This session of the IASB meeting addressed a number of different topics related to disclosure considerations when discussing effective dates and transition guidance for adoption of new or amended IFRSs. The topics that were discussed are the direct result of questions received by IASB staff in connection with IAS 8, Accounting Policies, Changes in Accounting Estimates, and Errors. These topics include:
- Disclosing comparative information when an entity applies an accounting policy retrospectively, considering (1) whether an entity that presents more than one year of comparative information should adjust the information for those additional earlier years or not or (2) whether information included in historical summaries (e.g. 5-year summaries) presented with financial statements should also be adjusted [Agenda Paper 10A];
- Considering whether disclosing the quantitative effect of both the old and the new accounting policy is needed in the current year of change when there is a required change in accounting policy should be eliminated [Agenda Paper 10B];
- Considering whether the requirement for entities to disclose the quantitative effect between the old and new accounting policy in the current year of change when there is a voluntary change in accounting policy should be eliminated [Agenda Paper 10C]; and
- Determining whether the requirement for entities to disclose the impact of accounting standards that are not yet effective has met the objective of providing relevant information and whether this requirement should be retained or deleted [Agenda Paper 10D].
Disclosure about information relating to periods earlier than required periods (Paper 10A)
The IASB Staff (the ‘staff’) has received a number of questions about the requirements in IFRS to adjust comparative information in instances when an entity applies a new accounting policy retrospectively. Those questions received by the staff, resulted in the recommendations presented in Agenda Paper 10A. Specifically, the staff presented the Board with two primary considerations including (1) whether an entity should adjust information included in earlier years in those instances where more than one comparative year has been presented and (2) whether information included in historical summaries as required by regulators, such as a five-year table, should be adjusted.
Certain regulators (e.g., Europe, Canada, and the United States) require entities to provide a least one additional year of comparative information and in some instances, even more (as in the case of the five-year table requirement in the United States.) As a result, constituents have contended that the additional costs related to preparing comparative information outside the IFRS requirement far exceeds the benefits achieved. Additionally, constituents have expressed concerns that the operational burden to prepare this information is extreme, especially in those instances where the resulting standard would have a pervasive impact on the entity’s financial statements, as would be the case with the proposed revenue recognition or financial instruments standards.
Board member discussion
|Prior to discussing the recommendations provided in Agenda Paper 10A, a question was raised by a board member as to whether a comprehensive project on effective dates has been considered. In response to this inquiry, the staff highlighted the fact that the concept of ‘effective dates’ is being considered as part of the other ongoing larger ‘big four’ projects. At this time, there is not a specific stand-alone project on effective dates. Board members offered varying views as to whether the recommendations presented in this paper as well as the other papers on ‘effective dates’ are maintenance in nature (i.e., can be addressed on a stand-alone basis) or are more significant in nature (might require more due process and a larger stand-alone project.) Board members had varying views on this where certain members felt as though the default should be ‘retrospective application’ of new standards whereas others offered the view that it should be considered on a case by case scenario.
As it relates specifically to the recommendations made by the staff in this paper, certain board members offered the view that since IFRS requires that one year of comparative information be presented, this concept would preclude an entity from the requirement of going back further when regulators require additional periods to be presented. To expand on this, one particular board member highlighted that it is not within the responsibility of the IASB to address whether an entity would need to adjust other years but rather the responsibility of the regulator to make this decision.
However, other board members supported the alternative view, which is the IASB through the issuance of IFRSs should provide guidance and clarification as to when financial statement preparers would be required to adjust periods outside the two-year required period. In fact, those supporting this view indicated that under the conceptual framework it is the IASB’s responsibility.
Question 1: We [the staff] recommend that entities are only required to adjust the comparative information relating to the preceding period for the effects of the new accounting policy. Do you agree?
Question 2: If the Board agrees with the staff recommendation in Question 1, we recommend that the entity is required to disclose the following information:
- Whether additional comparative information presented is adjusted and to label it clearly; and
- A description of the previous accounting policy that had been applied for that financial information if it has not been adjusted for the change in accounting policy.
Question 3: We [the staff] propose to clarify that an entity is not required to adjust financial information that is not contained in financial statements. Do you agree?
