Feedback summary—Cover paper (Agenda Paper 11)
The purpose of this meeting was for the IASB to discuss the feedback from comment letters on Exposure Draft ED/2021/3 Disclosure Requirements in IFRS Standards—A Pilot Approach. The cover paper included the background to the project as well as the following summary of the key messages in the comment letters:
Almost all respondents agreed that the IASB should:
- Engage early with users of financial statements and other stakeholders when developing disclosure requirements in IFRS Accounting Standards
- Integrate development of disclosure requirements with the rest of the accounting model
- Consider implications for digital reporting.
Proposed approach and disclosure problem
A few respondents agreed that the proposed approach would help solve the disclosure problem. The Basis for Conclusions (BC) on the ED describes the disclosure problem as not enough relevant information, too much irrelevant information, and ineffective communication of the information in financial statements. However, most respondents thought the proposed approach would not solve the disclosure problem and entities would continue to apply a checklist approach to disclosing items of information specified in a standard, even if those items are not drafted as requirements. Some thought the proposed approach would, at best, help reduce disclosure of irrelevant information. Respondents generally felt that a change of behaviours across the entire financial reporting eco-system is required to resolve the disclosure problem.
Some respondents thought that the root cause of the disclosure problem is that entities do not make effective materiality judgments when applying the disclosure requirements in a standard. Instead of using the proposed approach to draft disclosure requirements, a few respondents suggested the IASB simply reinforce the need to apply materiality by including at the beginning of the disclosure section in every standard a cross reference to IAS 1. IAS 1 states that an entity need not provide a specific disclosure required by a standard if the information resulting from that disclosure is not material and should also consider whether to provide additional disclosures when compliance with the specific requirements in a standard is insufficient to enable users of financial statements to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance.
Use of disclosure objectives
Respondents generally agreed with the use of disclosure objectives to describe user information needs. While they supported the use of prescriptive language in relation to specific disclosure objectives that describe precisely the detailed information needs of users, they were concerned about using prescriptive language in relation to the overall disclosure objectives. Some respondents suggested that overall disclosure objectives be drafted as context-setting paragraphs rather than as prescriptive requirements.
Respondents said that the overall disclosure objectives and some specific disclosure objectives in the proposed amendments to IFRS 13 and IAS 19 were generic and would not assist preparers in assessing user information needs. They requested more precise objectives, more precise explanations of what the information will help users do, application guidance and examples to help entities identify user information needs.
Items of information
Most respondents expressed the view that the IASB’s proposal to use less prescriptive language when referring to items of information would likely make the disclosure requirements difficult to operationalise or enforce. They said that the language used in these proposals would create an undue burden for preparers in terms of the costs of implementing new processes and systems, involvement of senior staff, documentation of judgements and audit costs. Also, respondents were concerned that the proposals would lead to decreased comparability of information. Respondents were also concerned about the implications for digital reporting, and compliance with prescriptive requirements in financial reporting laws and regulations in certain jurisdictions.
Recommendation from respondents
Many respondents suggested the IASB develop a ‘middle ground’ approach to disclosures, whereby disclosure objectives would be accompanied by a prescriptive list of items of information that an entity should disclose to meet the objectives. However, a few respondents said that a middle ground approach will not solve the disclosure problem unless entities make effective materiality judgements in applying the disclosure requirements.
The IASB was not asked to make any decisions on any of the papers provided for this meeting.
The cover paper was not discussed.
Feedback summary—Guidance for the Board (Agenda Paper 11A)
This paper analysed the feedback from comment letters on the proposed Guidance for developing disclosure requirements in IFRS Accounting Standards.
Almost all respondents welcomed the proposals for the IASB to work closely with users of financial statements and other stakeholders in developing disclosure requirements. Also, many respondents welcomed the proposals for the IASB to include overall and specific disclosure objectives in disclosure requirements. Some respondents said the objectives were helpful because they enabled respondents to understand what information users want and why they want it—thereby helping them decide what information should be disclosed.
However, many respondents, particularly preparers and accountancy bodies, said the overall and specific disclosure objectives in the two test Accounting Standards (IFRS 13 and IAS 19) were too broad and vague, and were concerned that the prescriptive nature of overall disclosure objectives would lead an entity to disclose much information, some of which could be beyond the remit of financial statements. Some of these respondents suggested the IASB develop overall and specific objectives with more precision so that preparers can exercise better judgement in deciding the information to be disclosed. Some respondents, mainly preparers, disagreed with drafting overall disclosure objectives as requirements, and explicitly suggested the IASB continue to develop overall disclosure objectives as context-setting paragraphs similar to the approach taken in recent standards. These respondents also said that if there are enough specific disclosure objectives, there will be no need for a ‘catch-all’ overall disclosure objective.
