IFRS – time to modernize!

As we discussed here, the trustees of the IFRS Foundation have been carrying out a review of its structure and effectiveness.

Here now are some extended extracts from the comment letter submitted by the United States’ CFA Institute:

  • “We believe that the IASB should continue to co-operate with other corporate reporting efforts such as Integrated Reporting and other such bodies as we find investors seeking new and additional sources of information to evaluate businesses. We believe the Trustees should consider that the disclosure overload narrative common in the financial reporting community – but not driven by investor input – is inconsistent with the behavior currently exhibited by investors. If investors were overloaded with information we do not believe we would see them seeking additional sources of information such as environmental, social and governance, sustainability information, various non-GAAP/non-IFRS measures, and new means of cultivating unstructured data to inform their decision-making process. Such sources may provide more forward-looking insight into the business. While the financial reporting community seeks ways to mitigate inclusion of forward-looking information or the inclusion of uncertain measures, the investment community is looking elsewhere for decision-useful information. While some say that is an indication that financial statements are not being used by investors, others perceive them as a means of validating their previous forward-looking assumptions or being an anchor to management behavioral biases. In either case, we think it is essential for the Trustees to stay connected to these other initiatives as many have significant investor support.
  • We also believe, that given the prevalence of entities reporting non-GAAP measures, the IASB should monitor the use of these measures. Companies often supplement generally accepted accounting principles (GAAP) information with non-GAAP measures, which have been used for many years, to provide users with information they believe will put them in a better position to understand a company’s performance, financial statements, or management’s point of view. However, trends in the use of non-GAAP measures may also provide insight into improvements needed in IFRS.
  • … We think a core competency of standard-setters must become an understanding regarding how technology is used or can be used in the financial reporting process. Thinking about financial statements based upon the number of pages in an annual report is, in our view, antiquated thinking. Much financial information is never printed. It is grabbed or snagged from data providers. In our view, standard-setters are simply the arbiters of much of the official data provided to investors and they need to understand how technology can be used to obtain and transmit data to investors. Further, the increased use of data analytics and business intelligence by companies for business decision-making highlights the increased availability of information. This should transfer to investors increased information for investment decision-making; however, when it comes to providing information to investors the common refrain and narrative is one of disclosure overload. In making cost-benefit decisions regarding disclosure, standard-setters must understand that technology is an essential element of the decision-making process and that they have the power to effectuate change through their decision-making. In our view, standard-setters’ most important initial step should be to reframe their thinking and consider why – with technological advancements – more and better information cannot be provided. The paradigm should be one of why can’t information be provided rather than considering additional information to be an element of, or additive to, a narrative of disclosure overload.”

These types of observations are much more significant I think than the gripings I commented on last time (and as a final word on that: if, say, IFRS 15 truly has a significant beneficial impact on capital allocation decisions, then any bumps in the road to get there will be readily forgotten – the problem is that, for all the IASB’s efforts, there’s an absence of collective certainty that it will actually have that beneficial impact, or indeed that any aspect of financial reporting does). Calmly but quite incisively, the CFA Institute takes on several key assumptions that hardly seem to be questioned by the IASB in many of its speeches and positions: that disclosure overload impedes the utility of financial information and decisions made on the basis of it, that non-GAAP measures are by and large a scourge which would ideally be stamped out, and that financial statements in their classic highly-defined linear form remain the necessary focal point of financial reporting. Of course, all these positions have some validity, but they’re deeply out of sync with the spirit of the age, which emphasizes abundance of and flexible access to information, and they’re based on limited if not outright implausible notions of investors. That is, if we think a particular investor will be snowed under by excessive disclosure, and led astray by non-GAAP measures, then there’s probably no point worrying much about trying to help that person anyway, because how capable can he or she possibly be of engaging with the nuances of everything in the financial statements? And to the extent there is a problem there, why wouldn’t we try to address it through technology, that is by finding ways to guide investors to what they need, regardless of the surrounding clutter, rather than by bending everything else out of shape?

In other words, the CFA Institute seems to be saying to the IASB, you need to get with the program! Modernize!

The opinions expressed are solely those of the author

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