7.1 IASB Agenda Consultation draft comment letter

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Dr Andreas Barckow IASB Chair International Accounting Standards Board 7 Westferry Circus Canary Wharf London E14 4HD

(Date)

Dear Dr Barckow

The UK Endorsement Board (UKEB) is the UK's National Standard Setter for IFRS. Its statutory functions include influencing the development and subsequent adoption of International Accounting Standards for use in the UK. This letter forms part of those influencing activities and is intended to contribute to the International Accounting Standards Board's (IASB) due process. The views expressed by the UKEB in this letter are separate from, and will not necessarily affect the conclusions in, any endorsement and adoption assessment on new or amended International Accounting Standards undertaken by the UKEB.

We welcome the opportunity to respond to the IASB's Third Agenda Consultation. We performed both desk-based research and outreach with our stakeholders to assess the implications for the IASB's future work plan. Our comments on the IASB's Request for Information (RFI) summarise that work and outreach. For detailed responses to the questions in the RFI please see appendix 1 to this letter.

IASB's strategic direction and balance of activities

1At a strategic level we recommend that the IASB reallocates resource to ensure that it:

  1. retains sufficient flexibility in its workplan to address the interaction between IFRS and any future international sustainability standards developed by its proposed sister Board, the International Sustainability Standards Board (ISSB). As a minimum, we think this will need to include co-ordination with the ISSB on any areas of overlap;
  2. allocates more resource to its work on digital financial reporting. This work should explore how advances in technology are changing the way investors consume information and assess the extent to which any changes are needed to the IFRS taxonomy and the way in which the Board writes Standards;
  3. adds to its work on Standards development a structured and cohesive research plan which anticipates and addresses emerging issues. To help alleviate pressure on IASB's resources, the IASB could coordinate with National Standard Setters' research programmes. If an agreement on the scope of the research project can be achieved, then drawing on local expertise and knowledge base in certain jurisdictions may help build capacity and expedite project delivery; and
  4. achieves this additional flexibility in its workplan by pausing or rationalising the Second Comprehensive Review of IFRS for SMEs, Management Commentary and Extractive Activities projects from its current work plan. IFRS for SMEs is non-mandatory, and none of our stakeholders identified it as being unfit for purpose nor requiring a comprehensive review as currently proposed by the IASB. The IFRS reporters in most jurisdictions are more interested in the project on Reduced Disclosures for Subsidiaries that are SMEs. Management Commentary is non-mandatory practice statement and most of its requirements are likely to be incorporated in the work of the ISSB. The Extractive Activities project could be addressed by educational material.

2Our recommendations are in line with the rising influence on corporate reporting of ESG1 and sustainability2 reporting as well as the increasing use of technology in the production and consumption of corporate reports3. We anticipate that these influences will continue to increase over the IASB's coming work cycle.

Priority projects

3Our desk-based research and initial outreach with stakeholders highlighted two key groups of projects for IASB's next work cycle. The first group of projects relates to emerging corporate reporting issues which need to be addressed in order for Standards to remain relevant. This group consists of climate-related risk, intangibles, and statement of cash flows. These projects also have the potential to support the development of sustainability standards. 4

4We recommend the following scope for these projects:

