To the International Accounting Standards Board (IASB)
Subcommittee on Corporate Accounting
Committee on Financial and Capital Markets
Keidanren (Japan Business Federation)
Keidanren welcomes the opportunity to provide comments on the Request for Information Third Agenda Consultation (the "RFI"). Our comments are as set out below.
The key message of our comment letter is threefold (responses to the questions are detailed in the Specific requests section).
The matters addressed by the IASB and those by the proposed new International Sustainability Standards Board (ISSB) must be clearly separated without mixing them up. The IASB should henceforth concentrate its resources on the projects that are greatly needed by market participants, for example, Goodwill and Impairment project. (See our response to Question 1.)
To develop high-quality standards, the IASB needs to take fully into account the views of not only investors but also preparers and managements. Furthermore, its standard-setting activities must pay attention to convergence with US GAAP. (See our response to Question 2.)
The IASB's highest priority projects going forward should be Goodwill and Impairment, Disclosure Initiative, and Other Comprehensive Income (recycling). (See our response to Question 3.)
Question 1: Strategic direction and balance of the Board's activities
Any discussion on the overall balance of the IASB's activities should presuppose that the IASB and the ISSB will greatly differ in the content and nature of standards they develop, including the auditability of reports they cover, and therefore the matters addressed by the respective boards must be clearly separated without mixing up.
In regard to the IASB's activity of developing new IFRS Standards and major amendments to IFRS Standards, given that many of its major standard-setting projects have already been completed, the IASB should limit the projects it will pursue to the ones greatly needed by market participants and, as with the period covered by the second agenda consultation, continue to regard the period covered by the third agenda consultation as a period of calm for accounting standards to take root. Accordingly, the IASB needs to decrease its current level of focus on the activity of developing new IFRS Standards and major amendments to IFRS Standards, while correspondingly increasing the current level of focus on the activity of maintaining IFRS Standards and supporting their consistent application, now that a growing number of companies have adopted IFRS around the world including in Japan. In particular, the IASB is urged to ensure the proper conduct of post-implementation reviews of its major standards, such as IFRS 15 Revenue from Contracts with Customers and IFRS 16 Leases, listening attentively to the voices of market participants to make sure whether or not there are any problems in the application of those standards.
Needless to say, if any problems are detected through post-implementation reviews and other procedures (like ones identified in the Goodwill and Impairment project), the IASB should commit substantial resources to correcting them to ensure that the standards it develops reflect the needs of market participants. Nevertheless, there were some IASB projects where the opposite was true—that is, the IASB went forward with deliberations on proposals that did not meet market participants' needs, resulting in the lower-quality accounting standard and ultimately in the cancellation of the project itself, the efforts of many stakeholders having gone to waste. In view of that, although many potential projects are listed in the RFI, they should be scrutinized and narrowed down to a few that proceed to the research project phase.
Question 2: Criteria for assessing the priority of financial reporting issues that could be added to the Board's work plan
We have three requests pertaining to the seven criteria proposed in Table 2 of paragraph 21.
With respect to Criterion 1 "The importance of the matter to investors," the users of accounting standards and of financial statements prepared in compliance therewith are obviously not limited to investors but include preparers and managements. Therefore, Criterion 1 should be amended to read "The importance of the matter to investors, preparers, managements, and other market participants." Recently we feel that in the course of IFRS development, the IASB has a strong tendency to overemphasize the views of investors and focus on discussing the enhancement of presentation and disclosure requirements, without spending sufficient time discussing the accounting standard (i.e., recognition and measurement) itself. To achieve the development of robust accounting standards that reflect economic substance, we consider it essential to take fully into account the views of preparers and managements throughout the development process.
IFRS are designed to be a single set of high-quality global accounting standards, and thus need to be developed with attention paid to other major accounting standards being developed. What we consider particularly important is to ensure convergence with US GAAP, which should be added to the criteria in Table 2 of paragraph 21. The term "convergence with US GAAP" here is not intended to require that IFRS and US GAAP be identically worded (naturally, the more important the standards are, the more desirable it is for them to be similarly worded, though); rather, it is intended to require that IFRS and US GAAP share the underlying concepts to such an extent that at least financial statement users are not misled.
