Background

The feedback on the Board's DP on Principles of Disclosure suggested that guidance is required to assist entities in determining which accounting policies to disclose. It was noted that the application of materiality is key to deciding which accounting policies to disclose, however IAS 1 Presentation of Financial Statements does not refer to materiality but states that ‘[a]n entity shall disclose its significant accounting policies' without the Board providing a definition for the term ‘significant’.

Therefore, the Board decided to develop amendments IAS 1 to require entities to disclose their material accounting policies rather than their significant accounting policies. To support this amendment the Board has also developed guidance and examples to explain and demonstrate the application of the ‘four-step materiality process’ described in IFRS Practice Statement 2 Making Materiality Judgements to accounting policy disclosures.

Changes

Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS Practice Statement 2) amends IAS 1 in the following ways:

• An entity is now required to disclose its material accounting policy information instead of its significant accounting policies;
• several paragraphs are added to explain how an entity can identify material accounting policy information and to give examples of when accounting policy information is likely to be material;
• the amendments clarify that accounting policy information may be material because of its nature, even if the related amounts are immaterial;
• the amendments clarify that accounting policy information is material if users of an entity’s financial statements would need it to understand other material information in the financial statements; and
• the amendments clarify that if an entity discloses immaterial accounting policy information, such information shall not obscure material accounting policy information.

In addition, IFRS Practice Statement 2 has been amended by adding guidance and examples to explain and demonstrate the application of the ‘four-step materiality process’ to accounting policy information in order to support the amendments to IAS 1.

Effective date and transition

The amendments are applied prospectively. The amendments to IAS 1 are effective for annual periods beginning on or after 1 January 2023. Earlier application is permitted. Once the entity applies the amendments to IAS 1, it is also permitted to apply the amendments to IFRS Practice Statement 2.

Dissenting opinion

Board member Françoise Flores dissented from issuing the final amendments. Ms Flores believes that stating that accounting policy information is material even if it is standardised or duplicates the requirements of IFRSs if the underlying accounting is complex and users of the entity’s financial statements would otherwise not understand material transactions, other events or conditions stretches the concept of materiality beyond its intended scope and undermines the overall aim of the amendments, which is to help an entity reduce the disclosure of immaterial accounting policy information.

Additional information

Please click for:

• IASB press release (link to IASB website)
• Our UK Accounting Plus Project page on Disclosure initiative — Accounting policies
• Our related Need to know publication
• Updated EFRAG endorsement status report

Background

In May 2020, the IASB issued Covid-19-Related Rent Concessions (Amendment to IFRS 16). The pronouncement amended IFRS 16 Leases to provide lessees with an exemption from assessing whether a COVID-19-related rent concession is a lease modification. On issuance, the practical expedient was limited to rent concessions for which any reduction in lease payments affects only payments originally due on or before 30 June 2021.

Since lessors continue to grant COVID-19-related rent concessions to lessees and since the effects of the COVID-19 pandemic are ongoing and significant, the IASB is now proposing to extend the time period over which the practical expedient is available for use.

Suggested changes

The changes proposed in ED/2021/2 Covid-19-Related Rent Concessions beyond 30 June 2021 (Proposed amendment to IFRS 16) would amend IFRS 16 to

1. permit a lessee to apply the practical expedient regarding COVID-19-related rent concessions to rent concessions for which any reduction in lease payments affects only payments originally due on or before 30 June 2022 (rather than only payments originally due on or before 30 June 2021);
2. require a lessee applying the amendment to do so for annual reporting periods beginning on or after 1 April 2021;
3. require a lessee applying the amendment to do so retrospectively, recognising the cumulative effect of initially applying the amendment as an adjustment to the opening balance of retained earnings (or other component of equity, as appropriate) at the beginning of the annual reporting period in which the lessee first applies the amendment; and
4. specify that, in the reporting period in which a lessee first applies the amendment, a lessee is not required to disclose the information required by paragraph 28(f) of IAS 8.

Comment period

The IFRS Foundation's Due Process Handbook sets out that 75% of the Trustees must approve comment periods shorter than 30 days. The Trustees approved a 14-day comment period. Therefore, comments on the proposed changes are requested by 25 February 2021.

Effective date

The Board expects to finalise the amendment by the end of March 2021 and proposes an effective date of 1 April 2021 for the final amendment (earlier application permitted, including in financial statements not yet authorised for issue at the date the amendment is issued).

Alternative view

The exposure draft includes an alternative view by Board member Nick Anderson. Mr Anderson voted against publication of the exposure draft noting that when the practical expedient was initially offered, its application was limited to a very specific timeframe. Extending the period during which the practical expedient is available would further impede comparability between lessees that apply the practical expedient and those that do not.

Additional information

Please click for:

• IASB press release (link to IASB website)
• Access to the exposure draft on the IASB website
• Our UK Accounting Plus project page on IFRS 16 and COVID-19 — Extension of practical expedient
• Our related Need to know publication

The research papers are due by 15 May 2022. Selected research papers will be featured at a joint conference on 2–4 November 2022 and considered for potential publication in the TAR. For more information, see the press release on the IASB’s website.

A recording of the virtual workshop is now available. It can be accessed here on the IASB website.

We welcome this thought leadership paper and the opportunity to reflect on the current reporting system in the UK. We believe that the Paper is timely given the significant pace of development in the UK and global corporate reporting landscape.

