Why we believe the IASB’s Third Agenda Consultation is a great opportunity for investors to influence its priorities.

Key points

  • We outline five overarching themes which we think should inform the IASB’s 2022-2026 work plan: connectivity with sustainability standards, global convergence, digital financial reporting, non-GAAP metrics and shareholder engagement.
  • We outline our top three priority projects: statement of cash flows and related matters, operating segments, and intangibles.

Investors have an insatiable appetite for more and better information to help forecast risk and return. Financial information remains the bedrock of analysis, but it is limited in scope and is generally backward-looking. Could financial information be improved? Are some accounting standards too hard for users to interpret? Are there important areas of disclosure missing?

All these questions are being asked in the IASB’s (International Accounting Standards Board) Third Agenda Consultation. The IASB is planning its work for the next five years, and it really wants to hear from investors. There is certainly no shortage of potential projects, so prioritising is essential. As the conductor Leonard Bernstein once said, “To achieve great things, two things are needed: a plan and not quite enough time”.

Five overarching themes

As Chair of the CRUF (Corporate Reporting Users’ Forum) UK, I co-ordinated a response based on input from participants from around the world. Before discussing specific project priorities, we highlighted what we thought should be five overarching themes for the IASB’s 2022-2026 work plan:

#1 Connectivity with sustainability standards

Climate change, along with other sustainability factors, is already top of the agenda for many politicians and for society in general. The challenge for investors is how to digest the rapidly expanding volume of sustainability data, which is outside the scope of a financial audit and where disclosure is inconsistent between companies. The IASB needs to work closely with the soon-to-be-established International Sustainability Standards Board (ISSB) to ensure that sustainability factors, such as climate-related risks and opportunities, are neither omitted nor double counted. Investors will always welcome information, both financial and non-financial, which is reliable, easily understood and relevant for making investment decisions.

#2 Global convergence

Global comparisons of similar businesses are complicated if some report under IFRS and others report under US GAAP (Generally Accepted Accounting Principles). Ideally, similar transactions and activities should be reported in the same way. We would encourage the IASB to coordinate its priority projects with the US-based Financial Accounting Standards Board (FASB), as far as possible.

#3 Digital financial reporting

Analysts increasingly consume and process financial information electronically using data aggregators, such as Bloomberg and Capital IQ, rather than reading the printed annual report. There are two problems with this: first, data aggregators are effectively setting the de facto accounting standards, as they define their own sub-totals in their standardised financial statements. Secondly, while the numbers in the main financial statements are well tagged, only some of the information in the notes, and very little in the footnotes, is tagged. As a result, disclosure outside the face of the three primary financial statements may not be getting the appropriate attention. 

#4 Shareholder engagement

The active investment management industry is experiencing fee pressure owing to competition from passive funds, such as index trackers, as well as rising compliance costs. Consequently, equity analysts, both on the sell side and buy side, are being asked to cover more and more stocks. It has become increasingly difficult for analysts to digest the financial information, especially as annual reports have become longer, and there have been several major new standards in recent years. Shareholder engagement is most effective when examples based on practical investment scenarios are used to illustrate the accounting problem and the possible solutions.

#5 Non-GAAP metrics

Non-GAAP metrics such as adjusted earnings are very important as these are often the headline valuation numbers investors first look at. Non-GAAP metrics are also a sensitive governance topic as management bonuses are often based on these. As non-GAAP metrics reflect management’s perspective, they are subject to bias and are not defined consistently between companies. However, sometimes non-GAAP metrics capture the underlying economics better than the equivalent GAAP metrics. For example, it is common practice to add back some, or all, of the amortisation of acquired intangibles to get a better measure of the performance of the business. We welcome the proposals in the Primary Financial Statements project, which will require alternative performance metrics (APMs) in the statement of profit or loss, to be reconciled to the nearest GAAP subtotal in a note to the audited financial statements.

Top three priority projects

Out of all the potential projects outlined by the IASB, we would highlight the following as the top three priorities: statement of cash flows and related matters, operating segments, and intangible assets.

Statement of cash flows and related matters

The key objective of an investor is to value the enterprise, which often entails predicting cash flows. Most analysts forecast cash flows using the income statement because the statement of cash flows cannot be tied back to the other main financial statements. Ideally there should be sufficient disclosure in the notes on the statement of financial position and statement of profit or loss to allow users to fully derive the statement of cash flows. All the necessary information exists in the general ledger, so this should be possible.

Operating segments

Segmental reporting is particularly important when trying to understand a business comprising divisions with very different operational and financial characteristics. The telecommunications industry is one example where analysts want to see a fixed versus mobile segmentation. Ideally, users often need a much more granular and complete picture of the segments to allow them to calculate the return on capital and assess the risks. Analysts understand that a full segmental statement of profit or loss may be a challenge, as common costs such as corporate overheads and taxation are hard to allocate. However, we do not think the challenge is insurmountable. Presumably management needs to do this exercise itself, in order to rationally allocate capital.

Intangible assets

Intangible assets have become more important over time as businesses have generally become less capital intensive. We don’t agree with proposals to loosen the recognition criteria, which would mean putting intangibles such as brands, efficient business processes and ‘big data’ on the balance sheet. This would lead to even higher amortisation charges in the years following an acquisition, which would further distort the picture of how well the combined entity is performing. In my opinion, intangibles are best addressed through expense disaggregation. In the past SG&A (selling, general and administrative expense) was a small, fixed cost, unrelated to growth. Nowadays, for many businesses, especially those with a digital presence, SG&A is a large, variable cost, closely tied to growth. Users want to know how much is being spent on the growth-oriented expenses such as marketing and promotional spend, information technology, and training. If these were required line items, similar to research and development, users would have a much better picture of the cost structure of the business and would be able to capitalise some, or all, of these expenses to come up with their own definition of invested capital.

In conclusion, we welcome the opportunity to provide our views on what we think the priorities for the IASB’s 2022-2026 work plan should be. As Benjamin Franklin once said, “If you fail to plan, you are planning to fail”. The IASB is certainly planning very carefully by considering the views of the primary end users of accounts – investors – and we look forward to improved financial information in the years to come.


Jeremy Stuber

Jeremy Stuber

Global research analyst, specialist research team


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