Materiality

The Technical Principal introduced the papers to be discussed on materiality and indicated that the first two papers were education sessions. She then went on to provide a general description of materiality, which was an abstract concept which you could not see or touch, a decision to include or not; it required judgement, it was based on the "substance" of something and applied in different contexts.

The Technical Principal continued saying that from a preparer’s perspective, materiality would be determined based on how the information would be used and whether information was likely to affect an assessment of a matter. She then commented that several issues related to disclosures (too much irrelevant or too little relevant disclosures) surfaced based on the discussion forum last year and feedback received from the proposed IAS 1 amendments and related surveys, which was the reason they were looking at it.

Some possible problems applying materiality included a lack of understanding of the general concept, the varying levels of detail wanted by users and uncertainty of who the users were. A few Board members agreed saying there was a definite problem with satisfying the requirements of a variety of users and added there was a need to be stricter in identifying the pool whose needs were being focused on. There was also the comment by one member who stated that companies might have to deal with a change of investors and users over time so might want to provide more disclosures now just in case.

The Research Associate then went on to disclose the nature of the research conducted which encompassed discussions with representatives of IOSCO and the IAASB who share the same wariness of being too prescriptive. The two organisations were moving in the same direction as the IASB and as such, the IASB would continue to monitor and consult with them.

Regarding the analysis of how the concept was applied in different jurisdictions and different contexts, the IASB requested help from national and regional standard-setters, reviewed academic papers, requirements by regulators, industry papers and case law. On the general concern of whether accounting and legal definitions could co-exist, the Research Associate used the USA as an example where there were a lot of authoritative sources, such as the Securities Act of 1933, which had many references to materiality but did not define it.

<p >Many of the Board members had queries around this area and one Board member asked what the difference in the threshold was. The Research Associate said the IASB’s threshold included the wording 'could influence' whereas the American court stated 'substantial likelihood of influencing'. The Research Associate stated that in their consultations one of the questions was on whether it would make a difference if the definition contained 'would' or 'should' and whether that difference in words would influence a decision. Respondents wrote back saying that it was really about semantics and wouldn’t really affect the decision. One would capture the same issues within the decision making process with 'could' or 'would', but maybe the court definition would be different.

Another member inquired about whether a definition was even needed to which the Research Associate later responded to saying, based on research, some of the responses were that the U.S. definition had been evolved by the courts and that many jurisdictions had operated without a definition. Some observations included that some jurisdictions were likely to find it helpful if the IASB had a definition and on the flipside, some might find it unhelpful.

Another member suggested raising the threshold as it might help to solve the problem of too much disclosure to which another member replied saying that even if there was a threshold, the regulator would apply it differently.

Feedback from respondents on whether more materiality guidance was needed was mixed as some thought more was needed given the concept was unclear and not well understood; others stated that the concept was clear and generally well understood and that problems applying the concept were behavioural, so additional guidance would not help. In addition, the opinion of some based on research was that language used in IFRSs was overly prescriptive, overriding the judgement inherent in materiality.

Where relevance was concerned, the main feedback provided were that what information was relevant to a particular topic was not clearly described or was at too high a level.

The Technical Principal stated that just because a figure was large did not make it material as a quantitative amount was just one ‘quality’, and materiality was a qualitative assessment. She also commented that brightlines and prescribed percentage thresholds discourage judgements, cause boilerplate disclosures and created a false sense that meeting brightline tests was sufficient.

Planned steps by the IASB to deal with these issues raised included to have discussions with the IFRS Advisory Council, with the World Standard-setters, additional consultation with the IAASB and IOSCO, and development of a full Staff Paper.

The Technical Principal opened up the floor to questions. One Board member indicated that there was no mention of application guidance in the slides provided to which she replied that AGs tended to relate to specific IFRSs. Due process and public consultations had yet to be done on updates to the AGs. Another member inquired of whether the words 'significant' and 'insignificant' come into the IASB’s planning and the response was it did come into mind but the Board could not simply change the word to 'material'. The terms mean different things to different jurisdictions so they would have to think about defining that. Changes would be made on a standard by standard basis where the language is used.

A few members voiced their opinion that they did not believe additional guidance was needed on materiality.

 

Materiality – Accounting policy disclosures

The Assistant Technical Manager introduced the next agenda paper to be discussed on accounting policy disclosures related to materiality. She went on to debrief what the IASB had heard about accounting policy disclosures, and one of the most commonly expressed concerns was that accounting policy statements in Financial Reports were summaries of the IFRS requirements. More fundamentally, different views had been heard about what factors make an accounting policy 'significant'. The views are outlined as follows:

• View 1 – accounting policies that involve management input. Some had suggested that accounting policy information should only be disclosed where there was a choice to the entity in application
• View 2 – 'most important' accounting policies. Some had suggested that accounting policies were significant and should be disclosed if they related to the transactions, events and circumstances that were most important, or unique, to the entity’s business, regardless of whether management had any discretion. Examples included revenue and foreign exchange.
• View 3 – all accounting policies applied. Some users of financial statements had suggested that they wanted information about all of the accounting policies applied by the entity in producing its financial statements as not all users of financial statements were familiar with accounting literature.

