Accounting: Play it again, Sam
The IFRS Foundation’s latest effectiveness review has drawn criticism. But, writes Stephen Bouvier, you could be forgiven for thinking you have read it somewhere before
“In sum, a rather disappointing output. This convergence-dominated work programme has not overall produced better, more useable or more decision-useful financial reporting standards for IFRS preparers and users, and in some areas standards have even been made worse: new standards have often given rise to a subsequent stream of amendments and interpretations as a result.”
Ian Bishop and Alan Dangerfield, two senior accounting experts from the multinational pharmaceutical company, Roche, wrote those words in a February 2011 letter addressed to the trustees of the International Financial Reporting Standards (IFRS) Foundation after its last strategic review.
History, however, has a strange way of repeating itself, and their words could be a summary of the views of the audit and accounting professionals who have damned the trustees’ latest effectiveness review with faint praise. Moreover, their blistering summary of the state of IFRS could even be read as a cutting commentary on the work of both the International Accounting Standards Board (IASB) and the IFRS Interpretations Committee (IC) on pensions accounting.
Since Bishop and Dangerfield’s comments, the IFRS Foundation’s trustees have launched a second review of their effectiveness, while the IASB has published a series of targeted amendments to its pensions standard, IAS 19. Simultaneously, the interpretations committee has re-visited the measurement of intermediate-risk plans. In June 2015, the IFRS IC proposed potentially far-reaching changes to IFRIC 14. Many of the views expressed in the 70-plus comment letters that the committee received from experts were highly critical.
Central to the proposals is the plan to force schemes to recognise an additional liability where a third party – perhaps a trustee body – could restrict the surplus available to a scheme sponsor. This could apply even if it is unlikely that the trustees would ever seize part or all of the surplus.
But despite the buzz around the exposure draft, not least the decision by Royal Bank of Scotland to apply its requirements, the project has stalled.
If the IFRS IC withdraws the exposure draft, it will be the latest in a long line of due process documents that have failed to fly. Indeed, the story of pensions accounting this decade has, ironically enough, been one of ineffectiveness rather than, in the IFRS Foundation’s own rubric, one of effectiveness.
For example, in 2008, the IASB issued an ill-fated pensions accounting discussion paper. This proposed a fair-value based accounting model that would have heaped mountains of volatile debt onto corporate balance sheets. The board scaled back its ambitions and published a series of targeted amendments to IAS 19 in 2011.
Although, the board’s reluctance to tackle pensions comprehensively gave defined benefit (DB) sponsors some respite, it also meant pensions accounting stagnated when pensions were coming up with more exotic plans and discounting strategies.
For example, in September 2008, in response to that year’s discussion paper, the UK Actuarial Profession wrote to the IASB and urged it to “give up any attempt to fundamentally change the accounting for any category of pension benefits until a comprehensive review of pensions accounting as a whole has been completed”.
The actuaries pointed out: “IASB staff have wrestled with this problem for several years now, and it is unlikely to be soluble as long as the accounting for pure defined contribution (DC) and final salary plans remain as they are. Drawing further lines between categories of pension benefits will not resolve the problem.”
“It seems significant resources have been dedicated to fixing problems that should have been identified during the standard-setting process. This may indicate further improvements can be made to the board’s due process”
Yet a decade later, there is little evidence that two effectiveness reviews have had any practical impact on the organisation’s pensions team. For example, in 2014, the IASB first announced plans to issue a discussion paper on pensions accounting. Similar noises were heard about discount rates. But despite public airing of the issues, no documents have emerged.
The decision to look again at pensions, and the focus on discounting, were both flagged up in final report on the board’s 2011 agenda consultation. Page 25 notes that work on measurement issues surrounding DB and contribution-based promises “has not yet commenced”. In practical terms it still hasn’t.
But just as pensions accounting has become a prisoner of time, so too has the IFRS Foundation. Although, much of the feedback to the trustees is hard hitting, you could be forgiven for thinking that you have heard it somewhere before.
One noteworthy and surprising critic of the board is the Institute of Chartered Accountants of England and Wales (ICAEW). In its comment letter, the ICAEW lashed out at the quality of the board’s standard-setting processes.
“It seems significant resources have been dedicated to fixing problems that should have been identified during the standard-setting process,” the ICAEW writes. “Again, this may indicate further improvements can be made to the board’s due process.” Indeed, as several correspondents point out, the IASB has a tendency to publish a standard only to unleash a flurry of editorial corrections, minor amendments and interpretive guidance.
In a meeting paper prepared for the board’s March meeting, staff wrote: “These respondents thought such amendments hurt the credibility of the Standards and [failed to] provide an incentive for preparers to take an early start in implementing the Standards.”
The volume of editorial corrections put by the board during 2015 runs to 15 pages of landscaped A4. The board kicked off 2016 with a further four pages of corrections, including, with no hint of irony, what it calls a “[r]etraction of a previous editorial correction”.
Another theme has emerged from the public comment letters to the effectiveness review that is of particular interest to pensions practitioners. Perhaps unsurprisingly given the recent travails with IFRIC 14, IASB staff reported during the 16 March 2016 meeting that commentators had summed up the workings of the interpretations committee as “slow and unresponsive, with a long lag between submissions and decisions”.
These critics believe that the committee “sometimes addresses ‘symptoms’ of problems with standards rather than the underlying causes”. This feedback will disappoint the IFRS Foundation trustees, who four years ago launched a bid to improve the committee’s image and responsiveness.
Michael Stewart, the IASB director charged with implementing the new user-friendly approach told the IASB’s March 2012 meeting that trustees wanted the committee to identify “other ways” to assist constituents “in conjunction with the board”. This was in response to the criticism that the interpretations committee was too passive.
As matters then stood, the committee either issued an interpretation, recommended that the board make an amendment to a standard, or rejected the issue on the grounds that the standard was clear.
To these interventions, Stewart explained, the committee would in future add the option of issuing illustrative examples, providing more expansive agenda decisions, or handling an issue as an educational project. This is, in fact, the very policy that the committee has followed in the intervening four years. If anything, it has demonstrated that an abundance of procedures by no means fills the void left by a lack of solutions.