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In EFRAG’s view, appropriate IASB quality control is necessary to facilitate and reduce the cost of implementation of new requirements and support its common objective of consistent application of IFRS. There is no doubt that the IASB and its staff are dedicated to delivering the best possible product and already make all possible efforts within the IASB’s current due process. Recent experience shows that, despite all these efforts, final requirements –or intended final requirements –can be difficult to understand and implement by the public at large. If EFRAG considers recent projects, it notes that at the time the IASB and the FASB issued the second ED on Revenue Recognition, they genuinely thought that a final standard was nearly ready for issue. The consultation period showed, however, that constituents had considerable difficulties in understanding some of the proposed requirements. An example of a recent standard that is causing numerous and significant implementation problems is IFRS 11 Joint Arrangements.
In EFRAG’s view this situation shows that the IASB’s standard setting process at the stage of finalising a standard can be improved. The IASB is striving to have its new standards improve financial reporting at as low a cost as feasible. Difficulties in understanding a standard increase the implementation costs, feed the views of those who feel that IFRS are too complex and encourage the questioning of the quality of IFRS. It also creates divergence in practice and tends to transfer to the auditors the responsibility for interpreting IFRS. In several cases in the recent past, narrow-scope amendments to recent standards have been needed, with the supplementary cost to IFRS standard setting, adoption and implementation of the frequent changes in financial reporting.
EFRAG has recommended that the IASB undertakes public fatal flaw reviews prior to finalising any major amendment or new standard. All those who participate in the IASB’s private fatal flaw reviews, including EFRAG, have had involvement and interaction with the IASB in the development of the standard. As a result, the draft requirements are read with prior understanding of the intended outcomes and the review is likely to miss shortcomings in the drafting. These shortcomings appear only after standards are published and exposed to the fresh eyes of preparers, auditors, and enforcers who have had no direct involvement in setting the standard.
EFRAG believes that the experience of the public fatal flaw review of IFRS 9 phase 3 “General Hedge Accounting Model” was successful. In its comments EFRAG did not re-open issues already fully deliberated - EFRAG recommended particular care in the final drafting of the basis for conclusions. Comments received were helpful in adjusting the final wording and this supplementary due process step has been helpful in reducing misunderstandings. One of the advantages of this process was that the IASB was encouraged to proceed to some helpful late amendments without undertaking a separate public consultation. Another advantage was that the fatal flaw review could be coupled with a final effect analysis of the upcoming standard. If the fatal flaw draft had not been publicly available an effect analysis and field testing would not have been possible.