The IFRS Foundation recently issued its 2023 Annual Report, titled Better information for better decisions.

This includes its audited consolidated financial statements for the year ended December 31, 2023, and as these must rank among the financial statements for which it would be most embarrassing if anything were identified as being less than state of the art, they make for an interesting read in various respects. This includes the identification of “key audit matters,” which you’ll recall are (as summarized in the auditors’ report) “those matters that, in our professional judgement, were of most significance in our audit of the group financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those that had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team.” The report has one such matter, described as follows:

• We identified contributions received after the reporting date (unpaid contributions) as a significant risk, which was one of the most significant assessed risks of material misstatement due to fraud and error.
• A significant proportion of income relates to voluntary contributions, with the largest contribution relating to the European Union grant. They are recognized as income on a receipts basis, exceptions being those received post year end, which have been designated by the contributor as relating to the previous year. As at year end £3.2m (2022: £4.2m) is included within contributions receivable. Unpaid contributions were considered a significant risk due to the significant judgements made by management in determining whether they were recognized correctly in the current year.

This is how the audit scope addressed the matter:

• In responding to the key audit matter, we performed the following audit procedures:
  • selected a sample of unpaid contributions and obtained evidence of subsequent receipt. If the contributor has not paid after year end, the engagement team has liaised directly with the contributor;
  • inspected correspondence with the donor to determine whether they had provided a firm commitment to the group to pay the funds due and whether the contribution related to the correct financial year;
  • performed a non-substantive analytical review of contributions income year on year by contributor and jurisdiction and identified any unusual movements in balances; and
  • checked post-year-end bank statements and identified whether a sample of unpaid contributions have been received post year end.

For those of us of a certain age, this may all seem rather endearing: the procedures sound much like the ones that would have been performed decades ago (how fondly I recall waiting for the post year end bank statements to come in so that one could rush to check them). Still, the question therefore arises (and I emphasize that my intention isn’t here to criticize or to second-guess the auditors, but rather to raise a question that may be inherent in such a reporting requirement): if the audit of this area was so relatively easy to pull off, did it really need to be highlighted in such a way? Just from a commonsensical perspective (which can of course be wildly unreliable) it might seem that an area of such specificity is just about the last place that a malign employe would choose in which to pull off a fraud (compared, say, to setting up a bunch of fake supplier invoices) or in which something might fall between the cracks. As a random reference point, the key audit matters in the last auditors’ report of Bank of Montreal were the valuation of loans acquired in an $18 billion acquisition, the allowances for loan credit losses, the determination of fair value for certain securities, income tax uncertainties and insurance-related liabilities, the “key” nature of all of which, and the resulting prominence within the audit, is likely easy to grasp.

Of course, everything is relative, and as I noted, it seems appropriate that the IFRS Foundation’s statements should provide some reflection-worthy reference points. Another one of these is the extended commentary in the notes on going concern, encompassing a discussion of cash flow projections and of a stress test on these cash flows, as well as a reverse stress scenario, described as follows:

• The Foundation also applied a reverse stress scenario to determine the level of revenue at which it would run out of liquidity at the end of 18 months. This scenario assumed the Foundation would:
  • take no management action to reduce its cost base or otherwise supplement income;
  • pay the remaining long-term liabilities (those with a term beyond 30 June 2025) at 30 June 2025; and
  • receive no value for any of its assets other than financial instruments.
• Applying these assumptions, the scenario concluded that a 45% reduction in revenue would reduce liquidity to zero by 30 June 2025. The Foundation considers this scenario implausible, given its business model and previously contracted and committed revenues. The Foundation also notes that it continually and actively monitors revenue flows, and that it would take management action in response to any early indications of negative variances.

All fascinating stuff, but does anything about the IFRS Foundation’s situation suggest the kind of “close call” in which such expanded disclosure might be expected? If so, maybe that should have been more precisely explained; if not, doesn’t such elaboration of the “implausible” constitute the dreaded disclosure overload? But again, I’m only asking. And I appreciate the opportunity to ask!

The opinions expressed are solely those of the author.