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FRC’s Response to IFRS Foundation’s Exposure Draft Proposed Amendments to the IFRS Foundation Due Process Handbook
Steven Maijoor Due Process Oversight Committee Chair IFRS Foundation Columbus Building 7 Westferry Circus Canary Wharf London E14 4HD
18 March 2025
Exposure Draft IFRS/DPH/ED/2024: Proposed Amendments to the IFRS Foundation Due Process Handbook
Dear Steven,
The Financial Reporting Council (FRC) welcomes the opportunity to provide comments on the IFRS Foundation's Exposure Draft IFRS/DPH/ED/2024: Proposed Amendments to the IFRS Foundation Due Process Handbook.
This letter highlights our key points for consideration and is followed by an Appendix which includes our detailed responses to the specific questions posed by the Due Process Oversight Committee (DPOC).
The purpose of the FRC is to serve the public interest and support UK economic growth by upholding high standards of corporate governance, corporate reporting, audit and actuarial work. The comments in this letter are based on the FRC's extensive experience in standard-setting, including in issuing accounting, audit, assurance and actuarial standards, in addition to setting the UK Corporate Governance Code and Stewardship Code.
We are responsible, in particular, for developing financial reporting standards applicable in the UK and Republic of Ireland and for developing the Guidance on the Strategic Report. We are also responsible for overseeing the UK Accounting Standards Endorsement Board (UKEB)'s adherence to due process and providing the Secretariat for the UK Sustainability Disclosure Technical Advisory Committee (TAC), which provides recommendations to the Secretary of State for the Department for Business and Trade for endorsing the IFRS Sustainability Disclosure Standards for use in the UK.
In addition, our role as a regulator, including the reviews we carry out of the accounts and reports of public and large private companies for compliance with the law, informs our interactions with the IFRS Foundation.
Our response reflects this range of interests in and experience of the activities of the IFRS Foundation, including both International Accounting Standards Board (IASB) and International Sustainability Standards Board (ISSB) activities. It also takes into account the views of UK stakeholders, including members of the UK Sustainability Disclosure TAC.
Our key points for consideration by the DPOC are as follows:
- We agree, in principle, that the boards should apply the same due process requirements and therefore generally support the proposed amendments to the Handbook to include the due process for the ISSB. However, rather than only replicating the requirements between the boards, we encourage the DPOC to consider whether the boards can learn lessons from each other. We also note that occasional divergences in practices between the boards may be justifiable.
- We encourage the DPOC to consider, as part of its due process, setting minimum periods for the arrangement of advisory body meetings, so that participants have access to proposed dates, agendas and papers well in advance. This would maximise the value of these bodies to the boards and the IFRS Foundation.
- We do not agree with the proposed amendments to the Handbook to include a specific due process for the SASB Standards and their Taxonomy. We are concerned, in particular, about the SASB Standards being developed in private and only ratified in public, which we believe falls below the standard that stakeholders expect of the IFRS Foundation. The ISSB and the IFRS Foundation should set out an expected architecture for the IFRS Sustainability Disclosure Standards, including the industry-based guidance, which makes clear to stakeholders the status of and the intentions for the SASB Standards and the incorporation of industry-based disclosure requirements into IFRS Sustainability Disclosure Standards. Without this it is not possible to comment further on the due process requirements in relation to the SASB Standards, but, in principle, if they are to have the same status as IFRS Sustainability Disclosure Standards, then we would expect them to be subject to the same level of due process as IFRS Sustainability Disclosure Standards.
- We are unclear about the IFRS Foundation's due process for third-party materials which are required to be used in applying IFRS Standards, but which the IFRS Foundation does not own. Examples are the requirements in IFRS S2 Climate-related Disclosures for banks and insurers to use the Global Industry Classification Standard (GICS) and the requirement for entities to use the GHG Protocol Corporate Accounting and Reporting Standard (GHG Protocol Corporate Standard). We encourage the DPOC to consider formalising a due process for these materials.
- We strongly support greater connectivity between IFRS Standards and their Taxonomies and encourage the joining up of IFRS Taxonomies with the development of IFRS Standards, with the ultimate goal of releasing them together.
