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Disclosure initiative: Principles of disclosures

Date recorded:

Disclosure Initiative: Principles of Disclosure – Cover Paper - Agenda paper 11

Background

The Board discussed the detailed feedback received on the Disclosure Initiative—Principles of Disclosure Discussion Paper (PoD DP) in this session. The Staff provided the Board with a high-level overview of the feedback received in its December 2017 meeting. The papers for this meeting were as follows:

  • Feedback from users of financial statements
    • 11A: Summary of investor outreach activities
    • 11B: Feedback from users of financial statements
  • Feedback from stakeholders other than users
    • 11C: Cover paper
    • 11D: Overall project approach and scope
    • 11E to 11L: summary of feedback received by each section of the DP

As most of the feedback from users was obtained from outreach activities conducted by the Staff and various Board members rather than through comment letters, their comments were presented separately from those raised by the other stakeholder groups.

The Board was not asked to make any decisions at this meeting.

Next steps

The Staff plan to present their recommendations about the next steps of the project in the March 2018 Board meeting.

Feedback from users of financial statements – Agenda Paper 11B

Overview of feedback received from users

1. The disclosure problem

Most users found the lack of relevant information in financial statements to be the biggest problem, followed by ineffective communication. They generally preferred more disclosure and granularity and were less concerned about disclosure overload. Some users also highlighted the importance of making proper materiality judgements when deciding what to disclose and how best to communicate that information.

2. Principles of effective communication

Most users agreed with the principles expressed in the DP; however, they had mixed views about whether the Board should develop mandatory requirements based on these principles. While some users thought that mandatory principles would increase transparency and comparability, others questioned the auditability of the principles and their potential to limit innovative forms of communication.

3. Location of information—IFRS information outside the financial statements

Many users agreed that including IFRS information outside the financial statements could be useful if they are properly cross-referenced. Nevertheless, some users were concerned about the lack of cohesiveness, perceived lower level of assurance and the on-going availability of information if too much cross-referencing is used. They believed that IFRS information should be presented outside the financial statements only in limited circumstances and that it should be clearly labelled as IFRS information together with an indication of whether it is audited.

4. Location of information—Non-IFRS information inside the financial statements

Many users said that the Board should not prohibit the inclusion of non-IFRS information in financial statements because this information is useful to their analysis. However, users had some concerns about the risk of entities providing misleading information or clouding IFRS information. Consequently, it is important for an entity to identify, label, explain (including why the non-IFRS information provides a better economic reflection than IFRS information) and reconcile any non-IFRS information presented in the financial statements.

Some users were also concerned about the potential overlap or conflict between the requirements developed by local regulators about non-GAAP measures and those to be developed by the Board.

5. Use of performance measures in the financial statements

Many users believed that this topic should be included in the Primary Financial Statements project. They also said that it is difficult to provide feedback before the Board decides which performance measures (e.g. an EBIT, EBITDA or operating profit subtotal) will be included in the financial statements.

The feedback on this area is generally consistent with that on presenting non-IFRS information in the financial statements (see (4) above). Many users asked the Board to define one or more of EBIT, EBITDA and operating profit to enhance consistency and comparability across entities.

Most users supported the Board developing definitions for unusual or infrequently occurring items. They believed that entities should provide as much disaggregated information about these items as possible and that entities should disclose their policy for distinguishing between frequently and infrequently occurring items.

6. Disclosure of accounting policies

Most users supported the Board developing guidance on which accounting policies an entity should disclose. They found that accounting policy disclosures are useful when they relate to material items or transactions, or provide insight into how an entity has exercised judgement in selecting and applying accounting policies.

Once again, many users thought that materiality judgement is vital in deciding which accounting policies should be disclosed, as well as the level of detail and nature of information that should be provided for that policy.

As to the location of accounting policies, users had mixed views on this issue.

7. Roles of the primary financial statements and the notes, centralised disclosure objectives and the New Zealand Accounting Standards Board (NZASB) approach

Only a few users commented on these sections of the DP and they expressed mixed views on these matters.

8. The role of technology and digital reporting

Although this topic was not discussed in the DP, many users thought that the Board should consider the effects of technology and digital reporting as part of the project because the disclosure problems there are different from paper-based reporting.

Discussion

Most Board members observed that the investors’ requests for more relevant information is consistent with what they have heard from their own outreach activities. A couple of Board member observed that the most important thing for the Board to do is to help preparers put the effort into providing more relevant information, and to provide clarity within such information e.g. IFRS versus non-IFRS numbers, how they have been calculated, what the major assumptions are, etc. Feedback from some users also indicated that they would prefer to judge what is irrelevant for themselves rather than let the preparers make that decision, in order to satisfy their different information needs. To this end, the financial statements would admittedly contain irrelevant information to different extents for different users. In order to help users search for the information they need, one Board member asked the Staff to investigate whether the IFRS Taxonomy is able to achieve its objective of bringing consistency in the terminologies used to help with that search.

