Speech by Stephen Haddrill, CEO, FRC at ICAEW IFRS Conference 2015: Major changes on the horizon
News types: Speeches
Published: 1 December 2015
Stephen Haddrill, CEO, Financial Reporting Council
ICAEW IFRS Conference 2015: Major changes on the horizon
Monday 30 November 2015, speaking between 2.45pm and 3.15pm
ICAEW, Chartered Accountants' Hall, Moorgate Place, EC2R 6EA
Good afternoon everyone,
Thank you for asking me to speak today about the UK perspective on IFRS and what is currently developing here.
You will have heard a lot of interesting discussions about IFRS already today, and how it will affect the accountancy profession around the world. So I wanted to talk about some projects in this area that will dominate the accounting agenda, particularly in the UK and Europe, in terms of the impact on business. Although some of the other speakers have touched on what I will speak about, I think it’s important to let you know what the Financial Reporting Council’s views are on these projects.
One of the major issues for the UK is IFRS 9, which is the standard that will replace the current incurred loss provisioning regime for financial instruments, with expected loss provisioning. The standard was issued as a response to the credit crisis and is likely to have a significant impact on loan loss provisions held by banks and other financial institutions. As such, it requires significant systems changes for banks who need to be certain of the standard being endorsed in time for implementation of it. The effective date of the standard is 1 January 2018.
There is a point of contention for insurance businesses in all of this, as there is a misalignment in implementation dates for IFRS 9 and a revised IFRS 4 Insurance Contracts. IFRS 4 is unlikely to be ready for implementation until 2021, three years after the proposed start of IFRS 9.
To try and provide a solution to this issue, the IASB will issue an Exposure Draft by the end of December 2015 proposing a solution for the mismatch in these implementation dates. The solutions include the overlay approach, which is reporting the financial position in accordance with IFRS 9 but excluding the resulting accounting mismatches from the profit statement, or a deferral approach where IFRS 9 will be delayed until 2021 for reporting entities with predominantly insurance liabilities within the current scope of IFRS 4. We expect the comment period on that exposure draft to elapse into February 2016, and the final amendment to be issued in the third quarter of 2016. Both solutions are meeting significant push back from the insurers.
We believe the Accounting Regulatory Committee should take a final decision to endorse adoption of IFRS 9 as early as possible so as not to delay endorsement of IFRS 9 for banks and other European listed companies, with some deferment in the EU for insures.
Another standard on the horizon is the new leases standard (IFRS 16 Leases). It was expected to be published before the end of the year but it will probably be delayed until the beginning of January 2016.
We have previously expressed concerns about the IASB’s due process on the leases project. However, we consider that these concerns have been addressed by the actions of the IASB and the IFRS Foundation’s Due Process Oversight Committee (DPOC). Cost benefit analysis.
We recognise the benefits of convergence.
So now I want to turn your attention to the International Financial Reporting Standards Foundation’s structure and effectiveness review. This is an important time for the IFRS Foundation to review its strategic direction and assess the effectiveness of its strategy, as the IASB is in the process of issuing its revised Conceptual Framework and finalising other key projects and therefore will enter a new phase of work; a new strategic period.
Our response makes a number of suggestions:
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We believe that the Trustees should provide more direct oversight of the strategic direction of the IASB’s standard-setting and exercise greater oversight of the output of the IASB rather than their current focus which is limited to adherence to due process requirements. It is important that standards are developed and assessed with recognition of the context that financial reporting affects economic decision-making and financial stability. They must be practical and understandable by those that implement them – the preparers - and meet the needs of users in the jurisdictions that adopt them.
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We believe that the Trustees should, following consultation and in light of the Foundation’s Mission Statement, set the strategic direction of the IASB’s standard-setting agenda; hold the IASB to account for following this strategy; and assess the performance of the IASB as a whole, by reference to adherence to both the words and the spirit of the Foundation’s due process requirements and by reference to the quality and timeliness of its outputs.
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We note that the IASB is undertaking an agenda consultation in parallel with the Trustees’ strategic consultation and find it indicative of our concerns that the IASB’s work is not carried out within an agreed strategy and given effective strategic direction by the Trustees. We would expect those charged with governance of an organisation, such as the Trustees, to agree a strategic direction before more operational level matters, such as the short- to medium-term priorities for standard-setting, are agreed.