Our detailed responses to the specific questions posed by the DPOC are included in the Appendix.
If you have any queries or would like to discuss our comments in more detail, please do not hesitate to contact me or Sophie Campkin at [email protected].
Yours sincerely
Mark Babington Executive Director, Regulatory Standards Direct telephone line: 020 7492 2323 Email: [email protected]
Appendix
Exposure Draft IFRS/DPH/ED/2024: Proposed Amendments to the IFRS Foundation Due Process Handbook
Question 1—Reflecting the creation of the ISSB in the Handbook
Do you agree with how the DPOC proposes to reflect the creation of, and the due process for, the ISSB in the Handbook?
Including the due process for the ISSB
We agree, in principle, that the boards should apply the same due process requirements and therefore generally support the proposed amendments to the Handbook to include the due process for the ISSB. However, rather than only replicating the requirements between the boards, we encourage the DPOC to consider whether the boards can learn lessons from each other. We also note that occasional divergences in practices between the boards may be justifiable. There are important differences between the standards of each board and they are at different stages of development. We therefore encourage the DPOC to consider whether any different approaches to due process are merited on a case-by-case basis and in consultation with stakeholders.
In our 2023 response to the ISSB Request for Information on Agenda Priorities, we stipulated that clarity over the expected architecture for the IFRS Sustainability Disclosure Standards should be provided as a priority. This would cover the way entities are expected to apply all the standards and application guidance together, including the industry-based guidance. We continue to believe that such an architecture, covering current and future standards, would be desirable and note that it could also help to clarify the due process regarding each part of the architecture.
We note that the DPOC's use of the term 'financial reporting' to refer to the reporting of both boards is consistent with the definition of 'financial reporting' in the IFRS Conceptual Framework for Financial Reporting. However, national standard-setting and regional bodies, as well as other stakeholders, could continue to use different terminology to distinguish between different categories of information. In the UK, for example, we use terms such as 'corporate reporting', 'non-financial reporting', 'narrative reporting' and 'sustainability reporting' to refer to information beyond financial statements. In our 2023 response to the ISSB Request for Information on Agenda Priorities, we recommended a joint project to review and update the Conceptual Framework for Financial Reporting. Such a project could present an opportunity for the IFRS Foundation to further consider its use of terminology.
We support the proposed amendments to the Handbook to include the ISSB's advisory bodies and believe a mechanism such as the Sustainability Standards Advisory Forum (SSAF) is essential to engage with and seek comments from national standard-setting and regional bodies. However, we encourage the DPOC to consider, as part of its due process, setting minimum periods for the arrangement of advisory body meetings, so that participants have access to proposed dates, agendas and papers well in advance. This would maximise the value of these bodies to the boards and the IFRS Foundation.
Due process for the SASB Standards and the SASB Standards Taxonomy
We do not agree with the proposed amendments to the Handbook to include a specific due process for the SASB Standards and their Taxonomy. We agree with the DPOC that the SASB Standards have a unique role in IFRS Standards and their accompanying materials given that IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information requires entities to refer to and consider the applicability of the SASB Standards in identifying sustainability-related risks and opportunities and associated disclosures. We are concerned, in particular, about the SASB Standards being developed in private and only ratified in public. We note that the 2022 DPOC paper likens the SASB Standards to educational materials and describes review by three to five ISSB members, as well as ratification by the ISSB akin to ratification of final IFRIC Interpretations. We do not consider the SASB Standards to have the same status as educational material (given the reference in IFRS S1) and further note that, while ratification by the ISSB may be akin to ratification of final Interpretations by the IASB, the IFRS Interpretations Committee meetings take place in public, which helps to reinforce the credibility of the Interpretations Committee's deliberations with stakeholders.
