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Disclosure initiative

Date recorded:

Agenda paper 11A – Practice Statement: Application of materiality to financial statements

The Staff analyst introduced the agenda paper. The agenda paper asked the IASB to discuss the content and initial drafting of the Practice Statement on the application of materiality. The Practice Statement would be issued as an Exposure Draft separate from the Discussion Paper on the Principles of Disclosure.

She then opened the discussion to the Board to determine whether the Board believed that any additional topic should be addressed in the Practice Statement.

There was general support from the Board for the Practice Statement.

One Board member asked about the order and timetable for discussion, noting that they were discussing a practice statement before considering the definition of materiality.

The Chairman said that this could be discussed again if necessary and the Senior Director of technical activities pointed out that users were asking for guidance so he suggested not postponing this discussion.

The Chairman said that it was a good document providing guidance when things were material. He was concern about paragraph 19 of the agenda paper which included examples of situations in which a small amount might be material. He said that because the list was not exhaustive it could lead to confusion. Other Board members also raised concerns about this paragraph.

One Board member asked about paragraph 62 which dealt with excessive cost or effort to correct misstatements. He said that it would be important to address situations in which an entity had issued a press release and then needed to adjust the amount. He also raised another concern about the concept that not recording something for materiality reasons would be an intentional misstatement, he disagreed with that and said that using materiality for legitimate purposes should not lead to intentional misstatements.

Another Board member said that the paper should explain how an entity should document their decisions regarding materiality. He also disagreed with paragraph IN1 which indicated that the practice statement should be helpful in other reports such as management commentary or corporate governance disclosures because regulators might have different expectations.

One Board member asked why the statement had an effective date if it would not be mandatory. The staff analyst responded that the effective date was being provided so that jurisdictions could decide for its adoption.

Another Board member said that paragraph 19 should be written in terms of a general principle rather than as a checklist.  He also said that paragraphs 29 and 42 should focus on materiality. He suggested adding a decision tree. He said that for example leases (under the new standard) could be not material given the amounts involved, so expense recognition would not be material either, but he said that there could be instances in which the lease was not material due to the interest rate. In other situations the lease could be material but not necessary all related disclosures would be material. He then asked what would happen when there was no amount in the financial statements (for example Greek debt recorded at zero value); he said that still it would be important to explain the situation in the financial statements.  

He then asked whether the staff had discussions with regulators. The staff confirmed that they have discussed this guidance with regulators.

One Board member said that he disagreed with adding documentation requirements because they did not deal with internal control matters.

Another Board member disagreed with adding a discussion about materiality thresholds used by auditors, he said that it would not be appropriate because auditors have their own guidance and they focused on preparers. The project manager responded that the information was added to provide users with an understanding of how materiality operated in an audit and because preparers and auditors had discussions around materiality. Another Board member suggested clarifying that an entity should not rely on the materiality used by auditors. The Chairman pointed out that this could be addressed in the basis for conclusions.

One Board member agreed with the approach of the document and he said that it was helpful in the context of a practice statement. He was concerned with paragraph 40 because he believed that the notes were an integral part of the financial statements and that it would not be appropriate to discuss the notion of primary. He also said that the financial statements should be considered on a stand-alone basis, meaning that an entity should not assume that a user was also reading prior year financial statements. In relation to paragraph 55 which discussed providing too much immaterial information – for example disclosing as its accounting policies all accounting standards applicable – he said that it would be irrelevant if the information was presented without an explanation of the effect on the entity based on its particular facts and circumstances. He then referred to paragraph 61 which said that an entity with a material misstatement “shall be required to amend the financial statements” and said that it would be incorrect to say “shall be required” because it was not clear by whom. He also disagreed with the statement in paragraph 65 that some transactions were capable of precise measurement because there were estimates in mostly all account balances.

Another Board member said that he disagreed with paragraph 64b) which stated that misstatements could arise from incorrect judgement of the needs of the primary users; instead it should refer to the application of IFRSs.

The Chairman concluded that there was general support for document. The staff would consider the comments raised by the Board and the document would be discussed again at a future meeting.

Agenda paper 11B - Role of financial statements excluding the notes

The Staff analyst introduced the agenda paper. He said that the purpose of the paper was to obtain the Board’s views on (a) describing the set of Statements as ‘primary financial statements’ and clarifying the use of the terms – ‘present’ and ‘disclose’ and ‘on the face’ and ‘in the notes’; (b) the role of the set of Statements; (c) the implications of an individual statement being part of the set of Statements, including who should determine what individual statements make up that set; and (d) which individual statements should comprise the set of Statements.

He then said that the analysis was categorised into the following sections: (a) terminology (paragraphs 10–27); (b) materiality (paragraphs 28–36); and (c) what the set of Statements is (paragraphs 37–47).