  1. Climate-related risk - our outreach indicates that this project's scope would require expansion beyond the IASB's proposals of amendments to IAS 1 and IAS 36 to ensure long-dated impacts of climate-related risk are reflected in the measurement of assets and liabilities. Additional scope would include a cross-cutting project to identify and resolve potential areas of interaction between IFRS and future sustainability standards on climate-related risk5; for example, implications for IFRS 9 Financial Instruments of the classification of ESG bonds; implications for IFRS 10 Consolidated Financial Statements of whether renewable energy funds meet the investment entity criteria; implications for IFRS 8 Operating Segments of changes in the regulatory environment due to climate-related risk.
  2. Intangible assets - our outreach with stakeholders indicated that this is a key area for development. Our stakeholders consider that a comprehensive review of IAS 38 Intangible Assets is necessary and should address: the extent to which IAS 38 captures relevant information on intangibles, including crypto-currencies, emissions trading rights, software, and development costs; whether a separate standard for non-financial assets held for investment would provide more relevant information where intangibles such as crypto-currencies and emissions trading rights are held for investment, and; potential interaction between IFRS and future sustainability standards on intangibles.6
  3. Statement of cash flows - our stakeholders, in particular investors, advised us that recent events have once again reiterated the need for a comprehensive review of IAS 7 Statement of Cash Flows. Specifically, this should address whether: current voluntary disclosures should be mandated to improve the information on sustainability provided by the statement of cash flows; a review of statement of cash flows categories in line with the IASB's Exposure Draft General Presentation and Disclosures could improve comparability; and financial institutions should be required to prepare a statement of cash flows.

5The second group of projects consists of: variable and contingent consideration, discount rates, other comprehensive income, and government grants. Projects in this group were highlighted during our initial stakeholder outreach but assigned a slightly lower priority by stakeholders. In the event that rationalisation of the current work programme frees up further resource, we recommend that resource is allocated to this group of projects. This group of projects could be grouped on a theme of improving consistency and reducing optionality.

Thematic approach

6We recommend that IASB undertakes projects on a thematic basis.

7One way of achieving this is to take a cross-standard approach, as taken by IASB in the Disclosure Initiative. We support this approach as it allows for more consistency across Standards.

8This could be further overlaid by projects being grouped by theme, for example by the themes of retaining relevance or improving consistency. Grouping projects by theme could help to retain focus on strategic rationale and the user needs the projects are intended to address. Such a focus could be helpful for communicating the benefits of projects, and at the project scoping stage. We illustrate a thematic approach to projects in Appendix 2.

If you would like to discuss these comments, please contact the project team at [email protected].

Yours sincerely

Pauline Wallace Chair UK Endorsement Board

Appendix 1 Response to questions in IASB's Request for Information Third Agenda Consultation Appendix 2 Illustration of thematic approach

Appendix 1: Questions on Third Agenda Consultation

Question 1: Strategic direction and balance of the Board's activities

The Board's main activities include:

  • developing new IFRS Standards and major amendments to IFRS Standards;
  • maintaining IFRS Standards and supporting their consistent application;
  • developing and maintaining the IFRS for SMEs Standard;
  • supporting digital financial reporting by developing and maintaining the IFRS Taxonomy;
  • improving the understandability and accessibility of the Standards; and
  • engaging with stakeholders.

Paragraphs 14-18 and Table 1 provide an overview of the Board's main activities and the current level of focus for each activity. We would like your feedback on the overall balance of our main activities.

Should the Board increase, leave unchanged or decrease its current level of focus for each main activity? Why or why not? You can also specify the types of work within each main activity that the Board should increase or decrease, including your reasons for such changes.

Should the Board undertake any other activities within the current scope of its work?

A1The current allocation of resource across IASB's different activity areas is broadly appropriate.

A2However, we recommend that IASB:

  1. Within its activity on new IFRS, major amendments, and maintenance and consistent application:
    1. Allocates resource to support the development of sustainability standards and consider any overlaps with and implications for IFRS standards.
    2. Incorporates a more visible and structured research programme so that responses are developed in real-time for emerging issues. Collaborating with NSS may be an efficient way of achieving this.
  2. Allocates more resource to digital reporting since it is anticipated that digital tagging and consumption of financial information will become more prevalent.
  3. Allocates less resource to the IFRS for SMEs Standard.
  4. Reviews the scope for rationalising its existing work plan and considers removing the Second Comprehensive Review of the IFRS for SMEs, Management Commentary and Extractive Activities projects from its current work plan. IFRS for SMEs is non-mandatory and IFRS reporters in most jurisdictions are more interested in the project on Reduced Disclosures for Subsidiaries that are SMEs. Most of the requirements in the Management Commentary project are likely to be incorporated in the work of the ISSB. The Extractive Activities project could be addressed by educational material.

