Disclosure initiative

Date recorded:

Agenda Papers 11F through 11I:  Principles of Disclosure - Drafting of disclosure requirements

The spokesperson from the New Zealand Accounting Standards Board introduced the session.  She noted that the discussion would focus primarily on agenda paper 11F which summarised the content of agenda papers 11F through 11I.  She explained that a team from the New Zealand Accounting Standards Board had been carrying out work as part of the Principles of Disclosure project, and specifically, looking at a couple of existing standards to come up with a new proposed approach to drafting disclosure requirements.  She noted that the team had looked at IAS 16 and IFRS 3, and that these standards were chosen because they were different standards – one old, the other newer, one dealt with assets, the other with a transaction that occurred during the reporting period – and this enabled the team to develop an approach that would be broadly applicable across the suite of standards.  She explained that in developing the proposed approach, the team had looked at several key issues that existed in current standards – one issue was the lack of clear objectives (particularly in the older standards), and the other issue was around the use of prescriptive wording, particularly when accompanied by long lists of disclosure requirements, because this encouraged a checklist type approach.  She noted that the team had developed an approach that had an overall objective for the disclosure section of the standard, with sub-objectives for each group of disclosures; and looked at the way disclosure requirements were drafted, essentially to make a shift to putting more emphasis on the exercise of judgement.

She noted that the next steps after receiving feedback from the IASB would be to perform further work on the workability of the proposed approach in practice, which the team would like to do prior to publication of the Discussion Paper at the end of the year.

She referred the IASB members to the questions in paragraphs 14 and 24 of agenda paper 11F, and asked whether they had any questions or comments with respect to the proposed approach.

An IASB member noted that she believed that this was the right package to move the IASB forward on this issue.  She noted that the hardest part of the project had been to give people more anchors for determining materiality of disclosures, and what the basis was when it was a qualitative assessment.  She noted that it did not depend solely on the materiality of the related line item, and that the proposed approach was useful  because it gave someone trying to make a determination of materiality a benchmark to say why something was material or not.  With respect to structure, she observed that the team focused on the use of judgement being either in an IAS 1 type document or in each standard, noting that she believed that both the use of judgement and the overall objective seemed to be something that could be said once because it would be the same for each standard.

Another IASB member noted that she agreed with the general approach with the overriding objectives and sub-objectives.  She believed that this approach to drafting would improve the IASB’s standard setting as well as assisting people applying IFRS in thinking about what disclosures they should include to provide a good set of financial statements.

Another IASB member noted that he agreed with the direction of the staff, but expressed concern that it might introduce too much exercise of judgement and not provide enough clarity around when an entity needed to provide certain information, and that he believed anchoring it in ‘how important is it to your business?’ was a good way to do that.

The Executive Technical Director commented with respect to the geographic location of the overall objective, and questioned how possible it would be to include this in a single disclosure standard because there were certain disclosures that would not have a material impact on the primary financial statements, but were nonetheless material and made for other reasons, for example, related party disclosures.  He noted that more thought was needed before concluding that one location was appropriate for the overall objective.

An IASB member noted that he liked the greater focus on objectives and sub-objectives, but expressed concern that this was moving to the opposite extreme in terms of a principles based approach.  In particular he expressed concern with the use of the word “consider” in terms of the individual disclosure requirements, noting that when the IASB had talked to CMAC (Capital Markets Advisory Committee) in the past about changing “should” to “consider” or something similar, they had expressed concern that this would not work and would not result in the disclosures they wanted.  He stressed that the IASB needed to be very cautious about going down this route and needed to be confident that companies would still deliver the disclosures, and that the regulatory and audit processes would work appropriately to ensure those disclosures were delivered.

The Senior Director, Technical Activities noted that the IASB had made a lot of progress from this being an abstract idea to having something more tangible now, and suggested that the IASB could go back to CMAC and see whether they viewed the approach more favourably now that they could see words around it.