A few Board members also asked the Staff to seek more feedback from users on how to achieve comparability within a principles-based framework. The Vice-Chair noted that the requests for templates seem to conflict with the requests for more entity-specific information. The creation of templates also seems contrary to a principles-based framework and the push for preparers to use more judgement when preparing disclosures.

Overall project approach and scope – Agenda Paper 11D

Overview of feedback received

Many respondents thought that the DP lacks focus and depth. They agreed that this is an important project but found the DP to consist of a piecemeal collection of different problems with no coherent vision of project direction. Many respondents also found that the DP overlaps with other Disclosure Initiative projects such as the one on primary financial statements, materiality and the Conceptual Framework. This may lead to duplication of guidance, inconsistent or incomplete guidance and it detracts from the ability of stakeholders to understand the big picture of what the Board is trying to achieve.

Many respondents suggested that the Board focus on a few areas that will make the most difference to the disclosure problem. Many respondents felt that a failure to make proper materiality judgements is a key contributor to the disclosure problem. They believe that tackling this root cause would be more effective than trying to fix all the outward manifestations of this core issue.

Similar to users, many respondents suggested that the Board consider issues around digital reporting.

Discussion

Agenda papers 11D and 11E were discussed together.

There was significant discussion on the scope of the project and what the Board’s response should be. The discussion highlighted that the Board itself lacks direction for the project, what its objectives are and how the Board intends to achieve those objectives. Even the Vice-Chair admitted that the Board itself should do a better job in communication.

There was also significant discussion on whether the Board should undertake a Standards-level review of disclosure requirements. Board members had conflicting views. Those who were against it were of the view that it would take a great deal of time and would disrupt the normal functioning of Standards.

However, quite a few other Board members commented that preparers seriously expect the Board to reduce the volume of disclosure requirements which they thought could only be achieved through a standards-level review. They questioned whether applying materiality judgement could really ease the disclosure burden on preparers. Identifying material information requires proof that the other information is immaterial. That in itself means that immaterial information must be gathered and collated even if they do not end up being included in the financial statements. The judgement that this information is not material then needs to be explained and approved by the CFO, audit committee, auditors, etc. This is all practically difficult and time-consuming. A Board member observed that as long as there is a specified disclosure requirement, it will be very hard for a preparer to argue that the related information is immaterial especially from a qualitative point of view.

The Board generally agreed that this is mainly a behavioural issue and that it needs a long-term solution. A Board member also observed that it is very difficult for preparers to identify what is relevant for users because different groups have different information needs. Furthermore, preparers want a safe-harbour. They would prefer to rely on the Board to tell them what the critical disclosures are in each Standard. The Board generally believed that setting clear disclosure objectives could help resolve this problem. Some members also suggested conducting a standards-level review on one or two standards and couple that with best practice disclosures to gather reactions from stakeholders.

A couple of Board members also asked the Staff to consider whether the disclosure problem is caused by a misapplication of the disclosure requirements or a fundamental issue with the existing requirements. The former could arguably be resolved by education whereas the latter would require standard-setting activities. 

The disclosure problem – Agenda Paper 11E

Overview of feedback received

Most respondents broadly agreed with the disclosure problem as articulated in the DP but different stakeholder groups attributed it to different causes. Preparers attributed it to disclosure overload; users attributed it to the provision of insufficient relevant information (see AP 11B); and other stakeholder groups attributed it to a fundamental behavioural issue of not applying or misapplying materiality judgement. Tight regulatory control also tends to squeeze out any room for judgement.

Be that as it may, all stakeholders believed that the way the Board drafts Standards contributes to the disclosure problem. This came in the form of (1) using prescriptive language, (2) voluminous disclosure requirements, (3) a lack of clear disclosure objectives, and (4) inconsistent or piecemeal drafting of disclosure requirements over time.

Although corrective actions are clearly needed, respondents had widely varying views on what these actions should be, and whether the Board should develop disclosure principles to resolve the problem. The most prevalent view was that this would help but would not be enough in isolation. Those who supported this approach believed that this would provide a common platform for preparers and auditors to debate and document their judgement, which could then be used to deal with regulator questions about missing disclosures. Those who did not support this approach believed that disclosure principles would, by nature, be very high-level guidance that would not make a real difference practically. These principles would merely add to the existing disclosure overload.

