Q: There has been a lot of activity around integrated reporting and the reporting of nonfinancial information recently. How do you view these initiatives in relation to the IASB’s activities?
A: Historically, our position on this part of financial reporting has been that we were an interested, but passive, observer. But in November last year, the board decided that we needed to do more; to have a real seat at the table.
We know that something beyond the formal financial statements as we know them is relevant to help understand and interpret the financial statements, but also to understand the future prospects of companies. To do that, you need more than the traditional financial statement. So we think we have a role to play there.
And the other reason we decided we needed to have a seat at the table was that we were hearing real concerns from some investors that there have been so many different, disparate initiatives that it’s become confusing for investors, and potentially misleading, because there’s a lot of freedom. Firms can choose the regime that tells their story best.
What we’re working on now centers around updating our existing management commentary practice statement. That’s a non-mandatory document, but it sets out our principles for the front part of the annual report. We have been looking at initiatives and developments in the wider corporate reporting space since we published that – such as the integrated reporting initiatives and climate change disclosures – to try to decide what aspects of those new developments we would benefit from reflecting in an updated version of our practice statement.
It would stay non-mandatory – we think that’s realistic, given that there are specific government initiatives with mandatory requirements around the world that we don’t want to cut across. And, crucially, we want to keep its principles-based approach.
You’re not going to see us saying on climate, “You must disclose A, B, C and D.” It’s more about emphasizing the importance of entities thinking about matters beyond the traditional financial information that investors need to really understand their performance and what are going to be the long-term drivers of their value.
Q: Digitalization is having an increasing impact on financial reporting. How can regulation and standards keep pace with technological change?
A: We’ve got a technology initiative in place, which we’re still in the early stages of developing, in which we plan to monitor a number of different aspects of technology that we think are relevant. As part of that, there are four main streams of work that we’re focusing on.
The first is the direct accounting requirements. For example, do we need to have new guidance that tells people how to deal with cryptocurrencies? An accounting standard because of digital change, if you will.
The second stream centers around the consumption of financial information. Everybody’s trying to understand what the consequences are, and it’s hard to look into your crystal ball, but our thinking is still that, in a world with a lot of data, it’s useful to have a very structured piece of information where you understand exactly what’s behind it; it’s subject to audit, it’s got confirmation value. Because even if you’ve got all of this data gathered and you are able to process massive amounts of information, it’s still really valuable to use the financial statements to confirm whether you are on track with your analysis or not.
The third thing is what effect the digital revolution is actually having on our standard setting. What should we put in our standards? For example, whether a certain piece of information should sit at the front of the financial statements or in the notes perhaps doesn’t matter so much if you’re consuming things digitally.
And then the fourth and final strand focuses on the broader effects of technology on our organization and how we work with our stakeholders. Traditionally, when we put out a document for comment, we ask people to send us comment letters. And they still send us letters, but now they do it electronically.
However, is that the best way to gather information from people in a world of Twitter, Facebook and other channels? Of course, we know the constraints of a tweet can’t give us the informed arguments we need for standard setting, but are there tools that we can use, like online surveys, that would increase our access to the market and get more people engaged.