The IASB member noted that investors liked structured information and knowing where to find information in a set of financial statements.  He expressed concern that this could be lost with a more principles based approach.  Another IASB member noted that his understanding was that this concern was addressed by the sub-objectives, which, to be met, required disclosure of additional information when something was important to a business.  He stressed that if information was important to the business, analysts needed to have this information, and structured consistently.

The Vice-Chairman questioned whether there was a “halfway house” approach that could be taken, using principles and still getting the information wanted.  The Senior Director, Technical Activities responded noting that there could be certain disclosures that the IASB could give some structure around – adding that he believed that in areas where structure was important, structure should be imposed.

Another IASB member pointed out that the proposed overall disclosure objectives for each standard (IAS 16 and IFRS 3) set out in paragraphs 11 and 12 of agenda paper 11F contained very absolute statements “this Standard requires an entity to disclose…”, and the “consider” was just with respect to things an entity would think about when determining how it would actually meet the absolute requirements.

The IASB Technical Manager questioned whether the IASB would be happy to use the word “consider” in the Discussion Paper, and ask a specific question on this.  The Senior Director, Technical Activities noted that some testing would be done before the Discussion Paper was published, noting that this was one area that would need to be looked at.  He noted that there may be some cases where the IASB needed to be a bit more specific with either the terminology or the structure, but in other cases “consider” may well be appropriate.  The spokesperson from the New Zealand Accounting Standards Board also added that the team was conscious of the comments made by IASB members as to whether the proposed approach would achieve the right outcome, and agreed that further thought and testing was needed, which could result in the wording being tightened up where necessary prior to publication of the Discussion Paper. 

The IASB member noted that he did not believe field testing would result in a realistic assessment of whether or not this approach would work in practice, as people would produce stuff they know you want to see.  He noted that he believed the only real field testing that could be done was to look at the results once a standard had been issued, and suggested that if the IASB wanted to go down this route it should be rolled out as part of a new standard, which would provide 3 years of testing with an actual standard, and because it would not apply to anything else, the IASB would have the ability to roll it back in a post implementation review if necessary.

Another IASB member noted that the IASB should focus less on the particular words used, noting that different words had different meanings in different jurisdictions, and more on the fact that what an entity disclosed depended on materiality and the circumstances of the entity.

A further IASB member highlighted the importance of preparers understanding why certain information was necessary for users, and how they used it to analyse the entity.  He noted that knowledge of such information would be helpful for preparers in making judgements to respond to the needs of users.  He also raised the issue of comparability with an objective based approach.

Another IASB member believed part of the disclosure overload problem was derived from the wrong application of materiality, and that the solution could be to go to a more objective based approach because it was hard to apply materiality without knowing what the objective was.  However, he noted that he shared the concerns expressed by other IASB members, and also highlighted the problems this approach could have from a preparer’s perspective.  He noted that in the case of a multinational company with 500 reporting entities, applying materiality judgements to objectives every year end (or quarter) was a difficult task, and it was more practical to have structured requirements that could be rolled out to the reporting entities asking them to provide the information every quarter/year end.  He also noted that making judgements would require the entity to document how they had applied judgement in determining the information to disclose (this would be required by auditors), which would result in more work.  Accordingly, he stressed the importance of looking at the field test from the perspectives of both users and preparers. 

The Chairman noted that he believed it should be possible to have more principle based requirements and at the same time, retain a clear structure, noting that he saw the advantage of retaining a clear structure to the notes.

Another IASB member noted that he agreed with the overall approach, and believed it was something people would be able to work with.  He noted that the current absence of objectives/sub objectives had contributed to a checklist type approach.  He believed that this objective based approach would also change the way the IASB discussed disclosures, including the timing of such discussions within the context of a project.  He agreed with some earlier comments with respect to the need to retain some structure, highlighting the fact that preparers liked structure – so they knew what information to gather from business units etc.  He further noted that good preparers knew what information their analysts and other users would be likely to ask for, and preferred to give it once in the annual report.