We note that UK stakeholders and the UK Sustainability Disclosure TAC generally welcomed the SASB Standards, but raised concerns where materials were not developed using the same conceptual basis and have not been or are not subject to the usual IFRS Foundation due process. The DPOC notes that the proposed due process worked well for the ISSB in its project to enhance the international comparability of the SASB Standards, however, stakeholders have continued to express concerns about the SASB Standards being overly focused on the US context. In our 2023 response to the ISSB Exposure Draft Methodology for Enhancing the International Applicability of the SASB Standards and SASB Standards Taxonomy Updates, we argued that a fundamental review of the SASB Standards is needed if they are genuinely to be fully internationally applicable and consistent with other IFRS Sustainability Disclosure Standards. We continue to believe this to be the case. We also encourage the IFRS Foundation to ensure that the SASB Standards Board Adviser Group represents a range of viewpoints and global interests, particularly from non-US jurisdictions and a range of developing and developed economies.
We would also value greater clarity from the ISSB and the IFRS Foundation on the status of and the intentions for the SASB Standards and the incorporation of industry-based disclosure requirements into IFRS Sustainability Disclosure Standards. We understand that the SASB Standards will continue to be maintained on a standalone basis. We also understand that industry-based disclosure requirements will continue to be incorporated into IFRS Sustainability Disclosure Standards, in which case the ISSB will follow the usual due process for IFRS Sustainability Disclosure Standards. However, we caution that having two different locations for industry-based disclosures may be resource-intensive to maintain and potentially confusing to stakeholders. Stakeholders have asked whether the SASB Standards will be rebranded to reflect that they are owned by the IFRS Foundation and whether they will be made mandatory or renamed to make it clear they are guidance rather than standards. Without this clarity, it is difficult to comment conclusively on the due process requirements in relation to the SASB Standards, but, in principle, if they are to have the same status as IFRS Sustainability Disclosure Standards, then we would expect them to be subject to the same level of due process as IFRS Sustainability Disclosure Standards.
We also encourage the IFRS Foundation to give greater consideration to enabling stakeholders to contribute to the development of the SASB Standards and the incorporation of industry-based disclosure requirements into IFRS Sustainability Disclosure Standards. For example, when industry-based disclosure requirements were incorporated into and consulted on in relation to the Exposure Draft of IFRS S2, this resulted in there being a significant volume of information to review, which coincided with the consultations on IFRS S1 and the rest of IFRS S2. There may be similar challenges for stakeholders in consultations on future standards which incorporate industry-based disclosure requirements. We encourage the IFRS Foundation to consider whether this should have implications for the comment period or other aspects of the process. We also encourage the IFRS Foundation to consider whether different development and consultation processes are merited to reach varied industry stakeholders and access specialist skills and knowledge.
Third-party materials required to be used by IFRS Standards
We are unclear about the IFRS Foundation's due process for third-party materials which are required to be used in applying IFRS Standards, but which the IFRS Foundation does not own. Examples are the requirements in IFRS S2 for banks and insurers to use GICS and the requirement for entities to use the GHG Protocol Corporate Accounting and Reporting Standard. We note that UK stakeholders and the UK Sustainability Disclosure TAC raised concerns in relation to the requirements as follows:
- In relation to GICS, the UK Sustainability Disclosure TAC recommended that the financed emissions requirements in IFRS S2 are amended so that entities are not required to use GICS when disaggregating gross financed emissions by sector/industry classification but might use GICS or a different classification system they use for existing regulatory or financial reporting purposes.
- In relation to the GHG Protocol Corporate Standard, UK stakeholders and the UK Sustainability Disclosure TAC supported the reference to the GHG Protocol Corporate Standard, emphasising that it is internationally recognised and used as standard practice in the market, but raised concerns about mandating third-party material in IFRS S2, including that the GHG Protocol Corporate Standard was not originally designed to operate as a corporate reporting standard and that the content needs to be reviewed and aligned with current financial reporting standards.
In our 2023 response to the ISSB Exposure Draft Methodology for Enhancing the International Applicability of the SASB Standards and SASB Standards Taxonomy Updates, and in relation to the SASB Standards in particular, we argued that there are challenges associated with referencing third-party sources. The use of international references for definitions supports the establishment of consistency and a global baseline. However, the use of international metrics may not be appropriate when the ISSB does not own or have control of these sources. We stated that the ISSB should explain how these third-party sources will be monitored and the SASB Standards updated as necessary. A similar argument applies to third-party materials which are required to be used by IFRS Standards, but which the IFRS Foundation does not own, and we encourage the DPOC to consider formalising a due process for these materials, for example, covering the way it assesses these materials, including how it ensures they have been subject to sufficient due process and concludes they are fit for purpose. The DPOC could develop criteria for such a review and could make the reviews public.