The overall consensus of the Board was that the questions presented in Agenda Paper 10A should be deferred to a future period at which time the Board can look at this issue in a more holistic manner, perform additional analysis, discuss with regulators, and come to an informed decision.
Disclosure on the quantitative effects of a required change in accounting policy (Agenda Paper 10B)
Entities are required to apply changes in accounting policy retrospectively by default and, as a result, when the entity first applies the new policy, it adjusts all relevant prior period amounts and disclosures presented to comply with the new IFRS. IAS 8 sets out information to be disclosed when an IFRS requires a change in an accounting policy when the change has an effect on the past or current periods or might have an effect on future periods, including (1) the amount of the adjustment for each financial statement line item affected for the current period and each prior period presented, and (2) the amount of the adjustment relating to periods before those presented, to the extent practicable.
Providing prior period information using the old accounting policy is not too burdensome as the prior period information was already presented on the basis of the old accounting policy. This was done in previously issued financial statements and, therefore, this information is readily available. However, the financial information for the current period has only been prepared on the basis of the new accounting policy and the entity would need to recalculate the current amounts using their old methodology to present the effect/adjustments required to reflect current period amounts under old accounting policy. While providing disclosure on the quantitative effect of the old and new accounting on current information might be useful, various constituents have raised a concern that preparing the information in the current period might require the need to maintain its former accounting system, thereby presenting additional burden/costs.
As a result, the staff is recommending the removal of the requirement that entities quantify the effect that the change in an accounting policy would have in the current period. This recommendation is being made in the form of the two questions detailed below.
Board member discussion
The members of the Board offered varying views as to whether an entity should be required to quantify the effect of an accounting policy change in the current period.
- Certain board members felt that this requirement provides an undue burden to entities as they would be required to maintain two accounting systems (in some cases.) This is unreasonable in their view. Additionally, these same board members highlighted the fact that the new accounting standard is presumably transitioning to a more ‘favorable’ accounting practice. Requiring an entity to detail the impact of the ‘legacy accounting’ on the current period is counterintuitive as it is presumably going back to an accounting practice that is not as favorable. Finally, proponents of this view highlighted the fact that the new accounting policies would provide transitional guidance to preparers of financial statements. This transitional guidance might result in the preparer structuring transactions in a manner inconsistent with prior transactions that are similar in nature to take advantage of new accounting policy, thereby resulting in incomparable financial statement information if the entity was to translate current amounts based on the new current transaction methodology presented using legacy accounting methodology.
- Conversely, certain board members argued that this requirement will allow the current year financial statements/disclosures to be comparable to the prior year since the disclosure would include the needed information to understand what the current year amounts would be if reported under the legacy accounting (which could be compared to previously issued financial statements.) These individuals contend that users of the financial statements want to understand why there are significant changes and fluctuations in balances.
Additionally, the proponents of this view highlighted the fact that the users of the financial statements like to understand trends and the current two years of comparative information does not make a trend. Being able to understand current period amounts using legacy accounting would not only provide one year of comparative information, but many years of comparative information as the users could look at previously issued financial statements for several periods, thereby understanding the related trends.
- Finally, certain board members were of the opinion that these questions should be deferred until additional analysis is done as the only two constituent groups offering a view at this time are the auditors and preparers. It might be helpful to get additional perspective (e.g., from analysts and users of the financial statements.)
|Question 1: We [the staff] recommend removing the requirement that entities quantify the effect on the current period of a change in accounting policy as a result of a change in IFRSs. Do you agree?
Members of the board voted, and by a majority of vote agreed with the staff’s recommendation. There was additional discussion by certain members of the Board, detailing the fact that an alternative position is in the process of being drafted and would be presented in the future.
|Question 2: We [the staff] recommend that no additional amendments be made to the disclosure requirements in IAS 8 for circumstances in which transition requirements do not require retrospective application. Do you agree?
Similarly, members of the board voted and agreed with this staff recommendation, that is, no additional amendments to the disclosure requirements will be made to IAS 8 for circumstances in which transition requirements do not require retrospective application.
Disclosure on the quantitative effect of changes in accounting policies when it is a voluntary change (Agenda Paper 10C)
In accordance with IAS 8, entities must disclose information about the quantitative effect of a voluntary change in accounting policy on the current and prior periods. Similar to the discussion on Agenda Paper 10B, the board is being asked whether an entity that voluntarily changes its accounting policy should be required to disclose the quantitative effect about changes in accounting policies for the current period. This issue is the same as discussed in Agenda Paper 10B except that this paper considers the disclosure requirement for voluntary changes in accounting policy.