Another IASB member highlighted two negative experiences that the IASB should remember when looking at how to move forward on this.  The first was with “encouraged but not required disclosures”, which had resulted in virtually no disclosures in response, and stressed the importance of the IASB making it clear that what was being proposed were disclosure requirements, not encouraged disclosures. The second was the overarching requirement in IAS 1 to disclose significant estimates and judgements, noting that this had only been used in extremes rather than considered regularly, largely because of its placement in the literature.  She noted she believed that the IASB needed to provide more of their workings in the actual standard so people had the underlying thinking to judge against.  Like others, she also acknowledged that the IASB needed to figure out how to get the right balance between a principles based and a structured approach, and that she preferred the idea of field testing being performed on one standard and an assessment made based on the practice that had developed before the approach was applied to all standards.

Referring to earlier comments made by several IASB members, the Vice-Chairman agreed that large multinationals could well have different problems from smaller companies in applying this type of approach, and highlighted the need to ensure that there was a broad range of companies included in the field testing so that different situations could be taken into account.

Another IASB member noted that he believed the definition of materiality should be entirely focused on the omission of material information, and expressed concern with respect to the direction the practice bulletin on materiality was going, whereby if an entity provided information that could be considered immaterial, it could be asserted that the inclusion of said information clouded the signals and was actually misleading.  He noted that investors could choose to ignore information, and that overload of information should not be considered a violation of the materiality principle.

All thirteen IASB members present agreed to field test the proposed approach prior to publication of the Discussion Paper.


Agenda Paper 11E: Principles of Disclosure – Content of the notes

The Visiting Fellow introduced the Agenda Paper and said that the paper addressed the contents of a general disclosure Standard to replace IAS 1 as well as the objectives of such a Standard. The first staff recommendation was to reconfirm the current role of the notes which was to explain the information stated in the primary financial statements and to supplement the primary financial statements with additional information not depicted in the statements but necessary to meet the objective of financial statements.

One Board member said that the role was described too briefly in the agenda paper. She would like to see some examples as to what ‘explain’ and ‘supplement’ meant. One Board member asked whether there would be a different threshold of recognition between the primary financial statements and the notes. The Visiting Fellow confirmed that. He said that liabilities not recognised in the balance sheet could still have to be disclosed.

The Visiting Fellow continued with the objective of the notes. The staff recommended that a general disclosure Standard should have a set of objectives. The staff had developed two different approaches to objectives. The first approach was to develop a central set of disclosure objectives based on types of useful information. The second approach was to reflect how information in financial statements was commonly analysed and to reflect the disclosures that were mainly relevant for an assessment of management’s stewardship.

One Board member expressed concern about existing detailed disclosure requirements in the Standards that would not link in with the objectives set in the general disclosure Standard. The Visiting Fellow said that staff had considered this issue but constituents expressed the wish for a more fundamental approach to disclosures. She said that the fact that the objectives would be a Standard instead of a Framework could add to the issue.

The Vice-Chairman said that to him, the first approach was principles-based whilst the second approach was more structured. However he said that the structure proposed in the agenda paper (i.e., operating, investing, financing) would go too far for an objective. The Chairman disagreed with the statement that the first approach was principles-based. A Board member said that to him the approaches were not mutually exclusive.

One Board member said that the table in the agenda paper presenting types of useful information in financial statements for the first approach was missing key events and transactions that had a significant impact on the financial statements.  

A Board member said that he supported the second approach. He conceded that the current approach (i.e., standard-oriented disclosures) was convenient for the standard-setter, however it was not useful to users or preparers of financial statements. He preferred an objective-based approach which he conceded would be difficult to achieve.  A fellow Board member disagreed and said that the second approach was too ambitious. He said that the Framework, IAS 1 and IAS 8, for example, provided general principles for comparability with some transition relief as an exception to comparability. He said that this would be the same with a disclosure Standard.

