The IASB has a problem with effective date paragraphs. There are far too many of them and their number keeps growing. I believe it is time to find a better approach to writing these paragraphs.
What does the IASB do now?
When the IASB amends a standard, it also adds to that standard a paragraph listing the amended paragraphs and setting out the effective date for the amendments to those paragraphs. Except in simple cases, the IASB also specifies transitional requirements or transitional reliefs—either in the effective date paragraph or in a separate paragraph on transition.
‘Consequential’ amendments to other IFRS standards
For many amendments, the IASB often amends other standards as well. Because those amendments are a consequence of the main amendment, people often call them ‘consequential amendments’.
These days, though, the IASB tends to call them ‘amendments to other IFRS standards’ instead. This is because:
- the term ‘consequential amendment’ is unnecessary jargon.
- the word ‘consequential’ could cause confusion. That word has another meaning: significant (and its antonym ‘inconsequential’ means ‘insignificant’); if some amendments are consequential, do some amendments exist that are inconsequential?
Effect of amendments to other IFRS standards
These ‘amendments to other IFRS standards’ generally have much less effect than the underlying amendment to the main standard affected, but they vary greatly in effect. Some are substantive changes but have a much less pervasive effect than the amendment to the main standard. An example is when an amendment to a revenue recognition standard leads to a ‘consequential’ amendment, applying the same (amended) principle to a sale of property, plant or equipment.
At the other end of the spectrum, a large proportion of ‘amendments to other IFRS standards’ simply update terminology and will never cause any change in financial statements. These amendments truly are ‘inconsequential’. Nevertheless, even these inconsequential amendments to another standard need their own effective date paragraph in that standard.
Suppose the IASB were to amend IFRS 15 Revenue from Contracts with Customers and, at the same time, conform terminology in 10 other standards to the amended IFRS 15. The IASB would create 11 effective date paragraphs: one for IFRS 15 itself and one each for the other 10 standards.
Is there a better way?
I believe it is time to consider a different approach. Effective date paragraphs should all go in a single standard. The most logical home in current IFRS standards for these effective date paragraphs would be IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors—probably in a new appendix.
It might also be sensible to gather transition requirements (and transition reliefs) into that single home.
Suppose the IASB were to amend IFRS 15 Revenue from Contracts with Customers and, at the same time, conform terminology in 10 other standards to the amended IFRS 15. Under my suggestion, the IASB would write a single effective date (and transition) paragraph and put it in the new appendix to IAS 8. That single paragraph would cover the amendments to all 11 Standards.
Pruning expired paragraphs
Many effective date (and transition) paragraphs serve a purpose only during the year of transition, or perhaps a year or two longer. On the other hand, a few effective date paragraphs might be needed for longer. Perhaps the IASB should consider distinguishing those two cases.
The IASB already makes a similar distinction in IFRS 1 First-time Adoption of International Financial Reporting Standards. IFRS 1 distinguishes short-term exemptions from IFRS Standards (listed in appendix E) from other exceptions and exemptions (listed in appendices B-D). The IASB periodically deletes from appendix E to IFRS 1 those ‘short-term’ exemptions whose effects have expired.
In addition to moving effective date (and transition) paragraphs to a new single home, the IASB could periodically delete such paragraphs once their effects have expired. It could do this either by periodic standard-setting (as it already does for appendix E to IFRS 1), or by setting up some automatic mechanism.
Consequential amendment trivia
The IASB’s predecessor (IASC) was not generally in the business of making consequential amendments, although it did make some changes of this kind when it issued a ‘reformatted’ version of all its standards in 1994.
I wrote what I believe was the first ever stand-alone IASC standard containing a consequential amendment: IAS 12 Income Taxes, issued in 1996, made a consequential amendment to IAS 22 Business Combinations.
Unless the IASB takes some action, the effective date (and transition) paragraphs will continue to proliferate. It would be good to switch to a better approach before adding much more to this problem.
Switching to a new approach will be more effective if at the same time existing effective date (and transition) paragraphs move into the new home for such paragraphs. At that time, the IASB could simply delete all effective date (and transition) paragraphs that have expired.
Cleaning up existing effective date (and transition) paragraphs is not an exciting, glamourous or urgent task, and would take some resources of both the IASB and its stakeholders. But clearing out this deadwood out soon would stop the problem getting worse.