The discussion started with the terminology analysis and he said that the staff recommended that:

  1. the IASB should describe financial statements excluding the notes as primary financial statements with explanations of what it means (as discussed in paragraphs 15–20).
  2. the terms ‘present’ and ‘disclose’ should not be used in IFRS to denote where information was displayed in a complete set of financial statements for the reasons described in paragraphs 21–26. In the staff’s view, based on a decision about the terminology used to describe the financial statements excluding the notes, reference to disclosure in either the primary financial statements or in the notes was preferable.

One Board member said that they were not using the term primary in the standards; however he said that it was a recognised term and it would be confusing to add further guidance. The staff analyst indicated that the term primary was useful in terms of distinguishing what was included or excluded in the primary financial statements. He said that only the IASB should decide what information was included in the primary financial statements; otherwise it could cause problems for example for comparison across entities. Another Board member pointed out that the discussion was about terminology, and the Board would not prevent an entity from adding additional information outside the primary financial statements if it was judged to be important, but that it was important to have a consistent use of the term ‘primary’. Another Board member also clarified that the staff was intended to state that only the IASB could decide what a primary financial statement was and what should be presented in those statements.   

One Board member said that the term primary was only helpful for the discussions of the Board; further he asked whether an entity would be prohibited to call for example a debt rollforward “statement of debt rollforward”. The staff analysis responded that an entity could do that but that this would not make the information primary, but it would only give more prominence to the information presented.

Another Board member pointed out that the primary financial statements had a different role because they provided a complete summary of the entity’s performance.

There was substantive discussion about the fact that the terms ‘present’ and ‘disclose’ were being used inconsistently. Several Board members including the Chairman indicated that there should be more discipline in using those terms and whenever those terms were used, the Board should clarify whether they were referring to information that should be shown in the primary financial statements or in the notes.

The Chairman said that users currently understand that the term ‘disclose’ was meant related to the notes. He disagreed with the staff recommendation to use the term ‘disclose’ for both primary financial statements and the notes. He said that they should stick to the term ‘present’ for the primary statements and ‘disclose’ for the notes and being disciplined in their discussions. Another Board member said that he would prefer to use the term ‘present’ for everything; in the primary financial statements and in the notes. Some members said that preparers were used to using both terms.

The Chairman pointed out that the most important aspect would be the discipline of the Board in using both terms.

The staff analysis asked whether they agreed with their recommendation in terms of describing the financial statements excluding the notes as primary financial statements and whether they agreed on using ‘present’ for the primary financial statements and ‘disclose’ for the notes. There was agreement for this recommendation with focus on the Board being disciplined in using both terms.

The staff analyst then introduced the topic of materiality. He said that the staff recommended that:

  1. IAS 1 (or equivalent) should include a description of the role of primary financial statements based on the discussion in paragraph 31.
  2. IAS 1 (or equivalent) should include a description of the implications of a particular statement forming part of the primary financial statements based on the discussion in paragraph 32.
  3. in order to enable comparison across entities, the decision as to which individual statements should be part of primary financial statements should be decided by the IASB as discussed in paragraph 33.
  4. the Practice Statement being developed by the IASB should be used to decide what information should be displayed in the primary financial statements and in the notes (see paragraph 34).

The Chairman said that 32d) was suggesting that an item could be not material for the primary financial statements but could be material for the notes. He said that it could also be the case that an item could be not material for the primary statements and for the notes; so he was concerned that the message was not clear. The Project manager said that what they meant was that if something was material for the primary financial statement; that would mean that the item would be a line item in the primary financial statements.

Another Board member said that the paper was suggesting that the primary financial statements and the notes were of equal importance.  He said that the description in paragraph 31 was confusing. For example it said that it was useful to obtaining essential information. He said that it was not clear what it meant.  The staff analyst clarified that the term “equally important” was used in paragraph 7b) but it was referring to the ASAF statement.

One Board member said that he agreed with the description of the primary financial statements. He said that the importance of the primary financial statements and the notes were equal; however, there was a place for information to be shown in the primary financial statements and in the notes. He also said that the role of the financial statements should also include to assess effectively net cash inflows.

The chairman concluded that there was general agreement with the staff recommendation and the staff would consider the recommendations raised by the Board.  

The staff analyst introduced the final topic which was the definition of a set of financial statements. The staff recommended that:

  1. the IASB should develop additional guidance by describing criteria as discussed in paragraph 45(a) and perform a reassessment of the current set of primary financial statements as discussed in paragraph 45(b); and
  2. the IASB should document the criteria and conclusions of the reassessment in a general disclosure Standard. The staff recommendations was included in paragraph 47.

There were concerns raised by the Board with the staff proposal to add further guidance. One Board member indicated that they were not aware of issues in the application of IAS 1 so there would be no need to add further guidance. Another Board member also said that the proposal would imply taking on a long journey without knowing the possible outcome.

The Chairman called to vote and the Board agreed not to perform a reassessment of the current set of primary financial statements as suggested by the staff.

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