Draft Comment Letter - Agenda Consultation
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 responsible for endorsement and adoption of IFRS for use in the UK and therefore is the UK's National Standard Setter for IFRS. The UKEB also leads the UK's engagement with the IFRS Foundation (Foundation) on the development of new standards, amendments and interpretations. 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
- At a strategic level we recommend that the IASB reallocates resource to ensure that it:
- 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;
- 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;
- 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
- resources the areas identified in a-c above by pausing the projects on the Second Comprehensive Review of IFRS for SMEs and Management Commentary and rationalising the Extractive Activities projects from its current work plan. The IASB's mission is to develop Standards that bring transparency, accountability and efficiency to financial markets around the world and we recommend that in a time of resource constraint, the most pressing projects underpinning this core mission are prioritised. IFRS for SMEs is non-mandatory, and none of our stakeholders identified it as currently requiring a comprehensive review. The IFRS reporters in the UK are more interested in the project on Reduced Disclosures for Subsidiaries that are SMEs. Management Commentary is also non-mandatory and before proceeding with work on that project it is important to develop an understanding of whether any 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 ESG[^1] and sustainability[^2] reporting as well as the increasing use of technology in the production and consumption of corporate reports[^3]. 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 clearly identified three high-priority projects for IASB's next work cycle. The projects address emerging corporate reporting issues which should be prioritised in order for Standards to remain relevant. The projects are climate-related risk, intangibles, and statement of cash flows.
4We recommend the following scope for these projects:
- Climate-related risk – our outreach identified that the scope of this project should build on the IASB's previous work in this area[^4] and should consist of a cross-standard review to identify and resolve any potential areas of interaction between IFRS and future sustainability standards on climate-related risk.[^5] In addition to the potential amendments to IAS 1 and IAS 36 to capture long-dated climate risk identified in the RFI, this would include consideration of, 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; and implications for IFRS 8 Operating Segments of changes in the regulatory environment due to climate-related risk.
- Intangible assets – our outreach with stakeholders indicated that this is a key area for development. A comprehensive review of IAS 38 Intangible Assets is necessary to address the extent to which it captures relevant information on intangibles, including crypto-currencies, pollutant pricing mechanisms, software, and development costs. The project should also consider whether more relevant information would be provided if intangible assets held for investment or for trading, such as crypto-currencies, pollutant pricing mechanisms, were addressed within the scope of other IFRS Standards.
- 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 and whether a review of the statement of cash flows categories in line with the IASB's Exposure Draft General Presentation and Disclosures could improve comparability. It should also address whether a statement of cash flows specifically for financial institutions should be developed and whether the definition of cash and cash equivalents should be updated.
Thematic approach
5Where projects impact multiple Standards, we suggest that IASB applies a thematic approach, whereby amendments to all relevant Standards are addressed as part of the same project and an overarching objective. This approach allows for more consistency across Standards and has potential for greater efficiency in the Standard-setting process.
6A thematic approach would be effective for the climate-related risk and intangibles projects outlined above and we note that a similar approach has been deployed by IASB in the Disclosure Initiative project. We illustrate a thematic approach to the climate-related risk and intangibles projects in Appendix 2.
7In addition, high-priority projects could be grouped by a theme, for example on the theme of retaining relevance. A unifying theme could provide a consistent focus for project scoping and for stakeholder communications.
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: 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:
- Within its activity on new IFRS, major amendments, and maintenance and consistent application:
- 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).
- 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.
- Allocates more resource to digital reporting since it is anticipated that digital tagging and consumption of financial information will become more prevalent.
- Allocates more resource to the priorities identified above by pausing the Second Comprehensive Review of IFRS for SMEs and the Management Commentary projects on its current work plan and rationalising the Extractive Activities project from its current work plan. IFRS for SMEs is non-mandatory and in our initial outreach stakeholders have not indicated a need for the Second Comprehensive Review of SMEs. IFRS reporters in the UK are more interested in the project on Reduced Disclosures for Subsidiaries that are SMEs. Management Commentary is also non-mandatory and before proceeding with work on that project it is important to develop an understanding of whether any of its requirements 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:
- There is a risk that application 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 that this is the 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.
- 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 is added. This criterion should assess whether the project is expected to remain relevant when it reaches implementation stage. The addition of this criteria would prevent projects of limited long-term relevance being added to the work plan.
A5We recommend that the first criterion 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.
A6The 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 recommended prioritisation of potential projects.
The diagram presents a circular arrangement with "Intangible assets (including crypto & PPMs)", "Climate-related risks", and "Statement of cash flows and related matters" at the center, indicating high priority.
Surrounding these central items are "Discontinued operations and disposal groups", "Borrowing costs", "Commodity transactions", "Foreign currencies", "Inflation", "Discount rates", "Variable and contingent consideration", "Other comprehensive income", "Interim financial reporting", "Employee benefits", "Separate financial statements", "Tax", "Government grants", "Income taxes", "Operating segments", "Negative interest rates", and "Going concern".
The diagram visually represents a prioritisation, with items closer to the center having higher priority.
A7The 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.
A8We recommend that these projects are scoped as follows:
- Climate-related risk
- 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.
- In addition, to identify and address potential areas of interaction between IFRS and future sustainability standards on climate-related risk[^7]; 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 and implications for IFRS 8 Operating Segments of changes in the regulatory environment due to climate-related risk.
- Intangibles
- As proposed by IASB, a comprehensive review of IAS 38. Specifically, this review should address:
- The extent to which IAS 38 captures relevant information on intangibles, including those which are becoming more prevalent, such as crypto-currencies, pollutant pricing mechanisms, software, and development costs, and;
- 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
- Statement of cash flows
- As specified by IASB, a comprehensive review of IAS 7. Specifically, this should address whether:
- Current voluntary disclosures[^8] should be mandated;
- 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
- Whether a statement of cash flows specifically for financial institutions should be developed.
- Whether the definition of cash and cash equivalents should be updated.
A9For the climate-related risk and intangibles projects, which involve multiple Standards, we recommend that a thematic approach is taken, whereby the impact across multiple Standards is considered as part of the same project. This approach supports consistency across Standards and potential efficiencies in the standard-setting process. See Appendix 2 for an illustration of the thematic approach.
A10Our 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 below:
| Project listed by the RFI[^9] | IASB proposed scope per RFI | UKEB rationale for low priority[^10] ```