At a Glance
- IFRS 18 and FASB DISE projects drive major changes in financial statement presentation and disclosures
- In-process R&D accounting varies widely based on deal structure, creating communication challenges
- Cross-functional alignment prevents conflicting stories across earnings calls and financial statements
Global accounting standards are shifting fast, from IFRS 18 presentation reforms to complex cross-border compliance, putting pressure on finance leaders to elevate reporting quality and stakeholder communication. Ahead of his upcoming presentation atAccounting and Reporting Europein London on November 17-18, Marc Siegel spoke with BioXconomy to discuss how multinational teams can navigate this intricate landscape.
As co-founder of Metrix Advisory and former board member of both the FASB and SASB, Siegel offered rare insight into how standards are built and applied.
In this Q&A, he shared practical strategies for tackling major shifts like the FASB’s DISE project, overcoming implementation hurdles in R&D and royalty monetization, and turning regulatory complexity into a competitive advantage.
BioXconomy (BX): What are the most significant accounting standard changes impacting financial reporting today?
Marc Siegel (MS):Right now, the thing I hear about the most is actually around presentation topics. So,IFRS 18, and, in the FASB world, there’s theDISEproject. Those are the two projects that are impacting companies the most right now.
IFRS 18 has a lot of different elements where it’s changing the presentation of the actual income statement itself, and that’s going to impact everybody’s key performance indicators and the data they collect. Companies are right now in the thick of implementation on that. There are also additional disclosures around management performance metrics. So those are important in this too. So a lot of different changes are coming around from IFRS 18.
The FASB has a project on DISE, the disaggregated income statement expenses, and that’s a disclosure-only project, but that will break out key line items in the income statement in their disclosures. Companies are in the midst of implementing that, and they’re going to have to break down things like cost of goods sold, research and development, and give some details around selling expenses.
These two standards are probably high on the list of what companies are rushing to implement or prepare for.
BX: What accounting areas show the biggest challenges in implementation and application under the current FASB guidance?
MS:What’s going to be most relevant are two areas of accounting that, maybe not so much in interpretation, but implementation.
The first is in-process research and development. In-process research and development happens all the time when two companies enter into a deal, and the way that you do the accounting for in-process research and development is substantially different, whether that transaction is accounted for as a business combination where you’re combining two whole businesses, or whether it’s structured as an asset acquisition where you’re just buying an asset.
Depending on how you do the accounting or how that deal is structured, you get completely different accounting answers for the IPR&D. If, for example, you decide that it’s a transaction that’s going to be a business combination, that in-process R&D is capitalized on the balance sheet as a long-term intangible asset that then just sits there on the balance sheet. If, on the other hand, the deal was structured as an asset acquisition, it’s most likely going to be expensed—the IPR&D.
Those are very different accounting outcomes for what could be economically similar kinds of transactions. So that always generates a lot of confusion as to why that makes sense or doesn’t and how you communicate it to leaders in the business and also investors.
The other broad area that’s been coming up is royalty monetizations. This is where you have an outside third party that will come in and offer to fund research and development for biotech or pharma companies. And under the FASB accounting guidance, there’s no clear guidance on this particular kind of transaction. The way most of the audit firms interpret it is that it will be accounted for like a financial instrument—like a loan—and you end up with loan-like accounting for the funding of research and development. Under IFRS, it’s a little bit more loose as to how it’s applied, and you get different accounting treatments.
The problem with the way it’s accounted for and interpreted under FASB is that loan-like accounting really doesn’t mirror the way management runs the business, nor does it mirror the way analysts think about the business. So, it makes communicating both internally and externally very difficult based on what’s actually showing up on the income statement and the balance sheet. So those are the two areas that are probably the most difficult and unusual in terms of challenges under FASB.
BX: From your experience, how can organizations use regulatory change as an opportunity to improve reporting quality and not just achieve compliance?
MS:We have a great live example of this right now in the US with the debate aroundquarterly versus semiannual reporting. Right now, the Form 10-Qs that are required to be filed every 13 weeks or so in the US are really seen as compliance documents, not communication exercises.
So if companies were to navigate a world where it’s an option to do semiannual reporting, you then have to figure out what needs to be communicated every 13 weeks, if anything. It’s a good chance to rethink with a complete blank slate, what is important to communicate to the investors and why and make effective disclosures and communications on a quarterly basis because there’s no requirement that you have to disclose certain things. It’s just going to be about what you think is going to be effective communication.
This whole debate has brought into specific relief what is the purpose of interim reporting? What are you trying to communicate? Can we make the whole system of reporting on an interim basis better and not just compliance driven, but effective communication, whether you end up filing SEC filings every quarter on an optional basis or not? That’s where I think if you were to take a step back and not just think about compliance exercises around quarterly reporting, you could improve the reporting quality and the communication quality between companies and their investors.
BX: What role does cross-functional collaboration play in successfully navigating accounting regulation changes and elevating reporting quality?
MS:An increasing role. I think it’s extremely important for finance teams not to stay in their silo and just think about what’s going on with the numbers in finance because that really misses the opportunity to think about communication holistically. Again, it’s not just about getting the numbers right, it’s about getting the numbers right in context of everything else that the company is communicating.
One of the things that I used to do as an investor was to make sure that the story that was coming out of the financial statements and the footnotes was aligned with the story coming out of earnings calls, was aligned with the story coming out of the website, aligned with the story coming out of social media. And sometimes it could very easily happen because all these different communication channels are being run by different people—you would get different stories that come out of the compliance documents than what’s coming out of the earnings calls or management commentary. And when that happens, investors are left with two different stories that might be conflicting a little bit, or at a minimum, don’t tell the exact same story, and investors will be at a little bit of a loss and will probably end up discounting the stock value because they don’t know which story is going to be the right one that’s going to play out.
The way to avoid that is actually working together so that the finance team is working with the operations team, the investor relations team, the C-suite, and the audit committee—and everybody is on notice and aligned with making sure that they’re not only complying in building out their accounts and their financial statements, but they’re actually communicating in context with everything else that’s going on so that the stories are all aligned. Then you’re achieving effective communication between the company and their investors.
BX: What’s your advice for finance leaders or accounting leaders trying to stay ahead of regulatory changes?
MS:Try to not only have a team dedicated to mapping out where the regulators are and where you think they might be going, but try to understand the principles behind these things. If you’re focused on effective communication to your investor audience, you will likely stay ahead of where the regulators are trying to go.
If you’re building out a strong communication platform—whether it’s in the financial statements, footnotes, social media, or earnings calls—you’re likely not going to run afoul of any regulations, which are naturally trying to achieve efficient, relevant communication to the markets anyway.
Your compliance team should map out all the different regulatory areas, especially in sustainability and financial reporting. But they also need to work with cross-functional teams to ensure your overall communication strategy is strong. That’s the best way to stay ahead of what regulators are going to be doing.
Finance & Accounting for Bioscience
Tailored to the unique needs of bioscience companies, this CPE-accredited annual forum convenes the brightest financial and accounting minds from the nation’s leading trailblazers. Hear from industry experts on high impact topics such as strategies to scale the business, creating value, emerging risks and digital transformation.