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Once the revision to the Conceptual Framework is completed we strongly urge the IASB to develop work on measurement, performance reporting (including the distinction between profit or loss and other comprehensive income) and the distinction between liabilities and equity.
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We support the Disclosure Initiative and consider that the main focus should be on the upcoming Discussion Paper on Principles of Disclosure. The other projects under this initiative should be based on these principles to reduce the risk of fragmentation.
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We believe that priority should be given to the performance reporting project (now included in the ‘Primary financial statements’ project). In particular, research and analysis should be undertaken on the reporting of financial performance to meet both users’ needs when making investment decisions and for holding management to account for their decisions.
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We note that a large number of changes can be burdensome for both preparers and users. Therefore, when assessing the merits of a proposal the IASB should also consider the capacity of stakeholders to implement and understand the changes.
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That the revised Conceptual Framework should not be issued until a reconsideration of stewardship, prudence and reliability is complete.
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The treatment of stewardship fails to acknowledge that investors need information to hold management to account. In order to reflect the importance of stewardship it should not, as it is in the Exposure Draft, be treated as an ancillary part of an objective of making buy, hold, or sell decisions, but either: stewardship should be identified as a separate objective; or the notion of decision-usefulness could be broadened to specifically include decisions about holding management to account.
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The Conceptual Framework should embrace asymmetric prudence (a lower threshold for the recognition of liabilities and losses than for assets and gains) and not only ‘prudence as caution’.
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Reliability (including measurement uncertainty) should be identified as a qualitative characteristic, with equal status to that of relevance.
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We are very concerned that the Exposure Draft does not propose to identify reliability as a qualitative characteristic, and that measurement uncertainty is discussed as an aspect of relevance. The pre-2010 Framework included the idea that reliable information ‘can be depended on by users’. That critical idea is not captured by the discussion of faithful representation in the Exposure Draft: to restore it requires the identification of reliability as a qualitative characteristic.
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One of the implications of what is proposed in the Exposure Draft is that the tension between relevance and reliability is replaced by one between measurement uncertainty and other aspects of relevance. Measurement uncertainty should be discussed as an aspect of reliability because in our view, one of the primary tensions in standard-setting is that between relevance and reliability.
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The Exposure Draft also fails to provide sufficient depth of analysis on the fundamental issues of measurement and performance reporting. The IASB should therefore commit itself to further work on these topics. In particular, the measurement chapter should specify the objective of measurement that will provide the information that can be expected to achieve the objectives of financial statements and discuss how measurement bases with different features can contribute to that end.
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We consider that the section on performance reporting that the Exposure Draft represents a missed opportunity to identify a conceptual basis for the use of other comprehensive income. It is difficult to dismiss the thought that the Exposure Draft may have been developed to provide a brief discussion of the profit and loss/other comprehensive income, or OCI, distinction that will be acceptable to as many readers as possible. We hope that the IASB’s research project on ‘Primary Financial Statements’ will develop principles for how income and expense should be presented to highlight components that are relevant to users.
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We disagree strongly with the proposal that it should be presumed that all income and expenses that are reported in OCI in one period will be reclassified (or ‘recycled’) to the statement of profit or loss in some future period. In our view it is of the essence of statements of financial performance that they report income and expenses resulting from events of the period. We can see no reason why the statement of profit or loss for the year 2225 should report a gain or loss when an asset is sold at the amount to which it was restated in 2010 when the change in carrying amount was (for whatever reason) reported in OCI.
We are using it to lead into clear and concise reporting and the importance of director reports as well as accounts.
The quality of corporate reporting in the UK is generally of a high standard, by improvements still needs to be made.
As part of our 2016-2019 strategy, we will continue to promote best practice in corporate reporting focussing on non-regulatory approaches to improve quality.
With this, Clear and Concise reporting remains high on our agenda. It needs to be easy to understand particularly for investors.
Narrative reporting is an integral part of the annual report with the Strategic Report and Corporate Governance Report complementing the financial statements.
Together they provide investors with a holistic picture of a company’s business model, performance and the principal risks it faces, including its future viability.
The introduction of the Strategic Report has resulted in improvements to the quality of corporate reporting in the UK with companies focussing on communication and ensuring that the key messages are given prominence.
We have also seen greater engagement from Boards in the annual report process as a consequence of the introduction of the fair, balanced and understandable principle in the Corporate Governance Code.
Thank you.