4.0 Economic impact assessment of narrow-scope amendments – proposed strategy

Executive Summary

Purpose of the paper

This paper sets out the:

• strategy for undertaking the economic impact assessment of narrow-scope amendments and annual improvements (NSAs);
• the approach to measuring the adoption costs for those projects;
• a draft survey for the estimation of NSAs implementation costs

Summary of the Issue

SI 2019/685 requires the UKEB to conduct an economic impact assessment for endorsement projects. Under the terms of the Small Business, Enterprise and Employment Act 2015 the UKEB is not a 'relevant regulator' required to undertake impact assessments in accordance with the Better Regulation Framework. The board noted however that the UKEB would benefit in aligning itself with this model. At the April 2022 Board Meeting the Secretariat proposed an approach for conducting impact assessments for Narrow Scope Amendments (NSAs) that was broadly in line with the Better Regulation Framework. The proposed strategy was discussed by the Board, including the scale of how impact assessment would be undertaken. The Board agreed to a bespoke approach for significant endorsement projects and a standardised approach for NSA projects. This document seeks the Board's final approval on the proposed strategy and approach.

Decisions for the Board

Board members are asked whether they agree with:

1. the proposed strategy; and
2. the proposed approach, specifically the survey for preparers (see paragraph 28 and Appendix 2).

Recommendation

We recommend that the Board approve the proposed strategy and approach.

Appendices

1. Contents of the economic impact assessment
2. Standardised direct adoption cost quantitative model and preparers' survey
3. Economic impact assessment of NSAs – template
4. Differences between the bespoke and the standardised approach

Introduction

1The endorsement and adoption of international accounting standards (or amendments to standards) is one of the UKEB's statutory functions. The legislation requires that the adoption decision takes into account the UK long term public good so that ultimately the standard or amendment is appropriate for use in the UK.

2An estimation of costs and benefits as well as an analysis of whether the use of a standard is likely to have an adverse effect on the economy of the UK, including on economic growth, is required by SI 2019/685 before a standard is adopted for use in the UK. However, the SI does not contain any further guidance on how to conduct these analyses.

3Under the terms of the Small Business, Enterprise and Employment Act 2015 the UKEB is not a 'relevant regulator' required to undertake impact assessments in compliance with the governance guidance, the Better Regulation Framework (BRF).¹

4The BRF contains guidance for UK government entities on how to conduct economic impact assessments. While the BRF is binding for many public bodies and regulators², the UKEB is not currently included within its scope. However, the regulations are currently under review, so it is not clear whether the adoption of IFRS would be included within the scope at a later date.

5At its September 2021 Board meeting, the UKEB considered and agreed at a high level its approach to the endorsement criteria in SI 2019/685, including that in conducting the economic impact assessments for significant projects, it should broadly follow the BRF. In addition, further detailed discussions were undertaken by the Board on its approach to economic impact assessment in relation to significant endorsement projects during its work on the endorsement of IFRS 17 Insurance Contracts.

6During the discussion at the September 2021 Board meeting, the Secretariat had also undertaken to conduct further work and bring forward a paper that proposed how best to tailor that BRF approach to the peculiar features of the UKEB's endorsement projects. This paper presents the results of that work.

Proposed Strategy for economic impact assessment

7This section sets out the proposed strategy to ensure that the economic impact assessment on endorsement projects undertaken by the UKEB broadly adheres to the BRF.

8In line with the Secretariat's recommendations at the Board's September 2021 meeting, at a strategic level we continue to believe that the UKEB would benefit from broadly following the BRF when undertaking impact assessment for endorsement projects as it would help ensure a balance between adhering to the highest standard and the efficient and effective deployment of resources.³ Following the BRF will ensure the UKEB would:

• Benefit from the guidance contained in the BRF.
• Streamline the economic impact assessment of endorsement projects.
• Be ready if the BRF become binding for the UKEB in future.

9Therefore, we propose the following approach to the different types of UKEB endorsement and adoption projects⁴:

• A bespoke approach is applied for significant endorsement projects; and
• A standardised approach is applied to narrow-scope endorsement projects.

10However, to deciding the approach to be taken requires an upfront triage exercise to ascertain the costs. So, the following sections first cover how the initial assessment of cost to business and then provides more details on the proposed bespoke and standardised approaches.