Many respondents also suggested that the Board undertake a standards-level review of disclosure requirements. However, they acknowledged that it would be no easy feat and if the Board were to go down this route, they have to plan the project direction and demand on resources properly.

Discussion

This paper was discussed together with AP 11D (see above).

Principles of effective communication – Agenda Paper 11F

Overview of feedback received

Most respondents broadly agreed with the seven principles of effective communication described in the DP and with the Board developing these principles further. However, respondents expressed mixed views as to:

  • (a) whether these principles should be mandatory or non-mandatory, and the best form for non-mandatory guidance (e.g. illustrative examples, educational materials or a Practice Statement); and
  • (b) whether the Board should develop non-mandatory guidance on the use of formatting in financial statements.

Their main concern with developing guidance or making them mandatory is that they may stifle innovation.

In addition, many respondents observed that the principles described in the DP are similar to the ones already developed by various regulators. They encouraged the Board to work with these bodies in order to be more efficient when further developing these principles.

Discussion

There was no discussion on this paper.

Roles of the primary financial statements and the notes – Agenda Paper 11G

Overview of feedback received

Most respondents agreed that the Board should describe the roles of the primary financial statements and the notes. They also agreed with the composition of the primary financial statements and the general contents of the notes. However, some respondents cautioned the Board against any sharp distinction between the two lest this makes the primary financial statements appear superior to the notes.

Many respondents also agreed that the Board should not prescribe the terms ‘present’ and ‘disclose’ as meaning to include information in the primary financial statements and in the notes respectively.

Discussion

There was no discussion on this paper.

Location of information – Agenda Paper 11H

This deals with the permissibility of including IFRS information outside the financial statements through cross-referencing and including non-IFRS information inside financial statements.

Overview of feedback received

In general, most respondents agreed that both ways should be allowed if circumstances justify their use, but that the Board should set some boundaries in order to prevent abuse. Furthermore, they believed that the Board should do further work and liaise with relevant regulatory bodies before developing any further guidance.

Many respondents thought that the issue of including non-IFRS information in the financial statements should be dealt with as part of the Primary Financial Statements project.

Including IFRS information outside the financial statements

The Board’s preliminary view in the DP was that IFRS information can be included outside the financial statements if:

  • (a) it is provided within the entity’s annual report;
  • (b) its location outside the financial statements makes the annual report as a whole more understandable; and
  • (c) it is clearly identified by means of a cross-reference.

Many respondents took issue with these criteria.

First of all, they were concerned with the use of the term ‘annual report’ because it means different things in different jurisdictions. For example, in Canada and Australia for some entities, an annual report includes documents that are separate from the financial statements which may be published at different times. As such, it will be difficult for this term to be applied consistently in practice. The same goes for describing an annual report as a ‘single reporting package’. These concerns are similar to those raised regarding the use of the term ‘annual reporting package’ in the proposed amendments to IFRS 8 and IAS 34 issued in March 2017.

Secondly, they found the phrase ‘makes the annual report as a whole more understandable’ subjective, which will make it difficult to apply and enforce in practice.

Thirdly, many respondents were concerned with the use of excessive cross-referencing. Their concerns were similar to those noted by the Board in the DP about fragmentation and reduced understandability. If cross-referencing is used, they believed that the Board should require such information to be clearly identified as IFRS information and that it has been audited, if applicable.

Finally, many respondents raised the following issues about incorporating IFRS information outside the financial statements:

  • potential lack of auditor responsibility over such information;
  • the need for the Board to co-ordinate with other regulatory bodies to ensure consistent requirements;
  • ongoing access to and availability of such information; and
  • the impact of technology and digital reporting.

Including non-IFRS information inside the financial statements

Most respondents, including some regulators, agreed that the Board should not prohibit the inclusion of non-IFRS information inside the financial statements. However, they believed that the Board should clearly define what ‘non-IFRS information’ is.

Non-IFRS information is described as a residual in the DP. The Board did so by distinguishing between different types of information, viz.:

  • (a) information specifically required by IFRS,
  • (b) additional information that is necessary to comply with IFRS, and
  • (c) other information (effectively non-IFRS information).

Many respondents took issue with this distinction and said that it would be difficult to distinguish between (b) and (c). Entities often disclose information falling within (c) because it is relevant to users. This, by default, is captured by the requirement of IAS 1 to provide any additional information that is relevant to users, which in turn makes it a category (b) information. Category (c) also includes information that, in some respondents’ view, should be banned from the financial statements, e.g. information that is inconsistent with IFRS.

With regard to the disclosures around non-IFRS information, most respondents agreed that such information should be clearly identified as non-IFRS and that they are unaudited (if applicable). Some respondents added that the Board should require an explanation of any non-IFRS information and a reconciliation thereof to an IFRS number. They disagreed with the other disclosure requirements suggested by the Board because they viewed them as redundant.