Question 2: Criteria for assessing the priority of financial reporting issues that could be added to the Board's work plan

Paragraph 21 discusses the criteria the Board proposes to continue using when assessing the priority of financial reporting issues that could be added to its work plan.

Do you think the Board has identified the right criteria to use? Why or why not?

Should the Board consider any other criteria? If so, what additional criteria should be considered and why?

A3We recommend that two of the IASB's criteria are redrafted:

  1. There is a risk that application issues and corporate governance issues are captured by the second criterion: ‘whether there is a deficiency in the way companies report the type of transaction or activity in financial report.' We do not think this is IASB's intention. We recommend that this criterion is redrafted as ‘whether there is a deficiency in the Standards for reporting this type of transaction or activity.'
  2. The third criterion considers: 'the type of companies the matter is likely to affect, including whether the matter is more prevalent in some jurisdictions than in others.' This suggests that some sectors and jurisdictions will be prioritised over others. Our view is that prevalence should be considered across all sectors and jurisdictions. We therefore recommend that this criterion is redrafted as 'the extent to which the matter is prevalent across jurisdictions and sectors.'

A4We recommend that an additional criterion, namely whether the matter is expected to be significant at the end of IASB's next work cycle. The addition of this criteria would prevent projects of limited long-term relevance being added to the work plan.

A5We recommend that the first criteria is redrafted in consultation documents so that it is consistent with the wording in the IASB's due process handbook, referring to users rather than investors.

Question 3: Financial reporting issues that could be added to the Board's work plan

Paragraphs 24-28 provide an overview of financial reporting issues that could be added to the Board's work plan.

What priority would you give each of the potential projects described in Appendix B-high, medium or low-considering the Board's capacity to add financial reporting issues to its work plan for 2022 to 2026 (see paragraphs 27-28)? If you have no opinion, please say so. Please provide information that explains your prioritisation and whether your prioritisation refers to all or only some aspects of the potential projects. The Board is particularly interested in explanations for potential projects that you rate a high or low priority.

Should the Board add any financial reporting issues not described in Appendix B to its work plan for 2022 to 2026? You can suggest as many issues as you consider necessary taking into consideration the Board's capacity to add financial reporting issues to its work plan for 2022 to 2026 (see paragraphs 27-28). To help the Board analyse the feedback, when possible, please explain: the nature of the issue; and why you think the issue is important.

The chart below illustrates our recommended prioritisation of potential projects and is based on feedback from our initial outreach with UK stakeholders and our own desk-based research. The highest priority projects are closest to the centre.

Diagram showing project prioritisation by proximity to center (highest priority)

  • Center / Highest Priority: Climate-related risks, Intangible assets, Statement of cash flows and related matters.
  • Inner Ring: Discount rates, Pollutant pricing mechanisms, Foreign currencies, Inflation.
  • Middle Ring: Negative interest rates, Operating segments, Income taxes, Government grants, Cryptocurrencies and related transactions, Discontinued operations and disposal groups, Variable and contingent consideration, Other comprehensive income.
  • Outer Ring / Lowest Priority: Borrowing costs, Going concern, Expenses - Inventory and cost of sales, Separate financial statements, Employee benefits, Interim financial reporting.

A6The three highest priority projects are: climate-related risks, intangible assets, and statement of cash flows and related matters. These projects relate to emerging corporate reporting issues which need to be addressed in order for Standards to remain relevant to the business environment over the coming decade. These projects also have the potential to support the development of sustainability standards.

