CFA Institute Offers Investor Perspective on IFRS Foundation Strategy Review

Marking its second decade in operation, the IFRS Foundation — the oversight body of the International Accounting Standards Board (IASB) — is soliciting input on its future strategy as part of a review covering its mission, governance, standard-setting process, and financing.

CFA Institute recently provided its views on the IFRS Foundation Report of the Trustees’ Strategy Review, IFRSs as the Global Standard: Setting a Strategy for the Foundation’s Second Decade (the “Strategy Review”). This is a follow up to a public consultation paper, Status of Trustees’ Strategy Review, on which we commented earlier this year and the IFRS Foundation Monitoring Board’s Consultative Report on the Review of the IFRS Foundation’s Governance.

CFA Institute believes that the governance of the IFRS Foundation is critical to an effective IASB and, to that end, has written comment letters regarding the constitution and prior strategy reviews as well as provided public testimony. We have articulated our perspective on factors that influence IFRSs’ institutional integrity, governance, effectiveness, and accountability.

A summary of the feedback we provided to the IFRS Foundation:

• Coordination and Clarity of Roles: IFRS Foundation and Monitoring Board Roles and Responsibilities Should Be Better Defined — We raised our concerns regarding the overlap and duplication of the IFRS Foundation Trustee and the Monitoring Board’s review efforts of IFRS strategy and governance oversight. We thus recommended better coordination between these two key arms of IFRS governance, noting that the duplicative consultative efforts of the Trustees and the Monitoring Board reflect, and ultimately compound, the confusion regarding their respective roles and responsibilities.

• Mission: Must Be Investor-Focused — We expressed our belief that the Strategy Review is ambigious in how it defines users of financial statements. In response, we strongly recommend that the priority of investors, as primary users of financial statements, be articulated in all of the IFRS Foundation’s communications, including its constitution and strategy review documents. We reiterated that investor requirements of fully transparent information should not be seen as equivalent to, or less important than, that of prudential regulators.

• Governance: Must Be Independent of National Interests and Include More Investors — We emphasized the importance of greater investor representation at the Trustee level and instilling a formal mechanism at the Monitoring Board level to solicit investor views in a systematic fashion. We reiterated our support for an independent and publicly accountable IASB, with accountability defined as acting in investor interests that is synonymous with providing the most transparent information set. We do not view public accountability as accountability to the particular interests of sovereign states.

• Financing: Should Be Independent and a Specific Plan Developed — We articulated our support for the principle of pursuing a mandatory and stable funding mechanism for the IFRS Foundation. However, we believe it is time for the Trustees to put forward specific practical proposals and methods for achieving this goal, moving away from the discussion only of principles. Stakeholders can contribute their perspectives more effectively when reacting to clearly defined and actionable funding proposals, and it would be easier to make progress on this funding issue.

• Process: Opportunities for Improvement Exist — We indicated that we were supportive of proposals that improve due process, including having greater levels of field testing, improved outreach to investors, undertaking post-implementation reviews, building the research capacity, and integrating XBRL into the standard-setting process. We strongly recommend that the Trustees review and upgrade the technical and financial statement preparer and investor outreach capacities of the current International Financial Reporting Interpretations Committee (IFRIC), in order to be responsive to the inevitable demand for guidance resulting from the issuance of highly principles-based standards such as revenue recognition. A wider adoption of IFRS across the globe is likely to increase the risk that IFRS will be interpreted differently in various jurisdictions, reducing the comparability of financial statements that is the goal of IFRS in the first place. The significant number of incomplete Memorandum of Understanding (MoU) projects and re-exposed documents is an indication that improvements in the standard-setting process are desirable. We also support measures to benchmark due process and having Trustees formally monitor due process. However, it is not clear whether all these measures will remedy the systematic inefficiencies of the standard-setting process without an investor-focused mindset and conviction to independence, accountability, and quality.

Overall, our comments were provided in the context of our conditions for the adoption/incorporation of IFRS, one of which is improved independence and governance of the IASB.