As to the prohibition of including specific types of non-IFRS information in the financial statements, almost all regulators supported it whereas most preparers opposed it. Other stakeholder groups had mixed views. It is a clash between the risk of providing misleading information versus a lack of flexibility and the potential inconsistency with local requirements arising from any form of prohibition.

Discussion

There was not much substantive discussion on this paper. The Board will consider the feedback received in the Primary Financial Statements project.

Use of performance measures in the financial statements – Agenda Paper 11I

Overview of feedback received

Many respondents thought that this topic should be discussed as part of the Primary Financial Statements (PFS) project. Furthermore, some respondents thought that the Board should take a more holistic and principle-based approach to tackling the use of performance measures in financial statements. Some respondents also commented on the Board’s tentative decision to defining EBIT in the PFS project. While many supported the Board’s approach, some disagreed because it is a rule-based measure and it may not be suitable to all entities.

In the DP, the Board suggested that EBITDA can be disclosed only when an entity classifies expenses by nature, whereas EBIT can be disclosed regardless of whether an entity classifies expenses by nature or by function. Most respondents did not explicitly state whether they agreed with this view. However, they believed that the Board should not mandate these requirements because they are rule-based and that the existing requirements of IAS 1 about the fair presentation of additional subtotals is sufficient to help preparers make appropriate decisions.

Many respondents agreed that the Board should develop some guidance on unusual or infrequently occurring items; however, they warned that this would be difficult given the Board’s history of failed attempts and that what is unusual depends on the nature of an entity’s operations. They also asked the Board to clarify how these items differ from extraordinary items which the Board banned back in 2002, and how their separate presentation would interact with the Board’s thinking that ‘the nature or function of a transaction… rather than its frequency, should determine its presentation within the income statement.’ (IAS 1.BC63).

Instead of defining these terms, some respondents thought that the Board could provide general guidance for the fair presentation and disclosure of unusual or infrequently occurring items. Many respondents also disagreed with prohibiting the use of other terms to describe these items because they would be difficult to enforce from a translation perspective and entities will find ways around it.

As with the Board’s suggestion to describe how performance measures can be fairly presented in financial statements, most respondents agreed with it.

Discussion

There was no discussion on this paper. The Board will consider the feedback received in the Primary Financial Statements project.

Disclosure of accounting policies – Agenda Paper 11J

Overview of feedback received

Many respondents supported the Board developing guidance about which accounting policies to disclose; however, they were less concerned about where to disclose them. They had concerns about the different categories of accounting policies suggested by the Board – most respondents found them confusing and thought that they will add unnecessary complication to the issue.

Instead, many respondents suggested that the Board develop more principle-based guidance about which accounting policies should be disclose based on their relevance, usefulness and materiality. Educating preparers could also help.

Discussion

Agenda papers 11J to 11L were discussed together.

There was not much discussion on these papers. A number of Board members commented on the apparent lack of engagement on the part of respondents to comment on the centralised disclosure objectives and the NZASB staff’s approach to drafting disclosure requirements. The Staff noted that the respondents did engage but there were so many diverging views that they were unable to reflect them all in the papers. With regard to the NAZSB staff’s approach, some respondents observed that the Board did not develop the approach enough for them to provide robust feedback.

Centralised disclosure objectives – Agenda Paper 11K

Overview of feedback received

Many respondents supported the Board’s view to develop a set of centralised disclosure objectives. However, some respondents said that this would only be effective if these objectives are:

  • accompanied by a standards-level review of disclosure requirements;
  • specific, and strike a balance between high-level principles and more prescriptive guidance; and
  • linked to the concepts of materiality and relevance.

As to the methods proposed by the Board that it could use to develop the centralised disclosure objectives, as well as where to locate these objectives, respondents had mixed views on them.

Discussion

Agenda papers 11J to 11L were discussed together (see above).

New Zealand Accounting Standards Board (NZASB) staff’s approach to drafting disclosure requirements in IFRS Standards – Agenda Paper 11L

Overview of feedback received

Respondents provided fewer comments on this section of the DP.

Many respondents supported individual aspects of the NZASB staff’s approach to drafting disclosure requirements, for example, the explicit reference to the use of judgement and the use of less prescriptive language. However, they noted that many aspects will have to be clarified and tested before it can be applied in practice.

Overall, respondents had mixed views on the approach as a whole and had concerns about the Board developing it further. Instead, some thought that the Board should prioritise other activities to help address the disclosure problem.

Discussion

Agenda papers 11J to 11L were discussed together (see above).

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