Accounting Alert

Accounting Summit with the IASB

February 24, 2023

This was a short Accounting Alert report that we sent to our clients. We thought more investors would appreciate the update so we decided to share it widely. 

Please enjoy complimentary access and feel free to share with others.

By Anthony Scilipoti and Dimitry Khmelnitsky

Earlier this month, senior members of the International Accounting Standards Board (IASB), the Canadian Accounting Standards Board, and securities regulators, met informally with a number of Canadian professional investors for an open forum at our Veritas offices in Toronto. It has been six years since senior IASB officials travelled to Canada, and the discussion was spirited. 

From the side of the investors, there was an overriding sense of concern that accounting standards have lost relevance with their intended audience because of the increasing complexity of GAAP financial information. That complexity has manifested itself in the prominence of non-GAAP metrics in place of audited GAAP results and the growing market share of private over public investments. 

Andreas Barckow, IASB Chair, explained the process behind setting standards and the importance of input from financial statement users. As he said, standard setting requires compromise without compromising and he noted that the overriding challenge has always been the number of voices at the table (Canada is but one voice amongst 144 IASB countries). Linda Mezon-Hutter, former Canadian Accounting Standards Board Chair and now the IASB's Vice Chair, was in attendance and should help amplify the Canadian voice. 

In 2022, the IASB completed its five-year strategic review and, after considering 70 proposals, decided to address 20 topics, and chose three areas of focus: 

• Intangibles, accounting and presentation;
• The Statement of Cash Flows; and
• Incorporating climate risks in the financial statements.

Specific areas of concern/discussion:

1. Non-GAAP Metrics are replacing GAAP metrics: Non-GAAP metrics will not be banned. Instead, the IASB is finalizing disclosure standards (AP21) as "Management Performance Metrics" that would allow disclosure of metrics at management's discretion with proper reconciliation that would be audited. 
   Veritas Take: We welcome the change, especially when paired with the revised and more stringent non-GAAP securities regulations released in August of 2021, NI 52-112.
    
2. Excessive accounting standard changes: Since 2018, the IASB has announced four new standards that considerably altered reported financial information: IFRS 15 (revenue recognition), IFRS 9 (financial instruments), IFRS 16 (leases), and IFRS 17 (insurance contracts). Each change caused notable differences compared to U.S. GAAP and historic financial information, which are sore spots for Canadian investors. 
   Veritas Take: The IASB seems to have heard this message and stated it does not intend to make major changes in the near term. We will keep a close eye to see how many pages are added to the IASB's already over 3,000-page syllabus. 
    
3. Unintended consequence of Fair Value Accounting: Fair value accounting creates a disconnect with the historical cost structure of financial statement information. The latitude it affords preparers has pushed investors into alternatives and private equity that can "show" stable returns due to fair value accounting. Securities regulators welcomed fair value accounting because it provides relevant information. The IASB argued that GAAP is still highly relevant today because it serves as a baseline to which adjustments are made. 
   Veritas Take: We would agree that GAAP is a key reference point. However, in order for GAAP audited information to remain relevant it must clearly explain in plain terms the assumptions, estimates and choices that management teams have made to arrive at the reported results.
    
4. Sustainability Accounting: One of the key challenges of incorporating sustainability accounting, and specifically, environmental issues, into the formal GAAP audited financial statements is that the resulting estimates are inherently forward-looking and, therefore, subject to significant management judgement. 
   Veritas Take: Standard setters will have to balance the desire to address the "greenwashing" trend and incorporating future assumptions into historical financial information. 

No doubt, financial reporting challenges will always exist because business innovation moves more quickly than accounting innovation, and reporting issuers must balance their desire to keep certain information close to their chests while attracting and retaining third-party capital. One of the recommendations we voiced was that accounting standard setters should focus their attention on ensuring that historical information is transparent, consistently prepared and disclosed, and that changes in policies, assumptions and estimates are clearly explained and disclosed in the GAAP financial statements. 

The best path forward is for investors to be more involved so that their voices are heard amongst other stakeholders such as companies, auditors, accountants and governments. The IASB ensured us that their phone lines are always open, and we can corroborate that standard setters do listen to users and understand the challenges. Please reach out to us and we'd be happy to get you in touch with the right people to listen.  

Anthony Scilipoti is the President, CEO and Founder, and Dimitry Khmelnitsky is the Vice President and Head of Accounting & Special Situations