One Board member suggested including both alternatives in the Discussion Paper, however they should be more clearly distinguished. She expressed concern that the table presented in the agenda paper for the first approach started with results and then developed the objectives from those results.

Another Board member said she preferred having one overarching Standard instead of disclosure requirements in every standard. She said that this would force the Board to develop requirements more holistically. One Board member said that the Board should consider which information was relevant for the users of financial statements.

A Board member was concerned about stewardship being defined too narrowly for the second approach. The Visiting Fellow acknowledged that and said that this would be discussed with the Conceptual Framework team.

The Chairman called a vote on the description of the role of the notes proposed by staff. 12 of the 13 Board members present voted in favour. The Board was then asked to vote on including objectives in the disclosure Standard (as opposed to the due process handbook). 12 of the 13 Board members voted in favour. The Board also agreed that both approaches to disclosure objectives should be depicted in the Discussion Paper.


Agenda Paper 11C: Principles of Disclosure – Aggregation and summarisation of information

The Assistant Technical Manager introduced the agenda paper which concerned aggregation and materiality. The agenda paper addressed the questions of when an item had to be presented separately from other items in the primary financial statements and which level of detail an entity needed to provide to meet a disclosure requirement. IAS 1 currently provided guidance on the different levels of aggregation and the related materiality decision within the context of the primary financial statements and the notes. The Standard used the term ‘not sufficiently material’ to identify items that should only be disclosed in the notes and not in the primary financial statements. However, staff found this confusing. Staff therefore recommended amending IAS 1.

One Board member said that whilst he agreed that the IASB should strongly encourage preparers to only include items which provided useful information, he was concerned about changing the definition of materiality in the following agenda paper (see agenda paper 11B below) where it was stated that information was material if omitting, misstating or obscuring it would lead to false decisions of primary users of financial statements. He said that, for example, a reconciliation of PP&E provided by a bank could be interpreted as obscuring the judgement of a user which could lead to unnecessary litigation.

One Board member asked whether dependency on, for example, PP&E was the same as materiality. He asked if PP&E could be material although the entity did not depend on it. The Assistant Technical Manager replied that PP&E-dependent would automatically mean that PP&E was material. The Board member asked why the concept of materiality needed to be changed. The Assistant Technical Manager conceded that the wording might not be ideal.

A Board member said that the last two sentences in the proposed amendment were contradictory. The first sentence proposed to consider items for the primary financial statements and the notes separately whilst the second sentence proposed taking into consideration the financial statements in its entirety.

One Board member struggled with the statement that materiality was an absolute term. To her it was a matter of judgement. She also asked whether the amendment to IAS 1 would be included in the Discussion Paper or would follow after the Discussion Paper. A fellow Board member agreed and asked whether there would be different emphasis for different levels of materiality.

The Chairman asked the staff whether a vote was needed or whether they could draw conclusions from the discussion. The Technical Principal replied that in her view the amendment was accepted by the Board except for the last two sentences. She concluded that those sentences needed to be reconsidered.

The Assistant Technical Manager continued with the level of detail. He said that more material information might be disclosed with a higher level of detail and vice versa. The staff recommended including guidance in IAS 1 that required entities to consider the level of detail necessary to meet a disclosure requirement.

One Board member struggled with the term ‘disaggregation’ used in this discussion in the agenda paper as the Conceptual Framework would no longer use this term. The Technical Principal said that it would be difficult to avoid the term as some disclosures were a disaggregation of line items in the primary financial statements.

No vote was taken on the agenda paper.


Agenda Paper 11B: Materiality – Aligning the definition and additional paragraphs for IAS 1

The Research Associate informed the Board that the agenda paper addressed the issue of aligning the definition of materiality across the Standards using the Exposure Draft on the Conceptual Framework as a starting point. She said that in the ED, some confusion had arisen around the term ‘could’ in the definition of materiality (“[i]nformation is material if omitting or misstating it could influence decisions […]”). Staff recommended changing this to ‘could reasonably be expected to’. The staff had also considered replacing ‘could’ with ‘would’ but decided against that based on the results from outreach performed.

