Amid the ongoing political machinations over Brexit and the Northern Ireland protocol, one little-known positive aspect of Britain’s exit from the European Union was the establishment of the UK Endorsement Board (UKEB), the independent body that influences the international accounting standard-setting process.

Triggered by the UK’s exit from the EU, the UK government had to onshore the legislation as part of the transition process. Before Brexit, the European Financial Reporting Advisory Group (EFRAG) ensured that European views, including Britain’s, were properly considered in the international accounting standard-setting process.

Today, a year on since the UKEB received delegated powers from the Business Secretary on 22 May 2021, the body has just endorsed its first major standard, IFRS 17 Insurance Contracts.

Pauline Wallace, the UKEB’s inaugural Executive Chair, says: “The intention was to keep this as independent decision making; not just from government but also the FRC (Financial Reporting Council). And it’s always better, I think, to divorce any kind of standard setting from regulation. There is a conflict there. Government wanted this to be seen as a technical exercise, not a politically-driven exercise.”

The most significant change for the UK is that, in addition to the statutory power to endorse IFRSs for adoption, the UKEB also has an explicit responsibility to influence standard setting. “It’s about thought leadership,” Wallace explains, “and the UK has always been really good at that.” 

It’s also about having ideas that are floated with the international standards-setting community including the national standards setters in other countries, Wallace continues. “That’s one thing I’ve been focusing on – building those relationships. When you start having ideas and debating them with others, that’s the trigger point – when other people start thinking the same thing.”

As part of its new powers, the UKEB has a so-called carve-out option, allowing the UK to partially adopt a new accounting standard, as the EU does. Although Wallace acknowledges the importance of those powers, she is not keen to apply them: “I think we would have failed as influencers if it got to the stage where we couldn’t endorse the standard. And I don’t think it’s necessarily in the best interest of the UK capital markets,” she says.

Another vital aspect of the past year’s work for Wallace has been to develop new ways to garner feedback. Although Wallace would like to see more formal responses to consultations, she appreciates that in a world of time-poor professionals, drafting formal responses to consultations isn’t always a priority. “One of the best ways to get that input is through things like webinars, roundtables, one-to-one conversations, because not everybody has time to respond to myriad consultations,” she says.

With IFRS 17 in the bag, the UKEB is turning its attention to the next mammoth project – the thorny issue of how to account for intangibles, such as digital assets. The world of business has moved on exponentially in how it functions to the extent that the existing accounting standard on intangibles, IAS38 – although still workable – does not reflect modern business practices and predates issues such as digital assets.

With more than 30 years’ experience in accounting standards – including as a national standard setter in the UK and Hong Kong SAR – Wallace expects this process, which has just begun, to take a number of years. 

“It’s a hugely important topic. If there’s going to be one area where accounting could change significantly over the next five years or so, I think it’s in that area, because the standard has not kept pace with what’s going on in the world in terms of development of intangibles, and particularly internally generated ones,” she says.

In the past two years alone, the pace of technological development has leapfrogged anything the biggest tech evangelists could have imagined. Accounting rules for intangibles never foresaw such a development, and unless there is a clear and internationally agreed basis for how to account for intangibles, especially internally generated ones, then investors will struggle to know the true value of companies. 

Currently, technology companies such as Twitter are only valued when someone wants to buy them. Even then valuations are hugely contested, as Elon Musk’s attempted purchase of Twitter has shown. It is hoped that new accounting rules will help to change this.

Cryptocurrencies are another focus that will have the UKEB pondering over the next few years, as the board grapples to define how they are used and therefore how to account for them.

“There’s a lot of talk about cryptocurrencies. I don't think it’s as big an issue for companies as some people might have you believe – certainly we are not aware of that many UK companies that hold significant portfolios of cryptocurrencies. Nonetheless, once you start thinking about how people are using them as a means of exchange, then you realise how little accounting support there is for that type of thing,” Wallace says.

In the same way that Wallace is introducing a variety of ways to garner input on consultations, she has also made it her business to recruit board members from a broad spectrum as part of the board’s remit.

The board comprises between eight and 14 independent members from diverse backgrounds including professionals from accounting firms, preparers, investors, academics, a technical accountant and a lawyer.

The UKEB is also in the process of setting up four advisory groups, including one for accounting firms and institutes, one for preparers, one for users, and one for academics. The intention is that this becomes a two-way process, with the advisory boards feeding into the main board and communicating the board’s views to others. Wallace considers this process particularly important for the investor group.

The academic advisory board will help with UKEB research projects – two of which have recently been launched: a shorter one on goodwill, and the more extensive project on intangibles.

“That’s a really exciting opportunity to influence the project at a very early stage. We’ll be talking to the IASB throughout that project about what we’re finding. I'm a great believer that the best accounting standards are evidence based. We’ve got the right resources and the right people to get good evidence bases in the UK to support anything we’re going to be saying in future to the IASB on the subject.”

As PwC’s UK Head of Public Policy and Regulatory Affairs until her retirement in 2013, Wallace has a varied and deep experience overseeing complex technical projects at tricky times. She established and led the global financial instruments team during the transition of EU listed companies to IFRS and through the global financial crisis. Her enthusiasm for technical challenges has not waned. 

She remains “excited” at the prospect of helping to influence and develop what will arguably be one of the most transformational international accounting standards: “The whole point of accounting is to create a level playing field so you can make your investment decisions with the right level of information about each company. If you can’t compare one company with the other, then I don’t think you can make really intelligent investment decisions.”