We note that there are other third-party materials which are referenced in but not required to be used by the IFRS Standards, for example, the Black-Scholes-Merton formula model referenced in IFRS 2 Share-based Payment and the CDSB Framework Application Guidance, the Global Reporting Initiative (GRI) Standards and the European Sustainability Reporting Standards (ESRS) referenced in IFRS S1. Formalising a due process for assessing such materials prior to a reference being included, and a process for ongoing monitoring of these materials after a reference has been made would also be worth considering.
Reflecting connectivity
We welcome the proposed amendments to the Handbook to reflect the boards' aspirations for their requirements to work well together. We also welcome the proposed amendments to the Handbook to introduce clearer mechanisms for joint projects between the boards. However, some stakeholders call for an even greater focus on connectivity. Stakeholders note that the topics of projects can be closely related to the work of both boards and believe that the boards should be working closely together on them. We encourage the IFRS Foundation to consider joint projects with a view to providing a comprehensive package of information for users of general purpose financial reports. In our 2023 response to the ISSB Request for Information on Agenda Priorities, we recommended a joint project on the integration in reporting as part of the Management Commentary project. We continue to believe further work can be done in this area, for example, an integration in reporting project should be considered in the next work plan consultations. As we note in our answer to question two, we also believe there should be close coordination between the bodies responsible for interpreting both sets of IFRS Standards and encourage both boards to coordinate on their work plan consultations to facilitate the consideration of joint projects.
Question 2—Enhancements and clarifications
Do you agree with the proposed enhancements and clarifications to the Handbook?
Post-implementation reviews
We agree that the objective of post-implementation reviews (PIRs) should be clarified as it is in paragraph 6.50. However, the objective could reference whether the requirements are working well, as well as whether "the requirements... are as intended”. Paragraph 6.50 explains that the basis for the assessment is an effects analysis and paragraphs 6.51 and 6.52 provide further information on the matters considered and concluded on by a board. We believe these paragraphs could also reference matters such as consistency in application, diversity in practice and stakeholder feedback.
We also agree that there should be a principles-based approach with greater flexibility in relation to the start date for PIRs and note that this means certain PIRs could be completed sooner or later. However, it may sometimes be difficult to ascertain whether "sufficient information is available to assess the effects of the new requirements” without commencing a PIR. Further guidance could be given around the meaning of “sufficient information”, including a minimum threshold of data or stakeholder feedback, or a 'backstop' may be necessary. For example, this could state that PIRs would usually be held within five years of the effective date of the IFRS Standard. National standard-setting and regional bodies may also prefer PIRs to be performed within certain periods so that they can contribute to regulatory or legislative requirements to undertake PIRs.
We note, in particular, that IFRS Accounting Standards are widely used whereas IFRS Sustainability Disclosure Standards are not so widely used at present and we would not wish a lack of information to unduly delay a PIR. It may be that different thresholds in relation to the start date for PIRs are justified for the boards at present, or that the format of the PIR is varied if there is more limited information available.
An alternative or additional approach, which we encourage the IFRS Foundation to consider, could be to explore making changes to an IFRS Standard prior to initiating a PIR, when there is evidence that this would support the application of the IFRS Standard. A mechanism for identifying any issues could be the use of transition implementation or resource groups.
We also stress the importance of engaging with a wide range of stakeholders representing different stakeholder groups during the PIR process so that these diverse views and perspectives are considered in the review.
Finally, we encourage the IFRS Foundation to consider incorporating a PIR of an IFRS Taxonomy into the PIR of its IFRS Standard so that these are joined up. We comment further on the joining up of IFRS Taxonomies with the development of IFRS Standards in the section IFRS Taxonomies.
Minor improvements to IFRS Standards
We generally agree that minor improvements to IFRS Standards should include minor amendments that update requirements or material accompanying IFRS Standards. However, we caution that certain changes to metrics may not be minor amendments and advise the DPOC to consider such changes on a case-by-case basis. We note that the metrics included in industry-based requirements extend beyond climate-related disclosures and therefore agree that the proposed amendments could support the ISSB in maintaining the industry-based requirements in its current and future IFRS Sustainability Disclosure Standards.
