Eyes on Financial Accounting and Reporting Standards – IASB & FASB Consider “Convergence” and Separate Actions

by Hank Boerner – Chair & Chief Strategist – G&A Institute

March 2021

Investors Call For More Non-Financial Standards for Corporate Reporting, Less Confusion in “Voluntary” Disclosure.

Should there be more clarity in the rules for corporate sustainability accounting and reporting as many more investors embrace ESG/Sustainable analysis and portfolio management approaches?

Many investors around the world think so and have called for less confusion, more comparability, more credible and complete corporate disclosure for ESG matters.

Accounting firms are part of the chorus of supporters for global non-financial disclosure standards development.

Where and how might such rules be developed? There are two major financial accounting/reporting organizations whose work investors and stakeholder rely on: The International Accounting Standards Board (IASB) and in the United States of America, the Financial Accounting Standards Board (FASB). Both organizations develop financial reporting standards for publicly traded companies.

There are similarities and significant differences in their work. The US system is “rules-based” while the IASB’s approach has been more “principles-based” The differences have been diminishing to some degree with the US Securities & Exchange Commission more recently embracing some principles-based reporting.

By acts of the US Congress, FASB (a not-for-profit) was created and has governmental authority to impose new accounting rules — while the IASB rules are more voluntary.

The US system has “GAAP” – Generally Accepted Accounting Principles for guidance in disclosure. The adoption of IFRS is up to individual countries around the world (144 nations have adopted IFRS).

The IASB standards are global; these are the “IFRS” (International Financial Reporting Standards) issued by the IASB.

The FASB standards are used by US-based companies. For years, the two organizations have tried to better align their work to achieve a global financial reporting standard – “convergence”.

The IFRS Foundation is based in the United States and has the mission of developing a single set of “high-quality, understandable, enforceable and globally-accepted accounting standards (the IFRS), which are set by IASB.

In 2022 IASB and FASB will have a joint conference (“Accounting in an Ever-Changing World”) in New York City to “…strengthen connections between the academic and standard-setting communities…” and explore differences and similarities between US GAAP and IFRS Standards.

Consider that the Financial Stability Board (FSB), which launched the TCFD, is on record in support of a single set of high-quality global accounting standards.

Convergence. In the USA, the “whole of government” approach to the climate crisis by the Biden-Harris Administration may result in encouragement, perhaps even rules for, corporate ESG disclosure. The IASB is not waiting.

The IFRS Foundation Trustees are conducting analysis to see whether or not to create another board that would issue global standards for sustainability accounting and reporting.

A proposal will come by the time of the UN Climate Change Conference this fall. Should the IFRS foundation play a role? The International Federation of Accountants (IFAC) thinks so.

Many questions remain for IASB and FASB to address, of course. This is a complex situation, and we bring you some relevant news in the newsletter this week.

TOP STORIES

Here’s an update from the IFRS Foundation and what is being considered:

Meanwhile, the European Commission separately is exploring how to strengthen “non-financial” reporting – there’s the possibility that there could be EU standards developed:

Helpful information about the FASB-IASB differences:

Titles Matter to Provide Context and Direction – For Corporate Leaders and the Providers of Capital

May 14 2020

by Hank Boerner – Chair & Chief Strategist – G&A Institute

Shorthand terms in business and finance do matter – the “titling” of  certain developments can sum up trends we should be tuning in to.  Some examples for today: Sustainable Capitalism  – Stakeholder Primacy – Sustainable Investing – Corporate Sustainability – Corporate ESG Performance Factors – Environmental Sustainability – Corporate Citizenship…and more.

These are very relevant and important terms for our times as world leaders grapple with the impacts of the coronavirus, address climate change challenges, as well as addressing conditions of inequality, have/have not issues, questions about the directions of the capital markets, ensure issuer access to long-term capital…and more.  And, as influential leaders in the private, public and social sectors consider the way forward when the coronavirus crisis begins to wind down.

For investors and corporate sector leaders, the concept of shareholder primacy was more or less unchallenged for decades after World War II with the rise of large publicly-traded corporations – General Electric! — that dominated the business sector in the USA and set the pace other companies in the capital markets.

But as one crisis followed another – the names are familiar — Keating Five S&L scandal, Drexel Burnham Lambert and junk bonds, Tyco, Enron, WorldCom, Adelphia Cable, Arthur Andersen, the Wall Street research analysts’ debacle (Merrill Lynch et al), Lehman Bros and Bear Stearns, Turing Pharmaceutics, on to Wells Fargo, Purdue Pharma and its role in the Opiod crisis – over time, increasing numbers of investors began to seriously adjust they ways that they evaluate public companies they will provide vital capital to in both equities and fixed-income markets.

