Disclosure Initiative — Subsidiaries without Public Accountability: Disclosures

Date recorded:

Cover Paper (Agenda Paper 31)

In July 2021, the IASB published Exposure Draft ED/2021/7 Subsidiaries without Public Accountability: Disclosures which sets out the IASB’s proposal for a new IFRS Accounting Standard that would permit an eligible subsidiary to apply reduced disclosure requirements when applying IFRS Accounting Standards.

Objective of the draft Standard (Agenda Paper 31A)

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.

Staff analysis

Costs and benefits to subsidiaries and the group

In deciding whether to apply the standard an eligible subsidiary would consider:

  • Its current financial reporting framework
  • Its significance to the group
  • The financial reporting processes of the subsidiary and the group

There may also be other factors to consider, for example if the local GAAP is aligned with local tax laws and legislation.

Effects on users of the financial statements

The IASB expects that the draft standard will retain the usefulness of the financial statements for users of these eligible subsidiaries’ financial statements. Further, a parent can request additional information from its subsidiaries at any time:

Based on interviews with lenders during the development of the ED, lenders use financial statements as a verification tool when making lending decisions about entities without public accountability and can request additional information (e.g. about future cash flow information).

Staff view

The cost-benefits assessment may differ depending on the circumstances of the eligible subsidiary. If the costs of applying the draft standard do not justify the benefits, the subsidiary would choose to not apply the draft standard.

The proposed disclosure requirements in the draft standard are developed to address the needs of users of subsidiaries’ financial statements. Transition from IFRS Accounting standards to the draft standard will eliminate disclosure requirements designed for publicly accountable entities.

Most respondents agreed with the objective as proposed in the draft standard and reiterated the expected benefits of the proposals. Consequently, the staff think that the feedback supports retaining the objective in the draft standard.

Staff recommendations

The staff recommended that the IASB confirms the proposed objective of the draft standard.

IASB discussion

Most respondents agreed with the objective proposed in the draft standard. The purpose for the change is to reduce the costs and simplify the preparation of financial statements for eligible subsidiaries without losing useful information to the users of financial statements.

Some IASB members noted that the benefit of the standard would depend on various factors including relevant jurisdictions and current accounting frameworks.

One IASB member expressed a concern about users of financial statements being expected to rely on supplementary information, e.g. lenders requesting cash flow projections. They suggested the focus should be on the requirements of the standard instead of considering information that may be available through other means.

One IASB member expressed a concern about the cost-benefit assessment being related to “a subsidiary’s importance to the group”. The materiality will be defined by subsidiary, and this will be separate from the materiality for the information they need to report to the parent company.

Approach to developing the proposed disclosure requirements (Agenda Paper 31B)

This agenda paper discussed the feedback on the approach to developing the proposed disclosure requirements in the draft standard.

Staff recommendations

The staff recommended that the IASB:

  • Modify the approach to developing the proposed disclosure requirements in the draft Standard to ensure that the language used in the disclosure requirements are the same as in IFRS Accounting Standards
  • Explain in the Basis for Conclusions to the standard:
    • Why the disclosure requirements in the IFRS for SMEs Accounting Standard are an appropriate starting point
    • How cost-benefit considerations are taken into account
    • The reason for the exceptions made to the approach

IASB discussion

IASB members discussed that using full IFRS or the IFRS for SMEs Accounting Standard as the starting point for the new standard would ultimately end in the same result. In particular, a number of IASB members stated that the IFRS for SMEs Accounting Standard would not necessarily follow developments in the new standard.   

IASB members agreed that the language should be consistent with IFRS Accounting Standards as this will be part of the set of standards.

One IASB member expressed a concern about users expecting that the IFRS for SMEs Accounting Standard to follow the evolution of the new standard. However, other IASB members made it clear that the two standards should be independent. It was noted however that it would be efficient to consider updates to the new standard when considering updates to the IFRS for SMEs Accounting Standard. 

IASB decision

11 out of 11 agreed with the staff recommendation. 

Addressing comments on proposed disclosure requirements (Agenda Paper 31C)

The agenda paper outlined the staff’s recommended process to address comments on the proposed disclosure requirements in the draft standard.

Staff recommendations

The staff recommend that the IASB applies the following process:

  • Step 1—stratify the comments on the proposed disclosure requirements based on how the requirements were developed
  • Step 2—assess comments against a set of factors: consider principles on users’ information needs of non-publicly accountable entities’ financial statements, cost–benefit considerations, distribution of the comment, overall usefulness of information and previous IASB discussions and decisions on the topic
  • Step 3—recommend changes to the proposed disclosure requirements in the draft standard.

IASB decision

There was no significant discussion on this topic. All IASB members agreed with the staff recommendations.

Structure of the draft Standard (Agenda Paper 31D)

This agenda paper discussed the feedback on the structure of the draft standard and asked the IASB to decide on the structure of the standard, proposed in the ED.

Staff recommendations

The staff recommended that the standard:

  • Omits Appendix A proposed in the ED—that lists the disclosure requirements in other IFRS Accounting Standards replaced by the standard
  • Includes within the main body of the standard a paragraph that cross-references to disclosure requirements in other IFRS Accounting Standards that remain applicable, replacing those footnotes related to disclosure requirements that remain applicable proposed in the ED

IASB discussion

Some IASB members expressed the view that Appendix A should be retained, because it provided clarity on how to apply the standard and would facilitate a gap analysis between the full and reduced disclosure requirements. Appendix A would be particularly helpful to users who prepare or audit full disclosure and subsidiary disclosures. Some IASB members believed that Appendix A would potentially create confusion about the requirements of the new standard. Other IASB members expressed concerns about the burden of maintaining Appendix A for future changes in other standards.

Some IASB members suggested that if Appendix A were removed, an alternative framework would be required. Strong opinions were expressed on both sides. It was noted that further work was required on the transitional provisions before the issue could be finally decided.   

IASB decision

7 out of 11 agreed to omit Appendix A proposed in the ED.

11 out of 11 agreed to replace the footnotes with cross-references to disclosure requirements that remain applicable in other IFRS Accounting Standards, under each IFRS Accounting Standard subheading. 

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