We have concerns about Criterion 6 "The complexity and feasibility of the potential project and its solutions" and Criterion 7 "The capacity of the Board and its stakeholders to make timely progress on the potential project." If these criteria were to compel the IASB to give up on projects that are needed by market participants but on which consensus is difficult to reach, that might undermine the reputation of the IASB as an organization that aims to develop high-quality accounting standards. The IASB should tackle difficult issues head-on by hiring and training competent personnel capable of contributing to the development of high-quality accounting standards who can weigh the opinions of various market participants in a balanced manner, and assigning many of them to important projects.
Question 3: Financial reporting issues that could be added to the Board's work plan
We consider the following three projects the highest priority:
(1) Goodwill and Impairment
The post-implementation review of IFRS 3 identified a problem where impairment losses on goodwill were not recognized in a timely fashion (the "Too-Little-Too-Late issue"), bringing it to light that the reintroduction of goodwill amortization is a high-priority theme. As reintroducing the amortization of goodwill is under discussion at the US Financial Accounting Standards Board (FASB), the IASB should also work toward the reintroduction of goodwill amortization by moving this project from research to standard setting and devoting substantial resources to discussing the accounting standard (i.e., recognition and measurement) itself.
On the other hand, we regard the enhancement of disclosure requirements proposed in the Discussion Paper Business Combinations—Disclosures, Goodwill and Impairment as a low-priority issue. This is because the proposed enhancement has no intrinsic bearing on the "Too-Little-Too-Late issue" and the content of the proposal itself has serious problems.
(2) Disclosure Initiative
We have concerns about what is proposed in the IASB Exposure Draft Disclosure Requirements in IFRS Standards—A Pilot Approach on which public comments are currently being sought, in that the proposal would limit the improvement of disclosures, especially in terms of disclosure efficiency (which we will explain in more detail in our separate comment letter on the exposure draft). The IASB should take drastic action to enhance disclosure efficiency.
The Primary Financial Statements project, which spun off from the Disclosure Initiative, aims to overhaul requirements for presentation in the statement of profit or loss. We are deeply concerned, however, about the overall proposals made in the IASB Exposure Draft General Presentation and Disclosures, including the proposed category-based uniform presentation of the statement of profit or loss. The Primary Financial Statements project should have another opportunity to heed the views of market participants, for example by publishing a re-exposure draft before finalizing the standard.
(3) Other Comprehensive Income (recycling)
The accounting treatment for recycling varies from one IFRS Standard to another, lacking consistency. As the revised Conceptual Framework for Financial Reporting requires the recycling of other comprehensive income (OCI) items to profit or loss in principle, the pertinent standards should also be revised to allow for the recycling of all OCI items, in accordance with the approach taken in the Conceptual Framework.
Regarding other IASB projects, we have three requests.
(1) Equity Method
The concept of equity method accounting—namely, whether it is a consolidation procedure or a measurement technique—has not been adequately clarified, which is partly to blame for confusion and inconsistency in practice. Hence, the IASB should clarify the concept. What we request here, however, is not to drastically change the current IAS 28 Investments in Associates and Joint Ventures to a principle-based accounting standard like IFRS 10 to 12, but to simply provide conceptual clarification that eliminates confusion and inconsistency in practice.
(2) Intangible Assets
Even if a comprehensive review of accounting for intangible assets is undertaken, the scope of the review should be limited to how to account for intangible assets that are required to be recognized at present. We object to expanding the types of intangible assets to be recognized (and disclosed), such as by mandating the recognition of internally generated goodwill (and internally generated intangible assets) in the balance sheet. Not to recognize internally generated goodwill (and internally generated intangible assets) is an axiom of accounting standards, which must be strictly maintained.
(3) Management Commentary
The exposure draft proposing amendments to IFRS Practice Statement 1 Management Commentary sets out that the matters to which the proposed requirements and guidance apply "could include matters relating to the entity's intangible resources and relationships—including resources not recognized as assets in the entity's financial statements—and environmental and social matters" in paragraph IN16. In other words, the exposure draft proposes management commentary on not only information complementing financial reporting but also information relating to sustainability. In light of this, we request that Management Commentary as the IASB's solo project be abandoned and, after the establishment of the ISSB, how to handle this project be considered jointly by the two boards. As a consequence, the deadline for comments on the exposure draft (November 23, 2021) should be postponed.