The Assistant Technical Manager then introduced the section on staff analysis and discussed as follows: The objective of accounting policy disclosures was for users to understand relevant information about an entity’s transactions, events and circumstances to visualise the complete picture and have a faithful representation of the financial statements. Both ideas of completeness and enhanced understandability were covered in paragraph 117(b) of IAS 1. She stated there was agreement with constituents who had suggested that accounting policy disclosures should be entity-specific and should be tailored to the entity and explain how the accounting guidance had been applied in the context of the entity’s activities to make them more useful. She also mentioned that the current literature in Paragraph QC32 of the Conceptual Framework could be interpreted in two ways with two different end results.

Hence, staff had come to the following conclusion: The objective of accounting policy disclosures was to provide necessary context to, and enhance the understandability of an entity’s material transactions, events and circumstances. In addition, accounting policy disclosures should be more entity-specific and explain how the accounting guidance has been applied in the context of the entity’s activities.

Consequently, the accounting policies which an entity determined necessary for an understanding of its financial statements should be made more prominent. Guidance should be provided in IAS 1 to promote the prominence of the necessary accounting policies. Some examples of prominence could include including a summary of the necessary accounting policies in one note. The Technical Principal then asked the Board based whether they agreed with the staff analysis above, in particular:

1. the objective of accounting policy disclosures was to provide necessary context to, and enhance the understandability of, an entity’s material transactions, events and circumstances;
2. financial statements could include information about entity-specific accounting policies for all material transactions, events and circumstances; and
3. entities should use judgement to determine which accounting policies should be more prominent in the financial statements, but at a minimum the accounting policy information where there is a choice, change or significant judgement should be made more prominent in the financial statements.

In response to the questions, one Board member questioned the use of the word 'could include' in (b) above as it seemed to be incompatible with the notion of having to provide material information. He recommended that it be replaced with 'should' and some fellow Board members agreed.

General comments were then made by the Board members. One mentioned that the issue of judgements and estimates was always a case of companies just repeating the standard. The Senior Director for Technical Activities mentioned, as an example, the useful lives of fixed assets: These were not an accounting policy but an estimate that should be in the fixed asset note rather than the policy, so there was an inconsistency between where companies included its policies. Another Board member responded saying that it was not a policy but a material estimate and so disclosure of the depreciation should be in the note, not the policy.

As the discussions continued, the Chairman mentioned that people see the policy, judgement and estimate as one package and sometimes it was difficult to differentiate between these things. A fellow Board member agreed. Another Board member made an observation that over a decade ago, post Enron, this idea was baked in SEC requirements where there is a critical accounting policy and another note called critical accounting estimates and it would make sense to borrow that concept.

The Senior Director for Technical Activities concluded that there was no consensus amongst Board members for a narrow-scope amendment. He therefore asked the IASB whether they then agreed to include a discussion about accounting policy disclosures in the Principles of Disclosure project. The Board agreed.

 

Amendments to IAS 7 – Disclosure about restrictions on cash and cash equivalents.

The ASAF Coordinator introduced the paper and discussed the general objective which was for the IASB to conclude its discussions on whether the proposed amendments to IAS 7 Statement of Cash Flows should include amendments on disclosures about cash and cash equivalents.

She discussed the staff recommendations that the IASB were considering on improving disclosures about cash and cash equivalents as part of the Disclosure Initiative: Principles of Disclosure research project, instead of as part of the proposed amendments to IAS 7. She then went into some background details as follows: The IASB had discussed whether it should improve disclosures regarding cash and cash equivalents on several occasions, including its meetings in October 2013 and March 2014. During these meetings it had become apparent that investors needed to understand what amount of cash was immediately available for the repayment of debt and the restrictions over cash.

In the July meeting, the staff had proposed an amendment to IAS 7 to include disclosures of the costs that would be incurred if cash or cash equivalents were remitted as earnings to a parent entity. The IASB had been of the option that the objective of the proposed disclosure was unclear and asked the staff to perform outreach with preparers. Based on staff outreach to the Global Preparers Forum (GPF) it was deemed clear. Further, there was not necessarily a link between cash and cash equivalents and the amount of profits that were available for distribution.