Initial assessment of adoption costs

11The BRF prescribes that interventions with an estimated cost to business lower than £5 million should be subject to a light-touch approach.⁵ We believe that most narrow scope amendment (NSA) issued by the IASB and to be adopted by the UKEB would fall within this category, however this needs to be ascertained. We therefore propose to firstly, to test the assumption that the NSA being assessed leads to an estimated net cost to business that is below the threshold. We propose that the economic impact assessment for all NSA should start with a high-level initial estimate of the adoption costs.

12In principle the assessment should be quantitative in nature, but a qualitative assessment is possible if deemed proportionate. In line with the BRF, the assessment should be evidence-based.

13If the cost to business is estimated to be below the £5 million threshold set out in government regulation, the approach set out in paragraphs 18-20 below applies to the endorsement project. Otherwise, the approach described in paragraphs 15-17 below applies.

14When feasible, the preliminary assessment should be included in the Project Initiation Plan (PIP) of the endorsement project.

Bespoke approach for significant endorsement projects

15In line with BRF, the economic impact assessments for significant endorsement projects (usually when a new accounting standard is published by the IASB) would normally be expected to be bespoke exercises that reflect the specific changes brought about by the standard being considered for adoption and the likely impact on the entities within scope. In addition, any NSA that are deemed to be above the £5 million threshold at the initial assessment of costs stage will also follow the bespoke approach.

16Such economic impact assessment, which is conducted as part of the Draft Endorsement Criteria Assessment, would explicitly consider and broadly adhere to the guidance contained in the BRF. BEIS may be consulted for added guidance. The analyses would be published for stakeholder consultation. We think this approach is broadly akin to the full impact assessment approach under the BRF.

17We have already deployed this approach when undertaking the economic impact assessment for the endorsement of IFRS 17 and is included in the [Draft] Endorsement Criteria Assessment published in November for stakeholder consultation.

Standardised approach for narrow-scope endorsement projects

18However, every year the IASB also publish some annual improvements as well as a range of narrow-scope amendments to existing standards.⁶ For example, three narrow-scope amendments were published in 2021. These types of amendments typically have limited economic impact.

19The Secretariat considers that a proportionate approach to the economic impact assessment for such amendments would be to largely standardise the approach to be deployed when developing the economic impact assessment for the endorsement of NSA. This would enable efficiencies in resource allocation whilst ensuring that the assessments themselves are of the quality expected under the BRF.

20A table outlining the main differences between the two approaches is included in Appendix 4.

Economic impact assessment for NSAs: proposed standardised approach

22We think that the standardised approach to the NSA economic impact assessment should be broadly akin to the de-minimis impact assessment approach under the BRF.

23Once ascertained that cost to business is likely to be below the £5 million threshold (as per paragraphs 10-13 above), the following broad approach should be followed:

• To then address a high-level list of matters (see paragraphs 23-24 for the list and further details on the individual items in Appendix 1).
• To develop and use a standardised cost model to efficiently develop the economic impact assessment for NSAs. See paragraph 25 for more details on the standardised cost model.

24Finally, a template for the economic assessment of NSAs incorporating the above information will be completed and presented to the UKEB to enable self-certification that the economic impact assessment is conducted in line with the agreed approach. Details on the template are contained in paragraphs 26-27.

List of matters for the NSA economic impact assessment

26The economic impact assessment is performed as part of the [D]ECA for the NSA. The contents of the impact assessment and the depth of the analyses involved would be proportional to the estimated economic impact of the NSA. Referring to the RPC Proportionality Guidance, the economic impact assessment for NSAs should include:

1. A clear description of the NSAs, including the timeline of adoption.
2. A description of the businesses likely to be impacted and of the expected impact (referred to in this paper as the scope of the standard).
3. A qualitative description of the likely direct costs and benefits of the standard for stakeholders.
4. A best estimate of the monetised direct costs of adoption. As a general rule this should be performed using the standardised cost model described in paragraph 25. In the exceptional circumstance, where an NSA estimated to have a more sizable cost to business (though still below the £5 million threshold) and/or characterised by a higher degree of complexity, the assessment of costs and benefits may instead be performed using a bespoke analysis (described in Appendix I, paragraph 25).

27More detail on the contents listed in paragraph 24 are described in Appendix 1.