A7We recommend that these projects are scoped as follows:

  1. As proposed by IASB, amendments to IAS 1 and IAS 36 to ensure long-dated impacts of climate-related risk are reflected in the measurement of assets and liabilities.
  2. to identify and resolve potential areas of interaction between IFRS and future sustainability standards on climate-related risk8; for example, implications for IFRS 9 Financial Instruments of the classification of ESG bonds; implications for IFRS 10 Consolidated Financial Statements of whether renewable energy funds meet the investment entity criteria; implications for IFRS 8 Operating Segments of changes in the regulatory environment due to climate-related risk.

b. Intangibles

  1. As proposed by IASB, a comprehensive review of IAS 38. Specifically, this review should address:
  2. The extent to which IAS 38 captures relevant information on intangibles, including those which are becoming more prevalent, such as crypto-currencies, emissions trading rights, software, and development costs, and;
  3. Whether a separate standard for non-financial assets held for investment would provide more relevant information where intangibles such as crypto-currencies and emissions trading rights are held for investment, and;

The potential link to sustainability disclosures on intangibles.9

c. Statement of cash flows

  1. As specified by IASB, a comprehensive review of IAS 7. Specifically, this should address whether:
  1. Current voluntary disclosures10 should be mandated to improve the information on sustainability provided by the statement of cash flows;
  2. Building on the General Presentation and Disclosures ED work on the statement of profit or loss, a review of statement of cash flows categories could improve comparability; and
  3. Financial institutions should be required to prepare a statement of cash flows.

A8We propose that the pollutant pricing mechanism and crypto-currency projects are addressed within the intangibles project.

A9We recommend that a thematic approach is taken to the three top priority projects, as described in our answer to question 4 and shown in appendix 2.

A10Stakeholders also highlighted IASB's proposed projects on discount rates, variable and contingent consideration, OCI and government grants, although these were given less emphasis than the top three projects. This second group of projects could be grouped on a theme of reducing optionality and improving consistency across existing Standards. If the event that rationalisation of the current work plan releases additional resource, we recommend allocating that resource to this group of projects.

A11Our stakeholder outreach and research work highlighted that the remaining projects set out in the IASB's Agenda Consultation are low priority. We include our rationale for this below:

Project listed by the RFI11 IASB proposed scope per RFI UKEB rationale for low priority12
Borrowing costs Review the definition of borrowing costs and qualifying assets in IAS 23. Low potential for a principles-based solution. A review of a selected sample of FTSE 350 financial statements indicated this is not a prevalent or pervasive issue.
Commodities Develop accounting guidance for commodity loan transactions and other transactions involving commodities. Where entities hold commodities solely for investment purposes, guidance could be developed as part of a project on non-financial assets held solely for investment purposes. A review of a selected sample of FTSE 350 financial statements indicated commodity loan transactions are not frequent in the UK.
Discontinued operations and disposal groups Reconsider the single line-item presentation and develop more effective disclosures, or, Investors and preparers have raised matters on the application of IFRS 5. In January 2016 the Interpretation Committee concluded that most of these matters would be best addressed by the planned post-implementation review of IFRS 5. We agree with this conclusion.
Employee benefits Develop accounting requirements for hybrid pension plans; or, review IAS 19 requirements on discount rates; or, undertake a comprehensive review of IAS 19. A review of a sample of annual reports for FTSE 350 entities identified that hybrid pension plans are becoming more common for UK IFRS reporters. IASB has issued preliminary guidance on how to apply IAS 19 to hybrid pension plans. The guidance provides an interim solution, so the issue is not acute. A review of IAS 19 requirements on discount rates could be undertaken as part of a broader project on discount rates.
Expenses Develop an IFRS standard for cost of sales, using the principles of IFRS 15; develop detailed guidance on classification of expenses by function in profit or loss; develop enhanced disclosures IASB's General Presentation and Disclosures project addresses classification of expenses and disclosures on expenses. During outreach on the Primary Financial Statements project, UK stakeholders did not request further guidance on the areas proposed in the project scope. The feasibility of achieving a solution that works across multiple jurisdictions is low.
Foreign currencies Targeted project to improve aspects of IAS 21, or, a comprehensive review of IAS 21 Stakeholders have not identified this as an issue in our initial outreach.
Going concern Develop enhanced disclosure requirements for the going concern assumption; develop accounting requirements for entities that are no longer a going concern IFRS Standards already contain the principles for effective disclosure of key assumptions and judgements made in determining whether an entity is a going concern. Mandating enhanced disclosure requirements may undermine the existing principles-based approach. If disclosures are inadequate, this is an application issue rather than a deficiency in financial reporting standards.
Inflation Assess whether it would be feasible to extend the scope of IAS 29 Financial Reporting in Hyperinflationary Economies to cover economies subject to only high inflation, without amending other requirements of IAS 29. High inflation is not a prevalent or acute issue for UK IFRS reporters (even those with subsidiaries in inflationary economies). The Bank of England's May 2021 Monetary Policy Committee report predicts that UK inflation will not exceed 2% in the medium term.
Interim reporting Develop enhanced disclosure requirements and clarify what transition disclosures are required in the first year of applying a new Standard Stakeholders have not identified this as an issue in our initial outreach. The FRC's thematic review on interim reporting (May 2021) indicates interim reporting is working effectively in the UK.
Negative interest rates Develop accounting requirements for negative interest rates While negative interest rates are possible in the UK, their impact on financial statements is unlikely to be pervasive because they are likely to remain close to zero and because they are unlikely to last for extended periods of time. Negative interest rates are unlikely to be a significant issue at the end of IASB's next work cycle.
Operating segments Review aggregation criteria and improve disclosures While operating segment information is important to investors, IASB's 2013 post-implementation review of IFRS 8 concluded that the Standard achieved its objectives and improved disclosures in this area. IFRS 8 is converged with US GAAP Topic ASC 280 which increases the difficulty of making changes to this Standard. We note that FASB's current agenda includes a review of this topic and will monitor the situation.
Separate financial statements Review of IAS 27 Separate Financial Statements; clarify the accounting in separate financial statements for some transactions between a parent and its subsidiaries; develop more effective disclosures. This topic has been considered in previous agenda consultations and has not been added to IASB's work plan. The complexity of the project combined with the limited capacity of the Board means it is unlikely that timely progress would be made on the project.
Tax Improve tax disclosures and develop accounting guidance for emerging types of taxes While some investor groups have identified the need for greater tax transparency, the feasibility of developing a solution that works across multiple jurisdictions is low given the complexity of this topic. Accounting guidance on emerging types of taxes (such as carbon taxes) could be developed within the scope of the 'Climate-related risks and other emerging risks' project.

Question 4: Other comments

Do you have any other comments on the Board's activities and work plan? Appendix A provides a summary of the Board's current work plan.

A12We recommend that IASB undertakes projects on a thematic basis.

One way of achieving this is to take a cross-standard approach, as taken by IASB in the Disclosure Initiative. We support this approach as it allows for more consistency across Standards.

A13This can then be overlaid by grouping projects by theme, for example by the themes of retaining relevance or improving consistency. Grouping projects by theme could help to retain focus on strategic rationale and the user needs the projects are intended to address. Such a focus could be helpful for communicating the benefits of projects, and at the project scoping stage. [See Appendix 2 for an illustration of the thematic approach.]

Appendix 2 Illustration of Combined Approach

Thematic groupings of projects IAS 1 IAS 7 IFRS 8 IAS 2 IAS 16 IAS 36 IAS 38 IAS 40 New standard IAS 37 IFRS 9 IFRS 10 IFRS 15 IFRS 16
Retaining relevance theme
Climate-related risk
Intangibles
Statements of cash flows
Improving consistency theme
Discount rates
Variable and contingent consideration
Other comprehensive income
Government grants

Explanatory note:

Priority projects are grouped on related themes, for example retaining relevance and improving consistency. This supports focus on the rationale for the project.