A few respondents, including preparers, welcomed the move away from disclosing prescriptive items of information to meeting overall and specific disclosure objectives. These respondents thought the approach will encourage the use of judgement, enable preparers to provide entity-specific information and result in more useful disclosures for users and other stakeholders. A few respondents who agreed with the proposed approach said that their agreement was contingent on the IASB including an explicit explanation, in each standard, that the proposed items of information shall not be applied like a checklist. Preparers said that without such an explanation, the behaviours of auditors and regulators may prevent them from applying the proposed approach in the manner intended by the IASB. In addition, all stakeholders, including auditors, regulators, users, and preparers, would need to agree to apply disclosure requirements in the manner intended. Respondents agreed with the explanation in the BC that all stakeholders would need to play their part if the proposed approach is to be successful.
However, many respondents, including preparers, accountancy bodies, accounting firms and standard-setting bodies did not agree with the proposed approach and would prefer the IASB to continue requiring entities to disclose items of information. Respondents who did not agree with the proposed approach expressed concerns about:
- How to achieve compliance with objectives-based disclosure requirements. A few preparers were concerned that it would be impossible to disclose information that meets all needs of all users of the financial statements. These preparers said there are many different users and many different user needs, and the IASB is in a better position to turn those needs into disclosure requirements
- Whether the costs of applying the proposed approach exceed the benefits
- Whether the proposed approach would provide more useful information to users and other stakeholders, especially because of the potential loss of comparability of financial information across entities
- Whether the project objectives could be achieved in a less disruptive way, for example, by reinforcing the need to apply materiality judgements
Many respondents, including many regulators, suggested the IASB include a minimum list of required items of information to be disclosed to satisfy each specific disclosure objective. Conversely, a few respondents suggested reducing the number of items of information or removing them altogether—relying only on the disclosure objectives. Respondents also suggested that the IASB provide application guidance in each standard to help entities apply judgement in deciding the information to be disclosed.
IASB discussion
IASB members acknowledged the negative feedback received on the ED and discussed how to react to this. One IASB member said that the feedback indicates that the IASB needs to reach out to stakeholders earlier in the process to gauge whether there will be significant pushback on proposals. IASB members commented that branding disclosure requirements as “mandatory” and “non-mandatory” is not ideal. “Non-mandatory” disclosure requirements could become mandatory when they are relevant and material to the entity.
One IASB member said that the IASB may have misdiagnosed the disclosure issue, or that the disclosure issue has changed between the initial stages of the project and the ED. The feedback suggests that the issue is different now as the proposed response to the issue has been rejected. Nonetheless, there seemed to be support for continuing the project with a focus on disclosure objectives. However, it was suggested to abandon the two-tier system for objectives and to reconsider whether testing the guidance on IAS 19 and IFRS 13 was the right approach.
One IASB member touched on the legal and regulatory responsibilities of preparers, auditors and enforcers. Preparers are inclined to overdisclose to avoid legal challenge. Similarly, auditors may require certain immaterial disclosures to avoid regulator challenge. Therefore, more guidance on materiality may be needed, although it was acknowledged that there may be a conflict between materiality and digital reporting.
Feedback summary—IFRS 13 Fair Value Measurement (Agenda Paper 11B)
This paper analysed the feedback from comment letters on the proposed amendments to IFRS 13 included in the ED.
For assets and liabilities measured at fair value in the statement of financial position after initial recognition, many respondents agreed with the proposed overall disclosure objective. However, some respondents questioned whether the objective would result in the provision of more useful information than the current requirements because it is too generic and similar to the current disclosure objective in IFRS 13.
The specific disclosure objectives and items of information for assets and liabilities measured at fair value in the statement of financial position after initial recognition received a mixed response. A few respondents explicitly said these disclosure objectives and items of information would result in more relevant information for users about movements and uncertainties in fair value measurements. However, many respondents who commented said these disclosures should be restricted to Level 3 measurements, or Level 2 measurements that are closer to Level 3, to avoid irrelevant disclosures. Respondents were also concerned that extending the scope to measurements outside of Level 3 would require significant process changes—and thus additional costs—to collate this additional information.
Some respondents expressed concern about the clarity of the specific disclosure objective for assets and liabilities within each level of the fair value hierarchy.
Some respondents disagreed with the proposal to replace sensitivity analyses for changes in significant unobservable inputs with reasonably possible alternative fair value measurements. These respondents said such a disclosure would be difficult and costly to prepare, provide less useful information than a sensitivity analysis, and undermine the credibility of an entity’s fair value measurement.
For assets and liabilities not measured at fair value but for which fair value is disclosed in the notes, many respondents agreed with the proposed specific disclosure objective and items of information, while other respondents questioned the usefulness of such a disclosure.
IASB discussion
Many IASB members stated that there needs to be a clearer distinction in the responses and their evaluation between the proposed changes in framework and the proposed changes for the specific standards. They mentioned it was important to clarify whether the respondents’ comment was on the overall proposed disclosure framework or whether it applied to the specific proposed changes within IFRS 13. One IASB member said that the feedback on the specific standards needs to be considered regardless of the format of the disclosure requirements.