Standardised cost model

28The standardised cost model is the proposed framework for estimating the costs of implementing NSAs without recourse to project-by-project stakeholder engagement. It is designed to streamline, standardise, and facilitate the assessment of direct implementation costs for NSAs. Costs will be estimated by means of one-off engagements with preparers of accounts, with the model parameters being updated every three to five years. The model estimates would be used to assess direct implementation costs for the adoption of NSAs, removing the need for conducting project-by-project stakeholder engagement to assess the cost of implementation. To develop the model, we will follow the following process:

• Quantitative model: as a first step, we propose that direct implementation costs follow a generalised quantitative model, consistently with the approach adopted for the endorsement of IFRS 17. Further details on the proposed model are included in Appendix 2.
• Survey outreach: Based on previous experience conducting surveys to estimate implementation costs, the Secretariat has created a questionnaire to gather data about implementation costs to estimate the model. A draft survey questionnaire is included in Appendix 2. The questionnaire would be sent to preparers of account every three to five years. Pending the Board's approval, we will start conducting the first round of the survey during Q4 2022, and to complete the survey half-way through Q1 2023. We aim to estimate costs separately for large, medium and small listed firms, identified using market capitalisation thresholds. The survey will be piloted with a selected sample of friendly stakeholders. We aim to collect the survey from a large enough sample to cover the three size segments identified above and a diverse enough to cover different industries/sectors and as well as some large unlisted companies. We are however unlikely to achieve statistical representativeness. Therefore, the appropriateness of the sample will also entail qualitative considerations (such as achieving a diversity of sizes and industries).
• Application and subsequent rounds: The estimated model is used to assess direct implementation costs for NSAs without relying on project-by-project stakeholder engagement for most NSAs. Under the assumptions that estimates of additional hours spent on the implementation of NSAs would likely remain constant over time, we aim to update the survey results every three to five years. Monetary values (such as the average hourly rate) would instead be updated yearly by adjusting the estimates for inflation.⁷

NSA impact assessment template

30We propose that a NSA impact assessment template be submitted to the board together with the DECA as part of standard procedures on NSA adoption work for the Secretariat. The purpose of the template is twofold:

• To assist the Secretariat in performing the economic impact assessment in line with this guidance.
• To summarise evidence collected and the main conclusions arising from the economic impact assessment for reporting to the Board, in line with the self-certification process under the BRF.

31A copy of a blank NSA impact assessment template can be found in Appendix 3.

Next Steps

33If the Board approved the strategy and approach set out in this paper, we will bring a paper to the public meeting to commence the process for developing the standardised cost model described above.

Appendix 1: Contents of the economic impact assessment

1This appendix describes more in detail how to develop the contents of the economic impact assessment listed in paragraph 23 of the main document.

2The contents indicated in the sections below are meant to be the most exhaustive possible but can be pared down for NSAs deemed to have a small impact (for example, annual improvements associated with only cosmetic changes to a standard) following the principle of proportionality.

Description of the standard

3A description of the standard should be included as part of the economic impact assessment. A clear reference to the adoption timeline should be included.

Scope of the standard

4The impact assessment should include a description of the businesses (and/or industries) affected. Identifying the scope of the standard is necessary to:

• estimate costs and benefits of adoption.
• identify sources of evidence that might be needed for the assessment.

5The analysis of the scope of the standard should be brief and contain basic information such as:

• The affected sector(s).
• An estimate of the number of companies affected.
• A monetary estimate of the aggregate size of the entities affected (ideally based on easy-to-find figures such as revenues or market capitalisation).

6An NSA might apply to all IFRS-reporting entities. In that case, we would refer to the standardised information on the population of IFRS-adopting entities in the UK collected and regularly updated by the UKEB.

Cost and benefit analysis (CBA)

7The cost-benefit analysis (CBA) is a structured procedure to assess the costs and benefits arising from the adoption of an accounting standard for both preparers and users of financial accounts. It describes and, when possible, quantifies the likely direct monetary impacts of the adoption of a standard.⁸

8In accordance with the SI, the secretariat is required to conduct a CBA as part of the endorsement process. However, as per the letter of the SI, the CBA does not need to demonstrate that the benefits of adoption exceed its costs, but simply to consider and assess both within the context of the adoption process.⁹

9As mentioned, for most NSA endorsement projects direct adoption costs would be estimated using the standardised cost model (paragraph 5 of the board paper). A non-standardised procedure to estimate direct adoption costs is described below (paragraph 25) and applies to exceptional NSA endorsement projects characterised by higher impacts (though still below £5 million) and/or a higher degree of complexity. The Secretariat will discretionally choose whether the application of a bespoke procedure is proportionate.