The impact of projects across Standards is considered. For example, the climate-related risk project would look across multiple standards and explore:

  1. IASB's proposed amendments to IAS 1 Presentation of Financial Statements and IAS 36 Impairment of Assets to ensure long-dated impacts of climate-related risk are reflected in the measurement of assets and liabilities
  2. Implications for IFRS 9 Financial Instruments of the classification of ESG bonds
  3. Implications for IFRS 10 Consolidated Financial Statements of whether renewable energy funds meet the investment entity criteria
  4. Implications for IAS 38 Intangible Assets on traded emissions rights
  5. Whether there is need for a new standard on non-financial assets held for investment to address emissions trading rights held for investment
  6. Whether additional educational material is needed for:
    1. Implications for IFRS 8 Operating Segments of changes in the regulatory environment due to climate-related risk.
    2. Implications for IAS 2 Inventories due to climate-related risk.

Footnotes

  1. The rise of ESG reporting is evidenced, for example, by: The IFRS Foundation's consultation on sustainability, the SEC's March 2021 announcement of the formation of a climate and ESG task force, and the Bank of England's stress testing for climate-related risk. ↩

  2. We note that the terms ESG reporting and sustainability reporting are often used interchangeably. However, we believe that sustainability reporting is broader in scope than ESG reporting and encompasses reporting on value creation or erosion through any aspect of the entity's activities. For example, we believe sustainability reporting could encompass areas such as business processes, supply chains, brands, customer loyalty, and financial resilience. Our interpretation is aligned to the following statement from the IFRS Foundation's feedback statement on sustainability: 'The Trustees recognise the importance for the public interest of reporting standards that address enterprise value-which capture expected value creation (or erosion) for investors in the short, medium and long term and is interdependent with value creation for stakeholders in the context of social and environmental imperatives. The Trustees understand, based on the feedback to the Consultation Paper, that consistent and comparable disclosures on sustainability matters are needed to bring transparency to financial markets and provide investors with information useful in assessing a company's enterprise value' (IFRS Foundation Trustees Feedback Statement on the Consultation on Sustainability Reporting | April 2021 page 11). ↩

  3. The increased use of technology in digital reporting is evidenced by, for example: the requirement for UK entities which prepare consolidated accounts in line with IFRS to i. apply the European Single Electronic Format (ESEF) for financial years beginning on or after 1 January 2021 ii. tag, in XBRL, basic financial information iii. tag notes to the accounts for financial years starting on or after 1 January 2022. ↩

  4. We define sustainability reporting as reporting on enterprise value creation or erosion, as aligned with the IFRS Foundation's feedback statement on its Sustainability project: 'The Trustees recognise the importance for the public interest of reporting standards that address enterprise value.' ↩

  5. Climate is identified as the initial priority area for the development of sustainability standards in the IFRS Foundation Trustees Feedback Statement on the Consultation on Sustainability Reporting | April 2021. ↩

  6. For example, disclosures on intangibles such as customer loyalty through measures such as a net promoter score, or on talent retention through measures such as employee churn. ↩

  7. IAS 7 paragraph 50 encourages disclosure of i. Amount of undrawn borrowing facilities that may be available for future operating activities and to settle capital commitments ii. The aggregate amount of cash flows that represent increases in operating capacity separately from those cash flows that are required to maintain operating capacity iii. The amount of cash flows arising from the operating, investing and financing activities of each reportable segment ↩

  8. Climate is identified as the initial priority area for the development of sustainability standards in the IFRS Foundation Trustees Feedback Statement on the Consultation on Sustainability Reporting | April 2021. ↩

  9. For example, disclosures on intangibles such as customer loyalty through measures such as a net promoter score, or on talent retention through measures such as employee churn. ↩

  10. IAS 7 paragraph 50 encourages disclosure of i. Amount of undrawn borrowing facilities that may be available for future operating activities and to settle capital commitments ii. The aggregate amount of cash flows that represent increases in operating capacity separately from those cash flows that are required to maintain operating capacity iii. The amount of cash flows arising from the operating, investing and financing activities of each reportable segment ↩

  11. Projects in this table are presented in alphabetical order. ↩

  12. UKEB rationale incorporates stakeholder input from initial outreach. ↩