articulation of that project. It was originally described as a joint project with the IASB working on management commentary. We realised that we probably should.… make sure that our stakeholders were giving us feedback on the importance of pure sustainability projects as opposed to one that does further work bringing the reporting together.”

There is a little more to it than that. A glance at paragraph 8(c) of Agenda Paper 2 prepared for the board meeting reveals that this is re-articulated as: “[A]n ISSB project that could be pursued jointly with the IASB, rather than presenting it only as a formal ‘joint project’.”

The difference between a “joint” project and one that “could be pursued jointly” probably eludes most of us, given that it is a distinction without a difference. If it implies a looser working relationship between the two boards than moving in lock step to salvage the IASB’s management commentary project, it would be easier if they just said so.