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Disclosure Initiative

Date recorded:

The IASB discussed the following agenda papers:

11A Principles of Disclosure – Format of information in the notes

The purpose of this agenda paper was to seek the views of the IASB on several issues regarding the format of information in the notes to the financial statements.

The Technical Manager introduced the agenda paper, and asked the IASB members whether they agreed with the staff recommendations in the agenda paper that the IASB should provide:

a)      Further high level guidance on the use of formats which are applicable across IFRS; and

b)      Educational material on formatting

An IASB member noted that he agreed with the staff recommendations, but questioned whether this guidance was really necessary.  He acknowledged that the outreach that had been performed indicated that something was needed, and noted that it was impossible to provide detail level instructions in this area, and that the staff had come up with something at the right level.   He noted that he was wary about graphs and charts for the reason of precision, and suggested the question could be asked in the Discussion Paper whether they should be discouraged unless they could be shown with pretty high levels of precision.

Another IASB member noted that he agreed that educational materials could be helpful, but noted that he had mixed feelings about the idea of having a Standard on this topic as one characteristic of standards was that they should be enforceable, and this was difficult to achieve with very high level guidance.  Accordingly, he suggested this material was better suited to educational materials, but cautioned that the IASB was not in the business of communication, and that this aspect was more for preparers to deal with.  With respect to narrative text, he suggested that the IASB also include in paragraph 34 of the agenda paper the point that narrative text was needed in circumstances where there was a complex judgement in terms of quantifying a risk of litigation claims in addition to the quantitative data, as a lot of judgement was required in quantifying such risks.

The Chairman noted that the whole disclosure project WAS about communication, and the IASB was in the communication business.

Another IASB member pointed out that the IASB could not standardise communication, but they could help to better communication.

The Chairman noted that there had been discussions in small group meetings with respect to non-GAAP measures and how these were getting mixed with IFRS, and noted that the IASB needed to be much more prescriptive about what could and could not be done.  He noted that the shape in which financial information was reported was very important and that, although it was ultimately the responsibility of the preparer, the IASB had some responsibility to make it more difficult for preparers to cover up information.

Another IASB member noted that in some jurisdictions educational materials were required to be used as best practice and compliance with such materials was seen as necessary in order to comply with IFRS.  He also noted that it could be time consuming to develop educational materials, and that a lot of materials were already available, particularly from the big accounting firms who provided annual ‘best practice’ model financial statements, and noted that the IASB should bear this in mind. He further questioned how developing prescriptive guidance would interrelate with XBRL and how formatting of notes would be judged appropriate or not under XBRL.

The Technical Manager responded and noted that XBRL should not impact how an entity formatted its financial statements in paper format.  She noted that formatting in XBRL was less important compared to paper based reporting, as users could decide how they wanted to view the information in XBRL.

Another IASB member noted that there was a big difference between graphs and charts.  He noted that graphs did not provide any additional incremental information, they existed to enable readers to visualise the numbers, and could be used as tools to ‘mislead’ readers through the manipulation of scales and other aspects of the graph.  He noted that charts, on the other hand, could actually provide better information, than narrative text.  He further noted that he believed such points could be explained in educational material, and that he supported the staff recommendation to provide high level rules, and to develop educational material to provide further guidance.

Thirteen of the fourteen IASB members supported the staff recommendations in the agenda paper.

11B Principles of Disclosure – Cross-referencing - Disclosing IFRS information outside the financial statements

This agenda paper built on the IASB’s discussion on cross-referencing at its meeting in July.  The agenda paper addressed the concerns and questions raised by some IASB members about the staff’s initial proposals on when it might be appropriate to present information required by an IFRS outside the financial statements, and use cross-referencing to incorporate it into financial statements.

The Technical Manager introduced the agenda paper and asked the IASB members whether they agreed with the staff recommendations set out in the agenda paper.

An IASB member noted that although he did not disagree with the objective, he was concerned with respect to the ability of the IASB to formulate a Standard on this issue, and whether such guidance would be able to be enforced.

Another IASB member noted that he agreed with the staff recommendation.  He observed that paragraphs X3 and X4 were critical and that his interpretation of these paragraphs was that presenting information required by IFRSs outside of the financial statements would be a rare occurrence.  He noted that he believed this was a good outcome based on the outreach he had performed over the past five years or so on major projects, where one of the things he heard consistently from investors, was that it was very helpful to see all the information in one place, as it enhanced comparability and understandability. 

Another IASB member questioned what the staff meant in the last sentence of paragraph X3.

The Project Manager responded, and noted that the staff had used the term non-IFRS here as annual reports were comprised of the financial statements and then other information such as management commentary, directors’ reports, and other reports, and it was the latter items that the staff was referring to by the term non-IFRS.  He acknowledged that the IASB needed to be careful with this term, and that it might be necessary to explain further the meaning of this term.  He noted that it had been used merely to highlight the fact that an annual report had different components and that a preparer could also consider including some information required by IFRS in these other reports that were also part of the whole annual report package. 

