If cash flow is the lifeblood of business, Andreas Barckow, chair of the International Accounting Standards Board (IASB), describes financial reporting standards as the backbone of the entire financial system.

Barckow sits atop the organisation that is responsible for the development and publication of the International Financial Reporting Standards (IFRS), which are required in more than 140 jurisdictions. The IASB provides the standards that entities use to depict their financial position, performance and cash flows. And in June 2023, the IASB’s sister board, the International Sustainability Standards Board (ISSB), launched its inaugural global sustainability disclosure standards, which will enable companies to report to the capital markets on organisations’ sustainability responses, broader strategy and risk and opportunities, and so on.

“Our standards provide rigour,” he explains. “In companies they provide processes with internal controls, with systems.

“No CFO would be willing to actually give a view to outside stakeholders if it couldn’t be traced back to the financial reporting systems,” he says. “It’s really the central nervous system from which everything else then evolves and develops.”

He describes the accounting profession as a “very important stakeholder and a very important part of the ecosystem”.

Pictured: Andreas Barckow, International Accounting Standards Board. Image credit: Nic Walker

What’s working, what’s not

Accounting standards can be many years in the making. However, even once they are adopted, the work is far from over. Real-life implementation inevitably throws up scenarios and challenges that Barckow and his team can respond to with clarifications and refinements.

As part of this process of continual assessment and improvement, the IASB is currently carrying out post-implementation reviews (PIRs) of the ‘big three’ changes to accounting standards introduced a few years ago – revenue from contracts with customers (IFRS 15), financial instruments (IFRS 9) and leases (IFRS 16).

Barckow says that wholesale changes to any of these standards are unlikely. “PIRs are fact-finding projects to gather evidence that seek to evaluate whether the respective standard is broadly working as intended by the board when it developed the standard,” he says. “It’s not a fundamental rethink to discuss everything again.”

The board is testing whether the assumptions it made when it developed the standards were correct, and if not, whether a standard needs to be adjusted. With the review process just getting underway, Barckow says he mainly has anecdotal evidence to share.

Contracts with customers

The IFRS 15 standard establishes the principles that an entity applies when reporting information about the nature, amount, timing and uncertainty of revenue and cash flows from a contract with a customer. Applying IFRS 15, an entity recognises revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

“The majority of people say the standard seems to be working,” he says. “It’s bringing a new model that was costly for companies to implement but is probably now easier to apply for companies than the previous requirements because it follows a strict logic.”

The principal-versus-agent relationship is often flagged as an area companies find challenging. IFRS 15 sets out a range of considerations to help companies determine whether a party is the principal or the agent in a transaction. Barckow says this is ultimately a judgement call for businesses and acknowledges that some stakeholders feel uncomfortable with making judgement calls. He says there may have been new developments in licensing, particularly for intangibles and this could attract some comment from stakeholders.

Barckow says he hasn’t heard broad concerns that revenue recognition has been more complex than was initially anticipated, for example: what were previously seen as more peripheral revenues end up being deferred for long periods, but stresses that the PIR process is only in its early stages.

Financial instruments

IFRS 9 specifies how an entity should classify and measure financial assets, financial liabilities, and some contracts to buy or sell non-financial items. It requires an entity to recognise a financial asset or a financial liability in its statement of financial position when it becomes party to the contractual provisions of the instrument.

The standard was developed as a reaction to the global financial crisis and the IASB has heard that it seems to have stood the test of time. The major change to the previous standard, IAS 39, concerns the development of a new impairment model that is based on expected, rather than incurred, credit losses.

“It seemed to have worked reasonably well in the COVID period. Companies reacted to that and have built up their provisions as they were going into the crisis,” Barckow says. “That doesn’t mean that everybody appreciates the standard in the same way. Some may find the new expected credit loss [ECL] requirements challenging.”

There is also the perception among some people that the standards were developed with the financial and banking sector in mind, rather than the broader corporate sector. The IASB has introduced some alleviation for corporates to make it easier for them to carry out their ECL assessment.

While there was some uncertainty when IFRS 9 came into effect in 2018, Barckow says the market has settled and the initial uncertainty has passed.

Leases

The IASB’s review on the leasing standard (IFRS 16) has just got underway with some initial research being carried out, so there is only limited feedback. The IASB will seek stakeholder feedback to inform the PIR in due course.

IFRS 16 aims to ensure that financial reports faithfully represent lease transactions and provides a basis for users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. The standard introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months.

Barckow says the IASB will wait and see how stakeholders find the balance-sheet approach.

“There are some areas that are obviously requiring more judgement. If you think about variable rent, if you think about rents that are contingent on some future event, that is a change in the way of thinking compared to previous requirements,” he says. “And I could appreciate that people may find it challenging to assess that, but there is no indication the model is flawed.”

Once the PIRs have been carried out, the IASB will prioritise which concerns it will address, if any.

“We take these reviews seriously but we have to actually evaluate how significant and how prevalent any concern that may be flagged is, vis-a-vis all the other projects that we do have on our agenda,” Barckow says. “As a global standard setter, you just try to respond to as many needs as you can possibly fulfill. If you serve 140-plus jurisdictions, you will appreciate that they don’t all have the same views and the same priorities.”

Additional priorities

Along with conducting the PIRs, the IASB’s priority for the next couple of years is to finish the four other big projects it is working on. These include ongoing work to improve how information is communicated in the financial statements, with a focus on information in the statement of profit or loss.

The organisation is also working on issues relating to subsidiaries without public accountability, a project on rate-regulated activities and the latest revision of the IFRS for small- and medium-sized enterprise (SMEs) accounting standards.

