Cover note (Agenda Paper 5)

At this meeting, the staff presented two papers to the IASB. The first paper related to the forthcoming IFRS Accounting Standard Subsidiaries without Public Accountability (the Subsidiaries Standard) where the staff asked the IASB for tentative decisions on proposed consequential amendments to the Subsidiaries Standard. The second paper related to due process and permission to begin the balloting process.

Subsidiaries without public accountability: disclosures (Agenda Paper 5A)

This IASB expects to publish the FICE Exposure Draft (the FICE ED) in the last quarter of 2023, before the issue of the new standard Subsidiaries without Public Accountability. The Subsidiaries Standard will permit eligible subsidiaries to apply IFRS Accounting Standards with reduced disclosure requirements. The ED for that Standard (the Subsidiaries ED) includes IFRS Accounting Standards issued up until February 2021 and it was decided that the IASB will consider amendments to the disclosure requirements on an ongoing basis after that.

This staff considered each of the disclosures tentatively decided in the FICE ED and reviewed them against the principles for disclosures in the Subsidiaries ED. The principles for reducing disclosure requirements applied by the IASB consider the information needs of users of non-publicly accountable entities and that these users find the following information useful: short-term cash flows, obligations, commitments and contingencies (whether or not recognised as liabilities); liquidity and solvency; measurement uncertainty, accounting policy choices (i.e. information about accounting policies chosen by the entity); and disaggregation of amounts.

The staff recommended that the FICE ED includes consequential amendments to the Subsidiaries Standard to add disclosure requirements consistent with those proposed in the FICE ED in the following areas:

• Terms and conditions debt-like and equity-like features—as these impact short term cash flows
• Passage-of-time changes—as these impact short term cash flows
• Instruments containing obligations to redeem own equity instruments—as these impact disaggregation of amounts and accounting policy choices
• Financial liabilities with contractual obligations to pay amounts based on the entity’s performance or net assets—as these impact disaggregation of amounts
• Significant judgements—as these impact accounting policy choices

The staff recommended that the FICE ED does not include consequential amendments to the Subsidiaries Standard to add disclosure requirements consistent with those proposed in the FICE ED in the following areas:

• Potential dilution—these are more relevant to investments decisions in public capital markets than to transactions and events encountered by eligible subsidiaries applying the Subsidiaries Standard
• Nature and priority of claims against an entity—This information impacts liquidity and solvency and may impact short or long term cash flows, however this additional information does not justify the additional cost of preparing and presenting this information
• Terms and conditions about priority on liquidation—This information is not a priority for eligible subsidiaries and does not meet the list of principles
• Disclosure objectives—this is not a disclosure requirement and therefore will apply to eligible subsidiaries applying the Subsidiaries Standard
• Other disclosures—initial allocation to debt and equity components; reclassifications on change in circumstances—these does not meet the list of principles

The staff asked the IASB if they agree with the staff’s recommendation for consequential amendments to the disclosure requirements for eligible subsidiaries.

IASB discussion

IASB members were largely in agreement with the proposals. They liked the use of the principles and said that the arguments in the paper are well balanced.

There was strong support to include nature and priority of claims against an entity in the Subsidiaries Standard. This affects two of the principles: short term cash flows, and liquidity and solvency as noted in the staff paper. The staff excluded this area as they believed the additional cost of preparing the information would outweigh the benefit, however IASB members said that this information would largely already be prepared at a consolidated level and would therefore not lead to significant additional cost.

For terms and conditions debt-like and equity-like features, the staff proposed only to include disclosures about ‘debt-like’ features in financial instruments that are classified as equity instruments and ‘equity-like’ features in financial instruments that are classified as financial liabilities. However, the IASB said that the requirement included within paragraph 12c of the paper should also be included (i.e. ‘debt-like’ and ‘equity-like’ features that determine the classification of such financial instruments as financial liabilities, equity instruments or compound financial instruments).

IASB members did not agree that the specific requirement, included in para 18(b)v of the paper (i.e. ‘the cumulative amount transferred within equity and the component of equity to which it was transferred, if any cumulative amount in retained earnings was transferred’), within instruments containing obligations to redeem own equity instruments was required as the impact is only on equity and does not affect short term cash flows.

Some IASB members also proposed that terms and conditions about priority on liquidation and potential dilution should also be included within the Subsidiaries Standard. The view was that for those subsidiaries with no complex instruments these disclosures would be straightforward and for those with complex instruments these disclosures would be useful to users.

IASB decision

All IASB members voted in favour of the staff’s recommendation with the following amendments:

• Include Nature and priority of claims against an entity
• Include the disclosure in paragraph 12c
• Remove the disclosure in paragraph 18bv

9 out of 14 IASB members voted in favour to also include Term and conditions about priority on liquidation in the Subsidiaries Standard

1 out of 14 voted in favour to also include Potential dilution in the Subsidiaries Standard

Due process and permission to begin the balloting process (Agenda Paper 5B)

The purpose of this paper was to:

• Propose a comment period of 120 days for the forthcoming ED of the proposed amendments to IAS 32, IFRS 7 and IAS 1
• Explain the steps in the IFRS Foundation Due Process that the IASB has taken in developing the proposed amendments seek the IASB’s permission for the staff to begin the process for balloting the forthcoming ED
• Ask if any IASB member plans to dissent from the proposals in the forthcoming ED

The staff asked the IASB if they agree with the recommendation to have a comment period of 120 days, if any IASB members intend to dissent from the proposals in the forthcoming ED and if the IASB is satisfied that it has complied with the applicable due process steps so that the staff can begin the process for balloting the forthcoming ED.

IASB discussion

The staff confirmed that they plan to release the ED in the second half of November. 

IASB decision:

All IASB members voted in favour of the staff recommendation to set a 120 day comment period.

One Board member plans to dissent from the proposals.

All of the IASB members gave permission for the staff to begin the process for balloting the forthcoming ED.