IFRS Interpretations Committee
We note that the formal remit of the IFRS Interpretations Committee relates to the IASB and IFRS Accounting Standards and that the ISSB and its Transition Implementation Group on IFRS S1 and IFRS S2 (TIG) consider questions arising on IFRS Sustainability Disclosure Standards. In our 2021 response to the Proposed Targeted Amendments to the IFRS Foundation Constitution to Accommodate an International Sustainability Standards Board to Set IFRS Sustainability Standards, we disagreed with the decision not to establish an Interpretations Committee for the ISSB and IFRS Sustainability Disclosure Standards.
We believe that the use of the TIG only may be a practical arrangement in the short term, while the ISSB is still at an early stage in its operations. However, we continue to believe the IFRS Foundation should establish an Interpretations Committee for the ISSB and IFRS Sustainability Disclosure Standards in the medium-term. This could play an equivalent role to the Interpretations Committee for the IASB and IFRS Accounting Standards by working with the ISSB in maintaining and supporting the consistent application of IFRS Sustainability Disclosure Standards. We further note that the IASB's Transition Resource Groups play an equivalent role to the TIG, which suggests there is a role for both these groups and an Interpretations Committee.
We believe there should be close coordination between the bodies responsible for interpreting both sets of IFRS Standards to support connectivity. One way of supporting such coordination could be for each interpretive body to have representatives of the other interpretive body, for example the Interpretations Committee and the TIG could each have representatives of the other body. We would be concerned about the practical challenges of having one Interpretations Committee for both sets of IFRS Standards, given the breadth and depth of expertise this would require, but believe an understanding of both sets of IFRS Standards could support the interpretation of IFRS Standards.
Material to support application of IFRS Standards
We agree that the material supporting IFRS Standards should not be described as 'educational material', particularly given the work the ISSB conducts to support application of IFRS Sustainability Disclosure Standards. In our 2023 response to the ISSB Request for Information on Agenda Priorities, we called for the ISSB to provide significant ongoing support for the global implementation of IFRS S1 and IFRS S2, and we continue to welcome this work, including the development of interoperability guidance.
However, we encourage the IFRS Foundation to consider ways of clarifying the status of different materials as this could be confusing for stakeholders. For example, the term 'application guidance' is similar to 'application materials' and application materials can also include guidance. While the terms are similar, the materials may have a different status and may be subject to different levels of due process and jurisdictional adoption. This confusion could be exacerbated by IFRS Standards and their accompanying materials and other material being accessed on a website as it may be more difficult to distinguish between materials.
Other targeted amendments
- Work plan consultation: We encourage both boards to coordinate on their work plan consultations to facilitate the consideration of joint projects, thereby supporting connectivity, as well as the consideration of their cumulative effect on stakeholders. We welcome the references in the IFRS Foundation staff's proposed approach to the IASB's Fourth Agenda Consultation to consideration of the ISSB. We also note that a reasonable period of time is required for progress to have been made on the outcome of the previous consultation as projects agreed during one work plan consultation may still be under way during the next work plan consultation.
- IFRS Taxonomy: We support the changes to Annex A as we consider them to be improvements.
IFRS Taxonomies
We strongly support greater connectivity between IFRS Standards and their Taxonomies and encourage the joining up of IFRS Taxonomies with the development of IFRS Standards, with the ultimate goal of releasing them together. We also consider that where Taxonomies are developed alongside the IFRS Standards this could provide valuable insight into whether the disclosure requirements are suitable for digital reporting. We also note that the degree of connectivity may affect a jurisdiction's decision to use the IFRS Foundation's Taxonomies rather than developing its own.
The FRC's Discussion Paper: Opportunities for the future of digital reporting, for example, identifies different stakeholder groups which have different views and perspectives. We note that public bodies such as company registries and tax authorities that are collecting digital data are a key stakeholder group for taxonomy purposes and believe that the IFRS Foundation could do more to seek feedback from such bodies.
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