The last of these aims to revise the SME standard to reflect the improvements that have been made in full IFRS accounting standards, while keeping the standard simple. But sometimes unexpected issues arise which demand immediate attention and take the IASB and its technical staff away from these projects.

“Staff is a scarce resource and that means if something comes up unexpectedly, we will have to shift resources away from one of the existing projects to deal with that emergency issue, meaning that it slows our general work down,” Barckow says.

One such instance was the rent concessions granted by landlords to businesses during the COVID pandemic, which came at a time when many companies had just implemented the new leases standard and wanted to understand the accounting treatment.

Likewise, some stakeholders were concerned that the OECD Pillar 2 tax reforms could have quite significant impacts on deferred tax accounting. In May, the IASB introduced a temporary exception to the accounting for deferred taxes arising from the jurisdictional implementation of the global tax rules.

Barckow says it’s not for him to comment on how successful the Pillar 2 reforms could be in combating global profit shifting. He makes clear that the IASB doesn’t set the rules regarding profit shifting or indeed any other aspect of taxation.

“Our job is to maintain transparency and explain how companies are being affected,” he says. “We are not setting the policy rules. We are not saying this is good tax behaviour or bad tax behaviour. That’s really for lawmakers. Our job is to make transparent where entities are doing business and show the impact of any tax reforms.”

Digital first

The IASB is also responding to the broad economic trend of digitisation. As the IASB sets standards, it will work towards its end goal that information is made available digitally by creating a taxonomy that enables financial statements to be digitised.

A key difference will be in disclosure requirements. “If you are thinking about a narrative, you can be fuzzy. If you’re thinking about digital, you can’t be fuzzy, you need to be precise. It’s either one or it’s zero,” he says. “If you want that information to be analysed in a certain way, you have to be precise and you have to think through the best way to achieve this.”

“If you’re thinking about digital, you can’t be fuzzy, you need to be precise. It’s either one or it’s zero.”

This means the IASB needs to consider digital as it sets standards because it is difficult to implement digital standards after the fact.

Digitisation of financial statements using a uniform taxonomy should make life easier for investors because the information they receive from companies will provide comparability and consistency between accounts.

“It would make analyst jobs far easier because, instead of [comparing] a digital version that company A has with another digital version that company B has but that are completely irreconcilable, they could just do a mass comparison of a thousand reports at any one time,” Barckow says.

A challenge in digitising the standards is that different jurisdictions are up to different stages in digitisation. Some jurisdictions may have already developed their own digital taxonomy and will have to be persuaded that they should strive for global compatibility, while others won’t yet have begun. But Barckow says there is more awareness of the benefits of a global digital reporting language.

Another reason for the digitisation of reports is the ISSB’s intention to develop standards that will result in a high-quality, comprehensive global baseline of sustainability disclosures focused on the needs of investors and the financial markets.

The International Organization of Securities Commissions, a key stakeholder, has said it wants to see these as digital standards from day one.

“They didn’t want to see the same thing happening as with the IASB’s literature, where you first develop a paper-based version and, at a later stage, you bring out the digital version,” Barckow says.

As the organisation embraces digital and the benefits of digital-first thinking, Barckow knows that everyone in the financial ecosystem has to be on board.

“We want accountants to become more digital savvy, which is sometimes easier said than done. And we can take that into account in setting standards by thinking about digital implications of everything that we do,” he says.

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Climate-risk disclosures on the cards

The International Accounting Standards Board (IASB) is considering standard setting for the disclosure of climate risks in financial statements and is contemplating making the focus of financial risk reporting broader, to encompass the disclosure of more long-range risks.

“Our literature is principle-based and applies to any risk that an entity incurs, whether the risk is short term, whether it’s medium term, whether it’s long term or whether it’s financial, whether it’s operational, whether it’s whatever,” says IASB chair Andreas Barckow. “ESG [environmental, social and governance] risks like climate risk are no exception to that.”

However, the IASB acknowledges that some stakeholders may not have read its literature in that way and so remain more focused on traditional thinking about risks, classifying them as a market-based risk, credit risk, liquidity risk, operational risk and so on. Educational material on the IFRS Foundation website can help accountants and companies determine how to consider climate-related risks when preparing their financial statements.

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Pictured: Andreas Barckow, International Accounting Standards Board. Image credit: Nic Walker

A track record of excellence

When Andreas Barckow became the London-based chair of the International Accounting Standards Board (IASB) in July 2021, he already had considerable experience in standards setting. He served as president of the Accounting Standards Committee of Germany from 2015 to 2021 and was also a member of various IASB forums and of the European Financial Reporting Advisory Group.

He was a Frankfurt-based partner at Deloitte and head of the accounting giant’s IFRS Centre of Excellence in Germany, as well as a member of Deloitte’s nine-member global technical IFRS leadership team.

Barckow has a PhD from Paderborn University in Germany, where he graduated magna cum laude for his thesis on accounting for derivative financial instruments and hedging strategies. He was also a graduate student in management at Monash University in the early ’90s.

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Find out more

The External Reporting Board (EXB) is hosting a webinar with Andreas Barckow on Monday 27 November. Barckow will provide an overview of key IASB projects along with insights on the direction of travel for standard setting globally, followed by a live Q&A ‘Ask Andreas’ session.

Australia:
Perth: 8am, Adelaide: 9.30am, Darwin: 9.30am, Hobart: 10am, Brisbane: 10am and Canberra, Melbourne, Sydney: 10.30am. Register here.

New Zealand: 12.30pm – 1.15pm. Register here.

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