Cover Paper (Agenda Paper 31)

Background

At its June 2022 meeting, the International Accounting Standards Board (IASB) agreed on a project plan for redeliberating the Exposure Draft Subsidiaries without Public Accountability: Disclosures (ED) towards developing an IFRS Accounting Standard (Standard).

At this meeting, the IASB continued its redeliberations considering feedback on aspects of the proposed scope of the draft Standard.

Scope of the draft Standard (Agenda Paper 31A)

Background

This agenda paper discussed the feedback on the proposed objective of the draft Standard and asks the IASB to confirm the proposed objective of the draft Standard.

In line with the project plan, the IASB was asked to discuss feedback on other aspects of the proposed scope of the draft Standard as set out in the ED, including:

• Whether subsidiaries are required to be a ‘subsidiary at the end of the reporting period’
• Whether subsidiaries are required to have an ultimate or intermediate parent that produces consolidated financial statements that comply with IFRS Accounting Standards and are ‘available for public use’

Staff analysis

Subsidiary at the end of the reporting period

• The request to permit an entity that has ceased to be an eligible subsidiary close to the end of the reporting period to apply the draft Standard was restricted to outreach events
• Whilst it could be argued the information needs of users are similar, the staff think if entities that have ceased to be subsidiaries at the end of the reporting period are permitted to apply the Standard, this is ‘scope creep’ on the project objective
• Furthermore, participants in outreach events did not suggest how the IASB should determine the period an entity would have ceased being an eligible subsidiary prior to the end of its reporting period. If the scope proposed in the draft Standard were changed, it is likely this period would be arbitrary and some may argue the period is unfair

Ultimate or intermediate parent producing consolidated financial statements that comply with IFRS Accounting Standards

• Interaction of the requirement with the project objective:
  • Permitting subsidiaries without public accountability to apply the Standard regardless of the GAAP applied by its parent entity deviates from the project objective
  • It is questionable whether the cost-benefit analysis would be similar if the subsidiary’s parent entity does not comply with IFRS Accounting Standards because the subsidiary or the parent would have to maintain two sets of accounting records
  • Arguably, there may still be benefits to applying the Standard where IFRS Accounting Standards are required to be applied by all entities in a jurisdiction
• IFRS Equivalence:
  • The staff did not support the suggestion to permit subsidiaries without public accountability to apply the Standard if they apply a GAAP equivalent to IFRS Accounting Standards

Available for public use

• Use of ‘available for public use’ in other IFRS Accounting Standards:
  • The terms 'public use' and 'available for public use' are not defined in IFRS Accounting Standards
• Clarifying the requirement ‘available for public use’:
  • Providing guidance could have unintended consequences on the application of the term. For example, create conflict with existing regulations or practices
• Removing the requirement ‘available for public use’:
  • The IFRS for SMEs Accounting Standard does not require the ultimate or intermediate parent's consolidated financial statements to be 'available for public use'
  • Removing the requirement for the parent's financial statements to be 'available for public use' from the scope of the draft Standard may enable more subsidiaries to be eligible to apply the Standard and thereby benefit from the Standard

Staff recommendations

The staff recommended that the IASB:

• Confirms that subsidiaries eligible to apply the Standard:
  • Are a ‘subsidiary at the end of the reporting period’
  • Have an ultimate or intermediate parent that produces consolidated financial statements complying with IFRS Accounting Standards
• Does not proceed with the proposal that the parent’s consolidated financial statements are ‘available for public use’

IASB discussion

Subsidiary at the end of the reporting period

Some IASB members expressed support to include some form of transitional provision to reduce the cost burden for reporting entities that cease to be qualifying subsidiaries part way through a reporting period, and/or the time pressure for entities that cease to qualify close to the end of the reporting period. Most IASB members, however, expressed a preference for retaining the requirement, primarily due to their concerns over setting an inherently arbitrary cut-off period and other technical challenges that would be encountered in the design of such a transitional a provision. Some IASB members questioned whether dropping the requirement would provide preparers any significant cost savings. It was generally agreed that the approach recommended by the staff avoided the need for any subjective interpretation.

Ultimate or intermediate parent producing consolidated financial statements that comply with IFRS Accounting Standards

Some IASB members highlighted the potential cost saving benefits of extending the scope of the new Standard to non-IFRS parents, noting that if the main purpose of the project is cost saving it would make sense to extend the scope. A number of IASB members had, however, always understood the scope of the project to be limited to subsidiaries of IFRS reporting entities and noted that the project may have reached different conclusions had it had a wider scope from the start. A number of concerns were raised about scope creep. It was noted that if the parent reported under another GAAP, the cost savings would not be so significant because the subsidiary would still need to maintain two sets of books for recognition and measurements purposes; one for its parent’s GAAP and one for IFRS. A number of members raised the issue of IFRS equivalence and questioned whether the IASB was in a position to define this across a large number of potentially qualifying GAAPs. Some felt that this role was more appropriate to regulators.

Available for public use

There was no strong majority view on this topic, and some members reported that the debate had changed their views on the matter. A number of members highlighted the difficulty in defining “available for public use”, notwithstanding that this terminology is already present in IFRS 10. It was noted that a recent review of IFRS 10 had not highlighted any particular concerns about interpretation of the term, whilst others noted that the term was generally seen as problematic. Some noted an apparent inconsistency in purpose between requiring qualifying subsidiaries to have IFRS reporting parents, whilst not requiring that entities accounts have to be available for public use. Balancing this, a number of members noted that the original cost saving objective of the project was not limited to IFRS groups that make their accounts available for public use.

IASB decision

10 out of 11 agreed with the staff recommendation to confirm that subsidiaries eligible to apply the Standard are a ‘subsidiary at the end of the reporting period’.

11 out of 11 agreed with the staff recommendation to confirm that subsidiaries eligible to apply the Standard have an ultimate or intermediate parent that produces consolidated financial statements complying with IFRS Accounting Standards

6 out of 11 agreed with the staff recommendation to not proceed with the proposal that the parent’s consolidated financial statements are ‘available for public use’.