10Paragraphs 11-24 contain general principles that apply to a proportionate estimation of costs and benefits in line with the BRF regardless of the methodology used to estimate them.

Costs and benefits to be included in the analysis

Counterfactual

11In line with government regulation, costs and benefits should be evaluated against the counterfactual.

12The counterfactual, or business as usual (BaU) in the language of the Green Book, "is defined as the continuation of current arrangements, as if the proposal under consideration were not to be implemented...The purpose [of identifying one] is to provide a quantitative benchmark, as the “counterfactual" against which all proposals for change will be compared."¹⁰

13In other words, the counterfactual represents “what would have happened in absence of the intervention”¹¹, and should serve as a baseline comparison against which to compare incremental costs and benefits linked to the adoption of the standard.

14It would be wrong to think of the counterfactual as a do-nothing, static situation to benchmark against. Depending on the outcome of interest, the counterfactual should be considered in a dynamic state, taking into account upward and downward trends that would have taken place even if the standard were not adopted, and explicitly considering the consequences of non-adoption in a global environment where other jurisdictions may adopt instead.¹²

Costs

15The following costs should be included in the analysis.

16Direct (compliance) costs: the costs incurred as a direct result of meeting the requirements of the standard (or amendment to it). They are the incremental changes that firms would not have undertaken in the absence of the standard.¹³

17An assessment of compliance costs:

• should be "incremental”, that is carried out against the counterfactual (see paragraphs 11-14 above).
• should be performed for both preparers and users, though most compliance costs are expected to be borne by preparers.
• should be split into one-off implementation and ongoing costs.

18Indirect costs: i.e. the short to medium term costs incurred as an indirect result of meeting the requirements of the standard. Given the small scale of the projects these are expected to be negligible. Indirect costs are monetised only when possible and proportionate, and otherwise estimated using qualitative evidence.

19Sunk costs: in economics, sunk costs are cost that have already been incurred, cannot be recovered, and therefore should not matter for future decision-making. According to the Green Book, “expenditure or payments already incurred should be excluded from the appraisal of social value. What matters are costs and benefits affected by decisions still to be made.” Crucial to the estimation of sunk costs is the determination of a date prior to which costs are considered as “sunk", i.e. not affected by the endorsement decision to be made. While we don't expect sunk costs to be particularly relevant for NSAs, we consider the possibility that some sunk costs may be excluded from the cost and benefits assessment.

20We don't believe that other costs should be considered, as NSAs are expected to have a minor impact on UK business. Should the evaluation of additional costs become necessary after an initial assessment, we will refer to the BRF for further guidance.

21Avoided direct costs should be netted off incremental direct cost rather than included as a benefit.

22While in standard setting costs are by and large borne by preparers, we will consider direct and indirect costs borne by other stakeholder categories in our analyses.

Benefits

23Direct benefits the aim of an accounting standard is generally to improve the quality of financial reporting for the direct benefit of users of accounts. As such, we expect users to reap most direct benefits of NSAs, though we can't exclude the existence of direct benefits for preparers or other stakeholders (which would be assessed case by case).

24An assessment of direct benefits:

• should be "incremental", that is carried out against the counterfactual.
• should be performed for both preparers and users, though most direct benefits are expected to be enjoyed by users.
• should be monetized, when possible and proportionate.

25Indirect benefits: i.e. the short to medium-term benefits incurred as an indirect result of meeting the requirements of the NSA. Most benefits for preparers would most likely fall under this categorization, and as consequence a qualitative discussion of indirect long-term benefits for preparers might be included in the assessment.

26Considerations about other types of benefits might also be included into the economic assessment. If that appears to be necessary, we will refer to the BRF for further guidance.

Bespoke cost assessment

27For NSAs with a larger impact (though still within the £5 million threshold) and/or a higher degree of complexity a bespoke assessment based on project-specific stakeholder engagement may be performed. The collection of evidence should follow the principle of proportionality.

