A hiatus in the rollout of new global accounting standards is ending as rulemakers look to update some decades-old rules to better fit financial value concerns for today’s companies.
The International Accounting Standards Board is expected to launch or finish a few key standards in 2024. Among the board’s most important projects will be finalizing big changes to the income statement, in a rethink of its first-ever standard covering what companies must report in their financial statements.
The board also is taking a close look at long-standing problem areas like measuring intangible assets, such as branding and intellectual property. Improving climate risk disclosures in financial reporting is on the board’s agenda as well.
IASB chair Andreas Barckow said in a recent phone interview that the board was set to resume new standard-setting, after a long pause.
“There hasn’t been a new standard for six years,” he said. The last set of new rules IASB issued, related to insurance accounting, took 20 years to develop and were published in 2017.
The upcoming projects are among the first since the board advanced a slew of measures designed to fix accounting problems highlighted by the 2008 global financial crisis. That effort included writing rules for disclosing debts that are unlikely be repaid.
Barckow blamed the lack of activity lately partly on the pandemic, which meant the standard setter gave companies more time to respond to consultations. He denied that a sharp cut in funding from the board’s biggest financial backer, the EU, had fed the delays, saying it reflected Brexit, which meant UK funding was no longer lumped in with the rest of Europe’s funding.
EU funding for the international accounting body has fallen for the past two years to £3.4 million ($4.3 million) in fiscal year 2022, a 21% decrease from £4.3 million in 2020. The European Commission blamed a general lack of cash and the costs of launching its own sustainability reporting standards.
First-ever Standard Gets Update
Barckow highlighted a planned 2024 update of the income statement as a major change to a fundamental accounting standard. The new set of rules will replace the board’s first-ever accounting standard, IAS 1 Presentation of Financial Statements, which dates to 1975.
“Presently, you have revenues and profit and a big gap in between,” he said. “We’ve been working on this for eight years.”
Under proposals first published in 2019, new sub-totals will be introduced to the income statement. These cover areas such as operating profit, commonly used by companies but not defined by accounting standards. “That gave companies a lot of leeway over what to include as operating expenses and they took full advantage,” Barckow said.
The board also plans to tackle management performance measures, such as earnings before interest and tax. Frequently used by companies and investors, these are informal measurements that fall outside of formal accounting definitions, known as Generally Accepted Accounting Principles or GAAP.
Under the proposed new income statement rules, companies must spell out any non-GAAP measures they use in the notes to the accounts and reconcile them back to the formal financial statements. “Most importantly, that means they’ll be subject to assurance,” Barckow said, because non-GAAP figures can be traced back to the audited financials.
New rules allowing simplified accounting for some subsidiary companies should also be finalized in 2024, Barckow said.
Dipping Into Intangibles
The board also will lay groundwork in 2024 for proposing some important new accounting standards.
The IASB will examine intangibles reporting, although Barckow said the board is unlikely to come up with any concrete proposals before 2026. Intangibles refer to non-physical assets in a company’s operation, such as brands or intellectual property, that offer a long-term financial value to a business.
“IAS 38 was written for manufacturing companies,” Barckow said, referring to the current standard covering intangibles, which was issued in 1998. “It doesn’t take account of companies such as Google.”
Figures from the Financial Reporting Council show that the value of intangible assets has multiplied in recent years, to the extent that the UK accounting regulator says that intangible investment now equals the amount spent on tangible assets. Between 2008 and 2021, intangible assets reported by FTSE 350 companies nearly tripled in value, from £115 billion to £330 billion, the FRC said by email earlier this year.
Barckow said investors needed to be given more information on areas such as intellectual property, essential to valuing many modern companies. In 2022 after years of debate, the IASB decided not to change the accounting treatment of goodwill, the intangible asset recorded when a company acquires another firm.
Instead, it will look at whether it needs to write new rules to deal with some basic accounting problems. For example, under present accounting rules, companies can account for intangibles on an acquisition, but not intangibles generated by internal research.
“We need to know what investors want,” Pauline Wallace, chair of the UK Endorsement Board, said in a recent phone interview. The board plans to publish the results of a survey of investors about intangibles reporting in March 2024, designed to feed into the IASB’s deliberations.
“It’s a big area which probably needs a major standard-setting project,” Steve Cooper, a financial analyst who was previously an IASB board member, said by phone recently. “But the IASB might decide to do something smaller, clarifying the accounting treatment under existing rules.”
Barckow accepted that intangibles might require major standard-setting, but also said there were alternatives to look at such as giving investors more information in notes to the accounts, as with non-GAAP reporting. “It could also be an interim solution before a new standard,” he said.
Better Climate Disclosure
The IASB will also look at how to improve climate risk disclosures in financial reporting. Companies must report any material risks in the accounts, including risks related to climate change, but Barckow acknowledged that relatively few did so.
“It’s a timing problem,” he said, with financial accounts focused on the previous year and many sustainability risks regarded as longer term. “But in time, these risks will be recognized in the financial statements.”
The IASB will broaden its research to look at environmental, social, and governance risks beyond climate, but it has decided to publish guidance and educational material rather than write a new accounting standard. Sustainability reporting is the remit of the IASB’s sister body, the International Sustainability Standards Board, Barckow said.
“The elephant in the room for the IASB is the newly created ISSB — what should its relationship with this new ‘sister entity’ be,” Oxford University business professor Karthik Ramanna said by email. “While the ISSB seems to be focused on creating standards for PDF-based ESG disclosures, the hard nuts-and-bolts of quantitative climate accounting, which should be in the IASB’s wheelhouse, has gone unattended.”