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Disclosure initiative — Principles of disclosure

Date recorded:

The Project manager introduced Kimberly Crook from the New Zealand Accounting Standards Board (NZASB) who presented the agenda papers prepared by the NZASB staff: Agenda Paper 11A: Disclosure Initiative: Principles of Disclosure: Drafting of disclosure requirements — Cover paper and Agenda Paper 11B: Disclosure Initiative: Principles of Disclosure: Drafting of disclosure requirements — Chapter [x] — Approach to drafting disclosure requirements.

The spokesperson from the NZASB introduced the agenda papers. She indicated that the papers provided a new approach based on comments received at the last Board meeting held in April 2015 and feedback from a workshop held in Tokyo of Asia-Oceania standard setters.  She said that the feedback reflected the importance on being more specific on the objectives. She said that the papers proposed a two-tier approach for disclosures; the first one would be general disclosures objectives with minimum requirements and the second one would be additional disclosure requirements to provide a more complete overall picture of the item or transactions concerned. She also said that there was a change in the wording used in the additional information section to replace “an entity considers disclosing” with “an entity shall consider whether to disclose”, to clarify that entities were required to assess whether or not additional disclosures must be provided to meet the disclosure objective. She then opened the discussion to the Board.

There was general support expressed by the Board for the agenda papers. The following concerns were raised during the discussion:

One concern was related to whether the changes in the wording would imply that there would be additional documentation requirements. The spokesperson from the NZASB responded that there could be an audit issue in that area and it would be important to consult with auditors. She said that it would be important that entities could explain their rationale for assessing their particular disclosure requirements; however, she said that it was difficult to determine how prescriptive the standard should be.

There were several comments raised in relation to the application of judgement. For example, one Board member referred to the discussions held in Tokyo and said that it was a very effective and candid discussion. He said that there were concerns raised on the need to change behaviour in preparers, auditors and regulators. He said that the current checklist approach could be useful for auditors and regulators but it was not useful for preparers. He said that it was necessary to address this divergence and how entities could be able to explain their judgements to auditors and regulators. Another Board member said that in his view there was too much emphasis on the need of judgement because it was stated in each paragraph of the draft proposal and it would be important to understand how these requirements would be perceived by auditors and regulators. He said that it would be important to find a balance between the summary and additional information requirements. One Board member expressed concern as to whether this approach would be applicable in practice, he said that the financial statements were a legal document so it would be very difficult to justify in court whether certain information was not disclosed in terms of materiality, he also said that entities had a very short time frame to make those decisions given the reporting deadlines; and he suggested that the staff test the applicability of this approach in every standard. On that regard, another Board member pointed out that it would be necessary to have more involvement from the Audit Committee.

There were also suggestions mentioned to change the wording. (i) One Board member said that in addition to “shall consider whether to disclose…” it would be important to add “in order to meet the disclosure objectives”. (ii) Another suggestion was to indicate that the disclosure requirements depended on the relative importance of the item. (iii) there was concern related to the fact that it seemed that the wording would be similar for most of the standards so it would not make sense to repeat the same requirements on each standard; accordingly, it would be more appropriate to cross reference. On that point the spokesperson from the NZASB said that it had not yet been decided the location of the requirements and that one possibility would be to have the general requirements in IAS 1; (iv) another comment was that there should be more explicit requirements about quantitative and qualitative assessments; (v) another suggestion was related to analyse whether the requirements should be different based on applying a cost model vs a fair value model in IAS 16; (vi) another suggestion related to adding criteria for additional disclosure information situations such us the complexity of the transaction, local circumstances (which could indicate whether or not a transaction was material); and non-recurring transactions such as restructurings.

In regards to field testing, there were some suggestions raised by the Board such as: (i) expanding the number of entities to be consulted; (ii) obtain feedback on the wording from preparers with actual experience on preparing financial statements; (iii) to test the application of the approach with more challenging standards such as IFRS 9 and IFRS 15 because those were new standards; (iv) test the application on IFRS 2 and IAS 19 that also were challenging in terms of disclosure but users had more experience; and (v) obtaining feedback about disclosures requirements to understand changes in cash and non-cash changes in current periods and future periods.

Based on the concerns raised during the discussion, the Vice Chairman suggested including in the Discussion Paper the pros and cons of the approach so that respondents could comment on those concerns. Another suggestion was to request respondents to provide their own examples as to how they would apply the new requirements.

The Chairman concluded that it was a very useful discussion and that there was general support for the approach subject to consideration of the comments raised by the Board.

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