One view is that an entity that has voluntarily changed its accounting policy should be required to disclose the effect of the change on the current period as (1) financial statement users may not be informed in advance about voluntary changes in accounting policies, (2) voluntary changes in accounting policy may reduce comparability with other entities in the jurisdiction, and (3) there is a potential for some entities to change their accounting policy to achieve an accounting outcome.
However, the staff noted that an entity is not permitted to change an accounting policy unless the change results in providing reliable and more relevant information. Additionally, a voluntary change in accounting policy must always be applied retrospectively and therefore presenting the ‘amount of adjustment for each financial statement line item affected’ would not be needed for the current period as this information is given for the preceding period.
With the above in mind, the staff recommended removing the requirement that entities quantify the effect on the current period of a voluntary change in accounting policy (consistent with view offered in Agenda Paper 10B).
Board member discussion
Similar to Agenda Paper 10C, the members of the board offered varying views as to whether an entity should be required to quantify the effect of an accounting policy change in the current period for those changes that are done on a voluntary basis.
- Similar to Agenda Paper 10B, certain board members supported the staff view due the same reasons discussed in relation Agenda Paper 10B whereas certain board members did not support the staff view for the same reasons previously discussed.
- One board member did change their view from Agenda Paper 10B, citing a concern that a voluntary change in accounting policy might result in an entity trying to conceal the accounting impact of a change that might be adversely viewed by the financial statement users.
|Question 1: We [the staff] recommend removing the requirement that entities quantify the effect on the current period of a voluntary change in accounting policy. Do you agree?
The Board tentatively agreed to retain the requirement to disclose the current period effect of a voluntary change in the accounting policy.
Disclosure requirement in advance about forthcoming IFRSs (Agenda Paper 10D)
Entities are required to disclose the effect of IFRSs that are not yet effective and the expected impact of such standards on its financial statements. Some preparers and users have expressed concern that this requirement does not provide relevant information to the users of the financial statements. The staff, after much outreach, considered two differing viewpoints:
- View 1: Disclosure about the possible impact of new IFRSs should not be a requirement within financial statements:
- Information currently provided is boilerplate in nature and copied from the manuals of the auditors and not specific about the entity. Therefore, this information is not useful to financial statement end-users;
- This type of information should be provided as part of management commentary and one of the Board’s original objectives of requiring this disclosure was to converge with the United States and Canada. In these countries, the local securities regulators prescribe this disclosure and it is disclosed in management commentary;
- Current requirement has been interpreted as meaning that each entity needs to check, immediately before approving the financial statements, whether the IASB had issued any new IFRSs. This could result in the need for an entity to assess impact of new IFRS issued up until the entity publishes financial statements, resulting in potential late changes and burden to the entity;
- There is already an expectation that management would inform users if they deemed that new IFRSs could have a significant impact on their profit or loss information even if the Board did not mandate this requirement in IFRSs; and
- There is a concern that because this disclosure is in IFRSs and has to be audited and entities might limit what is auditable rather than provide a comprehensive disclosure on what could happen.
- View 1: Disclosure about the possible impact of new IFRSs should be retained as a required disclosure in the financial statements:
- Users maintain that this information is useful when well-prepared;
- Unless required, there is a concern that many entities would not provide this information when warranted; and
- Better-prepared entities would disclose better information to users.
While the staff understands the benefits and shortcomings of this requirement, they have concluded and recommend to the Board that requiring entities to provide information about the possible impact of new IFRSs should be retained as the staff is of the belief that this disclosure is relevant when prepared well. Furthermore, users found this disclosure helpful in preparing to update their analytical models for the new IFRS.
Additionally, the staff provided additional recommendations for the Board to consider if the Board was in agreement with the initial recommendation (i.e., entities should be required to provide information about the possible impact of new IFRSs.) These additional recommendations include:
- An entity should be required to disclose the possible impact of pending IFRSs if and only if applying that IFRS is expected to (1) affect an entity’s recognition of transactions or events in the financial statements; or (2) change an entity’s measurement basis from the one currently applied;
- An entity should be required to provide this disclosure for new or amended IFRSs that were issued by the date of its current statement of financial position (rather than all new/amended IFRSs);
- IAS 8 should be amended to require entity’s to disclose its best estimate of the likely effect that application of the IFRS will have on its financial statements.
