Disclosure principles

The Boards discussed staff proposals for disclosure principles that might put into effect the disclosure objective agreed at a previous meeting. The proposed disclosure principles were:

1. The significant judgements and assumptions (and changes to those judgements and assumptions) made by the reporting entity in determining whether it controls (or does not control) another entity and/or about the reporting entity's involvement with structured entities.
2. The interest that the non-controlling interests (NCI) have in the group's activities.
3. The effect of restrictions on the reporting entity's ability to access and use assets or settle liabilities of consolidated entities, as a result of where the assets or liabilities are held in the group.
4. The nature of, and changes in, the risks associated with the reporting entity's control of consolidated structured entities or involvement with unconsolidated structured entities.

None of the disclosure principles received universal support. Item (a) was criticised because several Board members thought that the 'and/or about the reporting entity's involvement with structured entities' was misplaced: it confused consolidation with the particular challenges of structured entities. Some FASB members were concerned that (a) had a parent company-only bias that was not appropriate.

Item (b) was criticised because, in the explanatory text that accompanied the proposal, the staff had suggested that a reporting entity should be required to disclose 'the non-controlling interests' proportionate interest in dividends paid for each individual subsidiary'. IASB members in particular were concerned that in jurisdictions in which non-controlling interests in consolidated groups are commonplace, the disclosures would be both voluminous and virtually meaningless. In addition, it was unclear whether NCI should be assessed for materiality at an individual entity level or at a group level. Analysts on both Boards stressed that users were interested in the effect of NCI on the reporting entity's ability to access benefits in the consolidated group.

Similar concerns existed with respect to (c). It was noted that the domicile of subsidiaries was important information as this would often give users a clue about the ability to repatriate earnings.

However, item (d) was most criticised because of the requirement to discuss 'involvement with unconsolidated structured entities'. Board members had sympathy with the intent, but not in a standard directed to consolidated entities.

These criticisms aside, the IASB thought that the disclosures related to unconsolidated interests best belonged in IFRS 7, with other risk disclosures. However, the staff cautioned the Board that IFRS 7 had a slightly different perspective and that, in outreach activities, they had been told that the legal perspectives in (d) were also important.

Ultimately, the Boards did not vote on the disclosure objectives, but proceeded to discuss a number of specific issues identified as sweep issues.

Disclosures – sweep issues

Basis of control

The Boards agreed that, when a reporting entity has a significant investment in an entity but concludes that it does not have the power to direct the activities of the other entity, the reporting entity should disclose the surrounding facts and circumstances that underlie the basis for its conclusion.

At least one IASB member was concerned that this disclosure would provide a basis for second-guessing the judgements made by management in difficult situations.

The interests that non-controlling interests have in the group's activities

The Boards discussed whether, with respect to subsidiaries with non-controlling interests that are individually material to the reporting entity, the reporting entity should disclose:

• the name;
• the country of incorporation or residence;
• the proportion of ownership interest and, if different, proportion of voting interest held; and
• summarised financial information.

Board members noted that in multinational groups, the information about domicile was very important. There were concerns about the level of disaggregation that might be involved, and that this might conflict with the disclosure required by IFRS 8 Operating Segments.

Other IASB members were concerned about the requirement to provide summarised financial statements and whether such a requirement would be operational and provide useful information. What was most important to those Board members was information about restrictions or limitations on assets and liabilities and cash flows. That type of information might be better suited as part of IFRS 8.

Another IASB member was concerned whether (c) was operational, especially with respect to ownership interests in structured entities.

The FASB members were in a different place altogether and were more concerned about restrictions and limitations within the consolidated group generally, irrespective of whether non-controlling interests were involved.

The proposal was not voted on. The analysts on the two Boards were tasked to work with the staff to prepare revised disclosures that might satisfy the Boards.

Risk disclosures for consolidated entities

The Boards agreed that a reporting entity should disclose the terms of an arrangement that could require the reporting entity to provide financial support (for example, liquidity arrangements and obligations to purchase assets) to any consolidated entity, including events or circumstances that could expose the reporting entity to a loss. This would be an extension of the current US GAAP requirements (which apply to consolidated structured entities).

Risk disclosures for unconsolidated structured entities with which the reporting entity has an involvement

The Boards agreed to require a reporting entity to disclose a comparison of the carrying amount of the assets and liabilities of the reporting entity that relate to the reporting entity's involvement with unconsolidated structured entities and the reporting entity's maximum exposure to loss. The disclosures would be similar to those in US GAAP, although US GAAP has a different scope.

Risk disclosures for unconsolidated structured entities that the reporting entity has set up or sponsored

The Boards agreed that a reporting entity should be required to disclose income from its involvement with unconsolidated structured entities that it has sponsored.

A staff proposal that a reporting entity should also disclose the carrying amount of assets held by those structured entities at the time that the structured entities are established was referred for further study by the staff.