The place of IFRS, or: tending the declining franchise

In a recent speech, IASB Chairman Hans Hoogervorst returns to familiar territory:

  • “…There is still a lot of work to do. But our focus will not be so much on creating more big new Standards as on improving the presentation of the information that we already require.
  • We recently sought feedback on our future Agenda for the coming years. Soon, we will publish a Feedback Statement that sets out our plans in detail. However, in response to the feedback received, there is one overriding priority we will focus on, and that is ‘better communication’.
  • High quality, IFRS-compliant financial information is ‘necessary but not sufficient’ for financial reporting to achieve its communications objectives. We must recognize that preparers sometimes experience financial reporting as too much of a compliance exercise. Investors sometimes believe that the financial statements depict performance in an insufficiently clear manner.
  • Valuable information gets drowned out by ‘tick the box’ disclosures and voluminous, but poorly organized and presented, financial data. Our Standards are partly to blame for that. The fact is that IFRS Standards prescribe very little in the way of formatting the income statement. We define revenue, we define profit or loss, but we do not define very much in between. (We) do not at all prescribe subtotals in the income statement, while investors are often looking for such subtotals to get a better view of the performance of a company.
  • So companies have considerable freedom in the way they present the components of income that make up profit or loss. As a result, there is little comparability above the bottom line, making it difficult for users to judge performance…
  • Partly as a result of IFRS Standards prescribing few subtotals in the income statement, preparers increasingly present alternative performance measures to investors, which is basically adjusted IFRS. This information is easier for users to consume, but it almost always paints a rosier picture than reality and can be highly misleading. In addition, many companies present non-financial information on, for example, sustainability issues. For the investor, it is often difficult to see the woods through the multitude of information trees.
  • So what will this ‘better communication’ theme mean in practical terms?
  • We will not propose to cut back the information provided, nor to dramatically increase it. But we are going to look at how this information is presented, how it is grouped together, and in what form it is made available. The objective is to make sure that companies can better tell their story through the financial statements, in a way that is clear, objective and consistent….”

I’ve commented before about the problems with the “woods for the trees” view of things. But more broadly, isn’t there something recurringly narrow and programmatic about all this? Suppose that Hoogervorst’s vision were achieved, and all companies henceforth delivered identically structured, impeccably comparable income statements, with alternative performance measures kept on the tightest of leashes. How much closer would that really bring anyone towards making the optimal risk-appropriate investment decisions? Not very close at all, given how little the income statement can possibly tell you about what lies beneath.

These fixations can actually start to seem rather juvenile, like a kid who brags about upgrading his phone but then never stops to consider where that actually gets him. Looking for something more substantial, I happened on a December 2013 Economia interview with Paul Druckman, at the time the chief executive of the International Integrated Reporting Council. Here’s an extract: 

  • “IR is not more reporting,” he says bluntly. “It is about an evolution in corporate reporting. I know it is a trite thing to say, but if you speak to the people involved in corporate reporting today, do they really believe that what they are doing is useful or worthwhile? Is the current reporting regime something that in itself tells the value-creation story of a company? No. That’s not a criticism of corporate reporting, because it has a compliance-driven nature. But if you look at IFRS, it is really good at getting comparative and consistent data. In the same way sustainability reporting is starting to get there on providing comparable and consistent reports. But they both miss the story.”
  • Druckman’s point is that we’re starting too often with the data and losing sight of the story. And while it’s true you can’t tell the story without the data, it makes more sense to start with the story and then go and find the bits of data that you need to measure to get that story across.
  • “What is the strategy of the business? Tell me that and then show me how you can justify that you are being successful. It’s at that point you go back to those performance measures that are consistent and reliable. The framework says, start with your strategy and pick the measures and numbers that show you have the credibility to achieve that strategy. You pick the numbers that best fit with measuring your strategy. You still need to know you have comparable, consistent numbers and so they need to be calculated on a consistent basis. IFRS makes you very clear on the numbers you chose and the basis you are using.”
  • “…times are changing and cultures have to adapt. Business is more complex. There’s some good research, which is continuing, into financial statements. When I started as an articled clerk in 1975 you could actually see 80% of the value of a business from the financial statements. In 2011 it was 19%. That is not because financial reporting is worse. Financial reporting is better. But business has changed. It is much more complicated than it used to be…”

I realize that Hoogervorst’s job is more about tending to (in Druckman’s way of putting it) the data than the story. But that last paragraph sums up the sense of someone fussily attending to a declining franchise. Rather than grandiosely overstate what can be achieved by financial reporting alone, Hoogervorst would better serve the ultimate cause by acknowledging its limits, and spending at least some of his time advocating for integrated reporting (or at least for something) as a consistent overall reporting framework within which to place IFRS-compliant information…

The opinions expressed are solely those of the author

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