Board member discussion
Certain aspects of the proposed recommendations were discussed. Specifically, a discussion was held around the whether it would make sense for an entity to disclose all new/amended IFRSs, highlighting which would not have a material impact on the entity’s financial statements versus disclosing only those IFRSs that would impact the entity.
Additionally, a discussion was held around what quantitative measures should be disclosed by the entity as to the impact of a new/amended IFRS where one board member offered the view that amounts, if readily available, should be disclosed though no specific analysis would be required. Another board member offered their view that unless undue cost or effort was required, an entity should make a reasonable effort to determine the impact of a new or amended IFRS.
Finally, the Board discussed the nature of the ‘additional’ recommendations provided within Question 2 and Question 3 of the Agenda Paper 10D.
|Question 1: We [the staff] recommend that the Board should retain the existing disclosure about the impact of new IFRSs. Do you agree?
Overwhelmingly, the Board agreed with the staff recommendation and decided to retain the existing disclosure about the impact of new IFRSs.
Question 2: We [the staff] recommend that:
- An entity should only be required to disclose the possible impact of forthcoming IFRSs if and only if applying those IFRSs is expected to affect an entity’s recognition of transactions or events in the financial statements or change the entity’s measurement basis from the one currently applied. Do you agree?
- An entity should only be required to provide this disclosure for new or amended IFRSs that were issued by the date of its current statement of financial position. Do you agree?
As it relates to question 2(a), the Board did not agree with the staffs’ recommendation that an entity should only be required to disclose the possible impact of new IFRSs ‘if and only if’ applying those IFRSs is expected to affect an entity’s recognition of transactions or events in the financial statements or change the entity’s measurement basis from the one currently being applied.
The Board did vote on and agree, overwhelmingly, with the staff recommendation that an entity should be required to provide the disclosure for new or amended IFRSs that were issued by the date of its current statement of financial position.
|Question 3: We [the staff] recommend that an entity should be required to disclose its best estimate of the likely effect that application of the IFRS will have on its financial statements. Do you agree?
The Board voted and did not agree with the staff recommendation that an entity should be required to disclose its best estimate of the likely effect that the application of an IFRS will have on its financial statements.
Cover memo – Questions on preparing exposure draft amending IAS 8
As a result of the discussions/vote on various matters discussed within this session (i.e., Agenda Paper 10A, 10B, 10C, and 10D), the staff will prepare a pre-ballot draft of the exposure draft amending IAS 8. The staff committed to preparing the pre-ballot draft and making it available to the Board members the week of June 2, to allow alternative viewpoints to be drafted and presented.
Board member discussion
Prior to voting on the below questions, one board member revisited a point from earlier in the day as to the impact of Agenda Paper 10B’s decision on the earlier discussion on IFRS 10, Consolidated Financial Statements. During the IFRS 10 discussion, it was determined that the quantitative affect of both old and new accounting should be disclosed in the in the current period. In light of the Board’s acceptance the staff’s recommendations in Agenda Paper 10B, it was recommended that an amendment be made to IFRS 10 removing the requirement to detail the effect on the current period of a change in accounting policy. The Board performed an immediate vote on this proposed amendment, which passed by majority vote. A caveat to this approved amendment was the Board can discuss this further when the IFRS 10 pre-ballot draft is reviewed.
|Do you agree that staff should prepare a pre-ballot draft of the exposure draft amending IAS 8?
The Board overwhelmingly agreed by a unanimous vote that the staff should prepare a pre-ballot draft of the exposure draft amending IAS 8.
|Do you agree that the comment period to amend IAS 8 should be for 120 days?
Similarly, the Board overwhelmingly agreed by a unanimous vote that the comment period to amend IAS 8 should be for 120 days.
|Is the Board satisfied that it has (a) performed all mandatory due process steps and (b) Performed sufficient non-mandatory due process steps?
Finally, the Board has concluded that it is satisfied that it met all due process steps when considering staff recommendations/issues related to IAS 8 as discussed within this session.