The Vice-Chairman questioned whether the scope of when it would be appropriate to present information required by an IFRS outside of the financial statements was a bit narrow.

The Project Manager responded, and noted that the staff was concerned that preparers could apply the permission given too widely, and that the staff’s preference was to limit the scenarios in which it was appropriate to disclose information required by IFRS outside the financial statements.

Another IASB member noted that he also shared the concerns expressed by another IASB member with respect to enforceability where requirements were vague.  He suggested that the staff deleted the word “generally” from paragraph X3, questioning how this word would be audited.  The Project Manager noted that this word could be taken out to make the requirement more prescriptive.

Another IASB member expressed concerns with providing permission to include information required by IFRS anywhere in an annual report.  She noted that this permission should be limited to management commentary to address concerns about fragmentation.  She suggested that the permission provided should state that items that were required to be disclosed could be presented either in the financial statements or in management commentary with a cross reference to the financial statements, rather than providing specific permission to do cross referencing.  She added that this way, the IASB could make decisions at a standards level to expand the possible placement.

Another IASB member observed that the annual report would be described as a single reporting package, and that often the annual report included the glossy, a regulatory filing containing other information, and a proxy statement, which was often filed 30 or 40 days after the first two.  He questioned whether the annual report needed to be a package that was delivered to the regulatory authority and shareholder at the same time.

The Project Manager responded, noting that, as stated in paragraph X1, it was clearly the intention that the information was available to users on the same terms as the financial statements and at the same time.

An IASB member noted that this was an important distinction for IFRS filers in the US because they would not be able to include information in the proxy statement that they otherwise would if the proxy statement was going to be filed later.

Another IASB member noted that he believed this was a good step as reporting packages continued to expand, and there was a lot of duplication within them.  He stressed the importance of the IASB talking with the IAASB to ensure they were in the same place with respect to what was viewed as auditable.

Another IASB member thought that it was too narrow to look only at the annual report, pointing out that the same cross-referencing should be allowed in interim reports also.  He noted that if financial statements were issued together with other documents in one report, then cross-referencing should be allowed.

Another IASB member noted that what the staff was proposing was a pragmatic way of trying to reduce duplication, and that, similar to other IASB members, believed that presenting information required by IFRS outside of the financial statements should be a rare occurrence rather than the norm.  She stressed the importance of emphasising that the information needed to be available on the same terms and at the same time.  She asked the staff to clarify whether the final sentence in paragraph X3 meant that if an entity had a disclosure requirement in IFRS 7 to provide information about a particular risk, and somewhere else in the annual report there was a longer explanation of risk that included that disclosure and other things, that the entity could satisfy the IFRS 7 disclosure requirement by cross-referencing to the longer explanation.  The Project Manager confirmed that this understanding was correct.

Another IASB member noted that he did not believe it was the IASB’s job to set a boundary for an annual report.  The Technical Manager responded and noted that the staff was only using the description of an annual report as a way to permit where required information could be disclosed, rather than stating what an entity’s annual report had to be.  She further noted that it aligned with the IAASB’s proposed definition of an annual report.

In response to a comment raised by an IASB member with respect to concerns about different definitions of an annual report in different jurisdictions, the Senior Director, Technical Activities noted that he did not believe this mattered as the principle was that it was clearly identifiable as one package of reports where everything was together, and available at the same time and on the same terms.

Another IASB member noted that if the IASB permitted preparers to satisfy disclosure requirements specified in IFRS with information required by another source, they needed to make it clear that the information should be prepared on the same basis as that required by IFRS. 

She also questioned the degree of integration that would result from the proposal.  She noted that auditors were concerned with auditing only part of a note, and that this could limit the ability to have integrated discussions, because if auditors needed to perform additional procedures to cover the broader discussion, this could be an economic incentive for entities not to move information around.  She emphasised the importance of the IASB talking early and often with the IAASB.

Twelve of the fourteen IASB members agreed with the staff recommendations in the agenda paper, subject to removal of the word “generally” from the final sentence of paragraph X3.

11C Disclosure Initiative – Materiality

The purpose of this agenda paper was to provide analysis on four issues about how to move forward with the materiality research project, and to ask the IASB to discuss these issues, and whether they agreed with the staff recommendations in the agenda paper.

Issue 1:  Do we need to change the current definition of materiality?

The Senior Director, Technical Activities confirmed that the staff recommendation was for the current definition to be retained, but the question was to be asked in the Discussion Paper whether constituents thought that the IASB should reconsider the definition of materiality.

The Chairman cautioned that making a change could result in people thinking there was something more significant behind the change than the IASB intended.

An IASB member noted that he believed this was an important issue that the IASB should discuss further.  He observed that the current wording [“could”] could result in a range of possibilities.  He noted that introducing wording along the lines of that in paragraph 18 of the agenda paper could go a long way to addressing the concerns that the term was being applied too widely.