Investors would like more information about cash and cash equivalents because there was a concern that cash and cash equivalents might not be available to settle debt. The information that was being requested by investors focused on cash and cash-equivalent balances, not retained earnings as there had been some confusion around this recently. Investors were also seeking information as part of their assessment of an entity’s liquidity position. In essence, the reason that investors were requesting more information about cash and cash equivalents was similar to the concern of those IASB members who had questioned the appropriateness of deducting cash and cash equivalents from debt, a concern that the cash and cash equivalents might not actually be used where and when it was required within the group. As noted at the March meeting, even though disclosures in current Standards were related, they did not specifically address the request from investors.

At the July meeting the staff had been asked to consider if there was a relationship between the requests from investors and the disclosures required by IAS 12 Income Taxes. The opinion had been that the IAS 12 disclosures would not necessarily respond to the request from investors because the temporary difference for which deferred tax liabilities had not been recognised might not arise from unremitted earnings; there was a possibility of creating confusion between cash and cash equivalent balances and retained earnings, if reference was made between IAS 7 and IAS 12.

The staff therefore retained their view that although there were disclosures in IFRSs that related to the investors’ request, there was not a specific requirement that ensured that the disclosures were made. There was nothing in IFRSs that prevented preparers from including additional disclosures to address investors’ requests in their financial statements.

Staff had asked the GPF for its assistance in developing disclosure requirements about cash and cash equivalents and advice was sought. Staff agreed with the GPF that, to be effective, the disclosure would need to be broader than cash and cash equivalents. If an amendment were to include liquid assets, then liquid assets would need to be defined. On balance, the ASAF Coordinator considered that it would be better to spend more time considering the suggestion as part of the Disclosure Initiative: Principles of Disclosure research project. She asked the Board for their views and whether members agreed with her suggestion.

One Board member mentioned that he was not entirely clear on why the initiative related to only IAS 7 as it extended to IAS 12 and other standards. Another Board member agreed. A fellow Board member mentioned that when a user saw a figure in the cash flow statement stated as cash, the expectation was that it was available when sometimes it just was not. It was those situations where disclosures were needed – if there were restrictions on that cash and it was not freely available for use. One Board member thought that the key was to do broader risk disclosures on how the liquidity risk was managed. Regarding quantification, she would focus on identifying the amount of cash rather than someone putting a cost estimate of moving that cash as the latter, based on what people said, entailed a lot of assumptions and was costly to do.

Two Board members mentioned that the Board should be careful on the scope of this project and not bring all the disclosure issues in here as it seemed that was what was currently being done.

The Technical Principal asked whether anyone agreed with including something on cash and cash equivalents in the ED. Given that only four Board members agreed, she stated that staff would try to draft something, either in the Basis or as an example, or both.

 

Amendments to IAS 7 – Summary of Due Process

The ASAF Coordinator then set out the due process steps that the IASB had taken before the publication of the Exposure Draft (Disclosure Initiative: Amendments to IAS 7 Statement of Cash Flows). She asked the IASB to confirm that it was satisfied that it had complied with the due process requirements to date.

A majority of 13 Board members agreed. One Board member stated he would dissent, as he did not believe the benefits of changing the standard were clear. Originally, the Board had sought to develop a net debt reconciliation and that had not been achieved. He believed that cost for preparers were huge and benefits for users were little.

 

Proposed amendments to IAS 1: feedback summary

The Technical Associate summarised the key points received from comment letters in response to the Disclosure Initiative: Proposed amendments to IAS 1 Exposure Draft (the ED). The staff would provide more detailed feedback and provide recommendations to the IASB at its meeting in October.

The Technical Associate said that the IASB had received 118 comment letters. During the comment period, IASB staff had conducted nine outreach meetings, six of which had been with investors and/or analysts. The overall feedback from the investor outreach showed widespread support for the proposals in the ED and for the IASB undertaking this project. Many respondents supported the proposed amendments as they would emphasise materiality and the exercise of judgement. However, a few respondents raised concerns that the proposals reflected a piecemeal approach to addressing the disclosure problem. Some considered that some or all of the issues would be more appropriately considered within the context of the Disclosure Initiative’s longer-term projects. Some respondents suggested drafting changes to the amendments proposed in the ED.

Whilst a majority of respondents agreed with the materiality proposals in the ED, feedback was somewhat mixed as regards the proposed ordering of the notes. Many respondents supported the proposals in the ED to clarify that entities have some flexibility in the way they order their notes, though they requested further guidance. On the other hand, some respondents saw a trade-off between comparability and understandability on which the ED was silent. In particular, many respondents welcomed the amendment that allowed entities to group accounting policies together with the related notes to the financial statements.

The Technical Associate went through the other proposed amendments, which had received broad support. He finally asked whether Board members had any comments, but there were none.