While we welcome the aspiration to simplify the corporate reporting landscape to drive accessible, meaningful information for stakeholders, we have significant concerns about the primary outcome being focused on promoting separate reports as set out in the paper. Key points we make in our response include:

• Connectivity: Reporting affects business behaviour. In our view, the approach to corporate reporting of the future set out in the Paper adversely impacts the critical connectivity that exists between non-financial and financial reporting, driving fragmented and siloed strategic behaviour - a step back from the move towards integrated thinking that Deloitte advocates. The narrative must be connected to judgements and estimates in the financial statements. Separating this narrative would be wrong, and including it twice is a duplicative and expensive exercise.
• Dilution of board focus: There is a risk that the silo approach may also result in diluting a Board’s focus if separate reports end up at different committees rather than being overseen as a whole by the audit committee. For example, the Public Interest Report may go to a governance committee and the business report to the Executive Committee and then maybe straight to the main Board, thereby reducing the overall level of scrutiny.
• Audience: The focus of UK annual reports on providers of financial capital as a primary audience is consistent with integrated reporting and the focus of other current global developments. This must remain the priority in order to direct capital to sustainable and resilient business. We believe investors should have easy access to the information that is relevant to their needs and not have to piece together various reports prepared to differing materialities. We are concerned that purely objective-driven reporting, as proposed in the Paper, would be unlikely to lead to the right outcome: although different users of a report may have the same overriding objective or interest in a topic, as the Paper suggests, we believe the needs of users from different stakeholder groups will vary as a result of the different lenses through which the users are viewing the information they are using.
• Materiality: The distinction between a) users with the objective of making economic decisions, and b) the broader user group focusing on the impacts a business has, is articulated clearly as a “dynamic” and “nested” approach to materiality of sustainability information in recent joint publications by CDP, CDSB, GRI, IIRC and SASB e.g. their Statement of Intent to Work Together Towards Comprehensive Corporate Reporting. We believe this approach to be consistent with that of the FRC to date and that it is a compelling starting point as to how a future system of comprehensive corporate reporting might be designed.
• Assurance: Assurance is an important contributor to trust, but for this to be the case clarity is needed regarding what level and quality of assurance each piece of information is subject to. We strongly feel that the quality of assurance over the connected ‘enterprise value’ report whose primary user is the shareholder is best delivered holistically by the auditor, recognising that the majority of the value of a company is represented by intangible factors which are currently discussed in the front half of the annual report. However, there is real opportunity for ‘non enterprise value’ data points required by broader stakeholders to be assured by other providers, subject to comparable independence and quality requirements. This approach could promote more choice and competition in the market and should link to the Audit and Assurance Policy recommendation from Brydon. It is critical that the market has clarity on the scope and quality of assurance that is applied to reported data.

The full response is contained within the comment letter.

The IASB's project on Common control transactions is designed to address accounting for transactions between entities that are ultimately controlled by the same party or parties (so-called 'common control transactions').

In its draft comment letter on the discussion paper published in November 2020, EFRAG

• supports the proposed scope of the discussion paper but considers that the IASB should better define 'group restructurings' without labelling them Business Combinations under Common Control (BCUCC) when they do not meet the description of a business combination in IFRS 3 Business Combinations;
• agrees that a single measurement method is not appropriate for all BCUCC and supports the two concepts of acquisition method and book-value method but proposes a few modifications to the IASB’s decision tree on when to apply each method;
• generally agrees with the IASB's proposals on how to apply the two methods but is consulting constituents on certain aspects of both methods;
• supports the proposed disclosure requirements for BCUCC accounted for under both the acquisition method and a book-value method.

Comments on EFRAG's draft comment letter are requested by 30 July 2021. For more information, see the press release and the draft comment letter on the EFRAG's website.

The webinars lasted approximately 60 minutes and consisted of an overview of the standard’s objectives and related research opportunities, followed by questions and answers.

For more information, see the press release on the IASB’s website.

The event will focus on the views of European investment decision-makers and information that they consider important in this area. The audience will be able to contribute to the discussion through polling questions and Q&A sessions. 

For more information and registration, please see the press release on the EFRAG website.

A recording of this webinar was released on 8 March 2021.

A summary report on the webinar was released on 12 May 2021.

In the short article he draws attention to the following disclosure practices and names a number of companies where he believes these practices have been displayed effectively:

• provision of concise yet rigorous analysis of how the Principles have been applied using cross-referencing to other parts of the Directors’ Report for further detail;
• reference to the Principles as a guide for reviewing and, where appropriate, improving governance arrangements;
• wholly-owned subsidiaries applying the Wates Principles and commenting specifically on how they apply to the subsidiary, rather than just referring to their holding company’s governance standards; and
• clear description of examples of issues that the board is grappling with.

There are two matters which Sir James cites as being “some disappointments”. Similar to previous Financial Reporting Council (FRC) comments on reporting on the UK Corporate Governance Code, there is reference to companies not fully embedding Purpose in their organisation and failing to provide specific examples of how the purpose has actually guided Board-level discussions and decisions. There is also criticism of companies who fail to make the Corporate Governance report easily accessible on their website.

In a final comment Sir James commends some common sense principles of good communication that he believes should apply to all corporate governance reporting:

• Brevity, Comprehensibility and Usefulness
• Relevance
• Company-specific
• Comparability

The full article is available via the FRC website here.

A summary of the agenda is set out below:

Agenda papers for the meeting will be made available on the IASB website.