Assessment of whether the NSA has an adverse effect on the UK economy

28The SI requires the UKEB to perform an assessment of whether the standard is likely to have an adverse effect on the UK economy, including on economic growth.

29Resources dedicated to the economic assessment should be in principle proportionate to the small-scale of the projects under consideration here. However, we anticipate that some NSA with an estimated low impact on businesses may nonetheless have broader economic effects that deserve deeper analyses. The level of complexity of the analyses will be assessed on a case-by-case basis. As a general rule, a proportionate approach would:

• Be based on the analysis of relevant technical and academic literature, focusing in particular on impact assessments on the same NSAs performed by other standard setters (such as EFRAG), reports by large accounting firms, reports by national regulator, and any relevant economic/academic studies.
• Rely on UKEB's expertise in the performance of endorsement projects, and in particular focus on economic impacts identified in previous endorsement projects and likely to be broadly applicable to other standards, such as:
  • Likely effects on the cost of capital and capital formation.
  • Likely effect on competition.
  • Likely effects on product offering and pricing.
  • Likely effects on financial stability.
  • Likely effects on economic growth (following the SI).
• Use simple statistics based on external data sources and utilise qualitative arguments based on economic reasoning to demonstrate the non-adverse effects on the UK economy.
• Rely on stakeholder engagement for arguments that would require it. For the sake of proportionality, stakeholder engagement should be kept to a minimum.
• Complex quantitative analyses (e.g. econometric models) should in principle be avoided and performed only whether strictly necessary, and as a last resort should evidence from stakeholder engagement and external sources not be enough to demonstrate an argument.

Appendix 2 Standardised direct adoption cost quantitative model and preparers' survey

1Based on the secretariat's own experience in estimating adoption costs for endorsement projects as well as other standard setters' work, we model implementation costs as follows:

Direct one-off costs = Accounting costs + IT system costs + Governance costs Direct one-off implementations costs are understood as the sum of:

• Accounting costs: these can be internal or external. Internal costs refer to the one-off incremental costs of familiarising with the NSA and designing data collection and other internal processes. External costs refer to the one-off incremental costs of obtaining external audit and advice;
• IT system costs: these can be internal or external. Internal costs refer to the one-off incremental costs of updating the accounting systems and/or acquiring additional data. External costs refer to the one-off incremental costs of obtaining advice and purchasing software and IT;
• Governance costs: these are internal only and refer to the one-off incremental costs of approving internal system changes;

Expected direct ongoing costs = Ongoing compliance costs Expected direct ongoing costs are understood as:

• Ongoing compliance costs: any incremental costs that the preparer anticipates having to bear on an annual basis for a given number of years, including any potential recurring costs among the one-off implementation costs.

2Costs should be incremental, that is considered with reference to the counterfactual, an estimate of what costs would be absent the NSA. The approach to the counterfactual is described in more detail in Appendix 1, paragraphs 11-14.

3Costs are considered and assessed in terms of additional hours of staff or external time staff time the preparer needs to implement the NSA

4We consider most of the above costs to be minor (i.e. subsumed to the business as usual situation) or negligible (higher than in the business as usual situation though very small) in most cases, though we consider the possibility that these costs might be significant (not very small but below the materiality threshold) or material (above the materiality threshold).

5A short section of the questionnaire will focus on benefits for preparers.

6Based on this model, the secretariat has drafted a questionnaire to be submitted to preparers during Q4 2022 to estimate standardised costs that would be representative of the average preparer.

7To make sure that the UKEB will collect as numerous a sample as possible, the secretariat will:

• disseminate the survey the growing number of preparers as well as relevant organisations (such as the 100 Group)the Secretariat regularly engages with
• rely on the advice and contacts of the Preparers' Advisory Group
• Disseminate the survey on professional social media, such as LinkedIN

8A draft survey is reported below. The survey will be circulated using a survey tool that the secretariat is in the process of purchasing at the time of writing. As a consequence its look and feel may be different, though its content will be maintained:

Estimation of direct adoption costs for narrow-scope amendments – survey tool

Cover Letter

Dear preparer,

This short survey aims to collect information on adoption costs borne by IFRS preparers when implementing annual improvements and narrow-scope amendments to existing standards published by the IASB every year (and herein referred to as Narrow-scope Amendments, NSAs, for simplicity).