The next issue was around the US Supreme Court’s description of materiality. The FASB had tentatively decided to align the US GAAP definition of materiality with the definition of the Supreme Court. Currently, IASB and FASB were aligned on the description. The Research Associate said that this would be a substantial change to the IASB’s understanding of materiality.

As discussed previously in the meeting, the staff also recommended to add ‘obscuring’ to the definition of materiality to read “[i]nformation is material if omitting, misstating or obscuring it could be reasonably be expected to influence decisions […]”.

Furthermore, the staff recommended clarifications to IAS 1.

The Chairman conceded that using ‘could’ in an isolated way would cause many issues. Therefore, he supported the staff’s recommendation to change this.  With regard to the Supreme Court decision he said that the Supreme Court had not used accounting language. He said that in practice the wording would not lead to a different result than the proposed IASB definition.

A Board member added that the Supreme Court’s jurisdiction was only the US whilst the IASB acted in more than 100 jurisdictions. Also, the courts would not focus on financial statements but included information that could be found elsewhere (e.g., press releases). He supported the staff recommendations but expressed concerns about the term ‘obscuring’. He said it would be difficult to enforce obscuring as it would be judgemental whether information was relevant or obscuring. The Senior Director for Technical Activities asked if ‘misrepresenting’ would be the better term. The Board member replied that ‘misstating’ and ‘omitting’ would result in the same as ‘misrepresenting’. The Research Associate said that although it might be difficult to enforce, it might change the behaviour of preparers. The Board member replied that he would not object to including this in the Discussion Paper.

One Board member said that the FASB would eventually follow the Supreme Court’s definition. He asked whether the IASB’s ‘reasonably be expected’ was a higher threshold than the Supreme Court’s ‘substantial likelihood’. The Research Associate replied that staff had not discussed this. The Senior Director for Technical Activities added that it was difficult to compare. The Chairman replied that it could be read as a lower threshold. A Board member added that preparers in the US would probably apply the most conservative definition of materiality to avoid being sued.

One Board member asked whether the staff recommendations would result in an Exposure Draft to amend IAS 1 or whether this would be included in the Discussion Paper on principles of disclosure. The Technical Principal confirmed it was the latter.

One Board member was concerned about including the term ‘specific reporting entity’ in the definition of material as IAS 1 otherwise only referred to ‘an entity’.

Another Board member asked whether the responses that the IASB would receive on the Discussion Paper were likely to have impact on the Conceptual Framework. The Research Director said that the Exposure Draft on the Conceptual Framework would state that materiality would be addressed by the Discussion Paper on the principles of disclosure.

The Chairman called a vote on the materiality definition and the clarifying paragraphs proposed by staff. 12 of the 13 Board members present voted in favour.


Agenda Paper 11A: Materiality – Due process steps and permission to ballot the Exposure Draft of a draft Practice Statement

The Senior Technical Manager advised the Board that the paper laid out the due process steps taken and explained why the guidance was issued as a Practice Statement and not as Implementation Guidance. Staff proposed to issue the Exposure Draft with a comment period of 120 days.

One Board member asked as to why there was no Basis for Conclusions on the Exposure Draft. She said that she would like to see an explanation as to why the IASB chose a Practice Statement to issue the guidance. A Board member replied that this was explained in the introduction to the Practice Statement. However, he agreed that a Basis for Conclusions would be helpful and could also be utilised to explain why the Practice Statement would be issued before the Discussion Paper. In light of the comments, the Chairman proposed to add a Basis for Conclusions to the Exposure Draft.

When called to vote, all of the Board members present agreed that all necessary due process steps were taken and that there should be a limited Basis for Conclusions. They also agreed with the proposed timetable and gave the staff permission to start the balloting process. Furthermore, all agreed with the comment period of 120 days.

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