Two IASB members mentioned that the impact of the proposed changes on the convergence with US GAAP needs to be considered and that there must be explicit consideration of cost of moving away from a converged standard.
Many IASB members acknowledged the comment from a few respondents (specifically the preparers) that they were in disagreement with the proposal to replace sensitivity analyses for changes in significant unobservable inputs with reasonably possible alternative fair value measurements. They agreed that this would increase the cost for the preparers as well as undermine the credibility of the entity’s fair value measurement.
Some IASB members stated that they believe the current IFRS 13 requirements are enough and it might not be worth reopening the standard.
One IASB member mentioned that the feedback that the current disclosures from other standards such as IFRS 7 already provides useful information is only partly true for certain entities but cannot be broadly applied for all industries (such as real estate).
Some IASB members stated that the concern expressed by some respondents, especially banks, related to the proposal to extend the objective to measurements other than Level 3, must be carefully considered. One IASB member said that the respondents’ suggestions to provide additional and/or prescriptive guidance on the level of significance of unobservable inputs; or on determining when a Level 2 measurement is ‘close’ to Level 3 was counter-supportive to the objective based approach. One IASB member said that it must be clarified that the proposed Level 2 measurement requirements are applicable for only those Level 2 investments that are close to Level 3 and that this population must be clearly defined.
Feedback summary—IAS 19 Employee Benefits (Agenda Paper 11C)
This paper analysed the feedback from comment letters on the proposed amendments to IAS 19 included in the ED.
A few respondents supported the objective-based approach in the IAS 19 proposals rather than prescriptive disclosure requirements and said that the IAS 19 proposals would enable entities to identify information that users need.
In relation to defined benefit plans:
- A few respondents agreed with the proposed overall disclosure objective. However, some respondents said the overall disclosure objective is too broad to identify user information needs and help an entity precisely determine what information would satisfy those needs.
- Some respondents said the disclosures resulting from applying the proposed overall disclosure objective together with the proposed specific disclosure objectives would not be significantly more useful than those resulting from applying the current requirements of IAS 19.
- Respondents generally supported the specific disclosure objectives with some concerns about whether the specific disclosure objective that requires disclosure of the nature of, and risks associated with, defined benefit plans is precise enough to help an entity identify and disclose more relevant information.
- A few respondents suggested the IASB combine the specific disclosure objective that requires disclosure of amounts in the primary financial statements and the specific disclosure objective that requires disclosure of reasons for changes in the amounts recognised in the statements of financial position.
- Most respondents did not agree with the specific disclosure objective that requires disclosure of future payments to members of defined benefit plans that are closed to new members.
- In relation to the items of information, respondents did not support the proposed disclosure of deferred tax asset or liability arising from defined benefit plans, the expected return on the plan assets, and alternative actuarial assumptions reasonably possible at the end of the reporting period that could have significantly changed the defined benefit obligation.
In relation to defined contribution plans, some respondents agreed with the proposed overall disclosure objective. A few respondents disagreed with the proposal and suggested retaining current IAS 19 disclosure requirements.
In relation to other types of employee benefit plans, some respondents agreed with the proposed overall disclosure objective. A few respondents said the proposed objective is generic and suggested the IASB develop items of information to meet the proposed objective.
In relation to multi-employer plans and defined benefit plans that share risks between entities under common control, a few respondents agreed with the proposals. Some respondents expressed concerns about combining the overall disclosure objective for defined contribution plans with the specific disclosure objective for defined benefit plans. They suggested the IASB either develop guidance to help an entity satisfy the proposed objectives or develop separate disclosure objectives for multi-employer plans and defined benefit plans that share risks between entities under common control.
IASB discussion
Some IASB members acknowledged that the overall feedback seemed to be that the proposed changes will not improve the information users already get from the current disclosures of IAS 19.
One IASB member stated the need to group the comments received to identify the substance of proposed changes to the disclosure requirements to what was needed to operationalise the proposed approach. They also mentioned it would then be needed to understand how strongly the respondents feel on whether a proposed change is crucial.
Some IASB members mentioned that some respondents said that there is no need for much information on defined contribution plans. The focus is more on defined benefit plans and what other information might be required related to them.
Some IASB members noted that many respondents were in disagreement with the proposed disclosure of alternative actuarial assumptions and suggested that the requirement for an entity to disclose a sensitivity analysis for each significant actuarial assumption should be retained.
One IASB member noted that he appreciated the comment to combine the executive summary with the proposed specific objective requiring disclosure of the reasons for changes in the amounts recognised in the statement of financial position for defined benefit plans.
One IASB member stated that most respondents generally supported the proposed specific objectives and suggested that these could be added. Another IASB member noted that some of the current disclosure requirements of IAS 19 are very generic and are perhaps already covered under other standards such as IAS 1.