Our aim is to collect information on one-off adoption and ongoing costs related to the implementation of NSAs, their nature (i.e. external vs internal, financial reporting vs IT costs) and, when relevant, their amount.

This information will support the UKEB in developing a standardised cost model to estimate adoption costs for NSAs, thus helping the Board endorse NSAs in a timely manner.

The survey should take 10-15 minutes to complete and should in principle be responded to by [ROLE In the organisation]. Please direct the survey to a relevant person within your organisation if you feel that you wouldn't be the best person to respond.

The data collected through completing this survey will be stored and processed by the UKEB. By completing this survey, you consent to the UKEB processing your data. For further information, please see our Stakeholder Engagement Privacy Notice and Freedom of Information Policy.

Responses to this survey will be aggregated with input from other responses and sources.

The deadline for completing the survey is DATE.

Should you have any questions on the survey and the work we are conducting on narrow-scope amendments, please don't hesitate to contact us at [email protected]

We thank you in advance for your contribution and we look forward to receiving your response.

Kindest regards,

Stefano Alderighi Project Director – Economics Team Leader

Part A: Your details

1Your details:

2Is your organisation (please select the appropriate box):

3Please could you provide the following information:

4Do you consent to being contacted to discuss your response to this survey? Yes/no

5Do you consent to being contacted by the UKEB for additional surveys and/or projects in the future? Yes/no

Part B: Incremental costs of implementing the NSAs

The IASB issues narrow-scope amendments (NSAs) to international accounting standards as part of its continuous effort to maintain and improve IFRS and to support their consistent application. Proposals for amendments often arise from questions submitted to the IFRS Interpretations Committee.

The following table contains a list of the NSAs issued by the IASB over the past three years:

[TABLE ABOUT HERE – DD to prepare]

6Considering the implementation of a typical or average NSA, please rate the magnitude of the below incremental implementation costs on the first year of adoption:

(Incremental: additional costs considered with respect to the business-as-usual situation, i.e. in addition to the normal costs the firm would have incurred anyways in case the NSA wasn't implemented. Avoided direct costs should be netted off incremental direct cost rather than included as a benefit.)

7Please indicate which NSA(s) you referred to when considering those costs.

8Please indicate the materiality threshold at your organization.

For all costs indicated to be significant or material the respondent will see the following questions:

9With reference to [significant or material cost], please indicate how that cost is broken into in terms of worked hours:

10Have [significant or material cost] been recurring? Yes/No

For all costs indicated to be significant or material and recurring the respondent will see the following questions

11Please indicate the annual amount of these recurring costs

12Please indicate for how many years you believe these costs are on average carried forward:

For all respondents:

13Have you faced any other significant/material ongoing costs during the years because of the implementation of the NSA?

For all respondents who answer yes to 14

14Please indicate the annual amount of these ongoing costs

15Please indicate for how many years you believe these costs are on average carried forward:

Part C: Incremental benefits of implementing the NSAs

16Considering the implementation of a typical or average NSA, please indicate whether your company on average has reaped any of the below incremental benefits:

(Select all that apply)

• Ability to use the NSA in case the accounting would be meaningless or not reflecting the underlying economics in its absence
• Ability of using UK-adopted IFRS as similar to IFRS as issued by the IASB
• Enhanced transparency/comparability with other companies' accounts nationally
• Enhanced transparency/comparability with other companies' accounts internationally
• Other benefits (please specify)

Part D: End of the survey

17Please indicate if you have any other comments

Thank you! [End of survey page]

Appendix 3 - Economic impact assessment of NSAs - template

Economic impact assessment checklist:

Appendix 4 Differences between the bespoke and the standardised approach

A clear description of the Standard/NSAs

A description of the businesses likely to be impacted and how (scope)

A qualitative description of the likely direct costs and benefits of the standard/NSA

A best estimate of the monetised direct costs of adoption.

A best estimate of the direct benefits of adoption, with a monetized impact if available and/or feasible to estimate

A description of the indirect costs and benefits, with a monetized impact if available and/or feasible to estimate

A proportional economic evaluation of whether the NSAs has a potential adverse effect on the UK economy

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Footnotes