Investors today in this time of great uncertainty are focused on: which equity issue to put in portfolio that will stand the test of time; whose bonds will be “safe”, especially during times of crisis; which corporate issuer’s reputation and long-term viability is not at risk; where alpha may be presented as portfolio management practices are challenged by macro-events.

This is about where the money will be “safer” overall, and provide future value and opportunity for the providers of capital – because there is great leadership in the board room and executive offices and resilience in crisis is being demonstrated.

As we think about this, the questions posed in context (virus crisis all around) are:  Why has sustainable investing gone mainstream?  What can savvy boards and C-Suite leaders do to exert leadership in corporate sustainability?  Where is sustainable capitalism headed?  How do we identify great leadership in the corporate sector in times of crisis?

Our choice of featured stories up top for you this week provide some interesting perspectives on these questions.

And, we’ve tried to illustrate the embrace of sustainability as a fundamental organizing principle today of great corporate leaders.  As well as explaining the continuing embrace of sustainable investing approaches of key providers of capital as a strategic risk management discipline — and proof of concept of acceptance of stakeholder primacy / sustainable capitalism in the 21st Century.

The other stories we’ve curated for you this issue of our newsletter help to broaden these perspectives that are offered up in these challenging times from thought leaders.

As the ancient blessing/curse goes:  May we live in interesting times.

Featured Stories – The Two Critical Halves of Sustainable Capitalism, Issuers and Providers of Capital…

Concept: A well-structured sustainability committee not only serves a critical coordinating function, but also steers sustainability right to the heart of the company and the company’s strategy. Let’s take a look at how boards at some of the world’s leading companies have tackled this…

How Can Boards Successfully Guide a Transition to Sustainable Business?
Source: Sustainable Brands – The UN’s Sustainable Development Goals are set to unlock $12 trillion in new business opportunities by 2030. Yet many companies are still stuck in the past. Over the next decade, businesses can either adapt and thrive or deny and, says the organization…

The evidence suggesting that boardrooms should prioritize sustainability is growing rapidly. On the one hand, there are increased risks associated with not prioritizing sustainability. On the other hand, the figures show the huge opportunities sustainability offers businesses. As a result, more and more, sustainability is positioned at the top of boards’ agendas.

Boards must put sustainability at the top of their agenda to thrive
Source: GreenBiz – Amidst the global COVID-19 crisis, there have also been glimmers of hope. A significant one is its impact on climate change. It’s estimated that global carbon emissions from the fossil fuel industry could fall by 2.5 billion…

During a recent CECP CEO Roundtable, current and former CEOs gathered virtually and shared insights from their perspectives on the business landscape. In these informative discussions, one executive noted that leadership, more so than having the right systems in place, is and will be integral as we navigate uncharted territory:

Pivoting with Moral Leadership
Source: CECP – During a recent CECP CEO Roundtable, current and former CEOs gathered virtually and shared insights from their perspectives on the business landscape. In these informative discussions, one executive noted that leadership, more so…

Bears watching:  On 8 April 2020 the European Commission published a consultation paper on its renewed sustainable finance strategy (the “Sustainability Strategy”). The Sustainability Strategy is a policy framework forming a key part of the European Green Deal, the EU’s roadmap to making the EU’s economy sustainable, including reducing net greenhouse gas emission to zero by 2050. Despite the inevitable recent shift of focus to measures dealing with the COVID-19 crisis, this remains a top EU priority and the outcome of this consultation may significantly affect :

European Commission Consultation on the Renewed Sustainable Finance Strategy
Source: National Law Review – The Sustainability Strategy is a policy framework forming a key part of the European Green Deal, the EU’s roadmap to making the EU’s economy sustainable, including reducing net greenhouse gas emission to zero by 2050. Despite the…

Tuning in to the European Union Changes in Corporate Reporting

By G&A Institute

In April, the European Commission (EC) acted on a proposal calling for new rules – officially, to implement, for a Directive of the European Parliament and of the Council to mandate disclosure of non-financial information and diversity information by large companies (500+employees).

The proposal (prepared by a working group) calls for mandating publication of non-financial information to be included in annual and consolidated financial statements and related reports.

Continue reading