The Chairman questioned in which languages the words “could” and “would” had the same meaning.  The Senior Director, Technical Activities responded, noting that Indonesia had indicated the meaning would be the same.  He added that what the staff had taken out of the exercise was that whatever word was used, elaboration was needed to clarify what the IASB meant.

Another IASB member noted that he agreed with the staff recommendation to retain the current wording from the perspective of moving the issue forward and obtaining feedback.  However, he noted that materiality was largely based on behaviour, and that ‘could’ had a very broad interpretation.  He acknowledged that practice and behaviour changed slowly, but noted that without providing the ability to change by using the word ‘would’, behaviour would never change.  He noted that accordingly, he favoured language more along the lines of what the staff had drafted in paragraph 18 of the agenda paper, but that he did not support changing for the purposes of the Discussion Paper, and suggested retaining the current language in the Discussion Paper and asking the question and getting feedback on the alternative [‘would’].

Another IASB member agreed with the previous IASB member with respect to this being a behavioural problem, and noted that retaining ‘could’ would not result in changing behaviour, as ‘could’ had a very broad interpretation as different information influenced different people in different ways.  He noted that if the IASB wanted to change behaviour, the threshold needed to be moved a bit higher, and recommended that the IASB looked at making it clearer what the threshold was.

Another IASB member noted that he agreed with the staff recommendation to retain the existing definition, noting that ‘could’ and ‘would’ meant two different things, and that changing to ‘would’ could have far reaching consequences.  He noted that he did not believe that the current materiality definition was ‘broken’, but acknowledged that the qualitative aspect of the materiality assessment could benefit from further clarification.

Another IASB member noted that he would not support moving from ‘could’ to ‘would’, as he believed ‘would’ was too high a threshold.  He noted that the problem with ‘could’ was that people interpreted it without applying judgement, and accordingly, what the IASB needed to do was to explain that ‘could’ should be applied with judgement.

Another IASB member noted that she agreed with moving the issue forward but cautioned that, even though this was a Discussion Paper, the IASB needed to be very clear about what their view was to avoid spending time in the consultation period trying to explain what they meant.  She observed that based on the discussion, the IASB’s view seemed to be that issues around materiality were not problems/disagreements with the basic definition but more behavioural and accordingly, the IASB’s preliminary view was that the objective should be to provide more guidance than to reconsider the definition.

The Chairman noted that although his preliminary view was ‘if it’s not broken, don’t fix it’, he did have some sympathy for the views expressed by other IASB members that ‘could’ was a very broad term and it was very hard for preparers to know what to do.  However, he noted that on the other hand, replacing ‘could’ with ‘would’ would lead to many discussions, and suggested that a happy median might be for the IASB to provide more guidance about what was meant by ‘could’ and bring it closer to ‘could likely’ or ‘could reasonably be expected to’.  He noted that ‘would’ was almost 100% there, and that ‘could’ was a lower threshold, but could be brought up a bit by saying a reasonable assumption needed to be made.

The Senior Director, Technical Activities noted that the staff would move forward and include the current definition in the Discussion Paper and request feedback on the issue.

All fourteen IASB members agreed with the staff recommendations in the agenda paper.

Issue 2:  Should the IASB provide any guidance on materiality and if so, what type?

An IASB member questioned whether the guidance would be standard specific.  The Senior Director, Technical Activities responded and noted that the staff would initially look at developing general guidance.  He added that there was some standard specific guidance that currently existed, for example, related party transactions was a standard specific application of materiality, as the standard required an entity to think about things in a different way.  He acknowledged that if the IASB was to develop some general guidance on materiality, the materiality threshold from an accounting perspective would need to be looked at, as well as the materiality threshold from a disclosure perspective, but questioned how far this would go given this issue was in the context of the principles of disclosure project.

Another IASB member noted that the IAASB had issued guidance on the application of materiality for auditors, and questioned whether the IASB would issue guidance for preparers that would just duplicate the IAASB literature.

The Senior Director, Technical Activities responded, and noted that there might be some duplication, but that the IASB guidance was for different purposes.  Another IASB member added that the IASB would need to explain how the two sets of guidance related to each other.  The Senior Director, Technical Activities agreed this needed to be included, and that the IASB needed to explain how it related to disclosure of items, as most people thought about materiality from an audit perspective.

Another IASB member noted that she believed there should be a very high threshold for issuing guidance on the application of materiality as the more the IASB said, the more problems could potentially be created.  She noted that if the IASB did provide guidance, her preference was that it would be authoritative material, and kept to the minimum guidance the IASB considered necessary.

The Chairman noted that he believed the most important work to be done was in IAS 1, as that would have the most influence, and reiterated the importance of the IASB providing more clarity around what it meant by the word “could”.

The Technical Director noted that she had received feedback that some additional guidance in IFRS on the application of materiality would be helpful.  She noted that many filers, particularly SEC filers, looked to more extensive guidance issued by the SEC, even in the context of an IFRS filing, because the SEC guidance was the only guidance that existed in this area. 

Thirteen of the fourteen IASB members agreed with the staff recommendation that the IASB should develop guidance on the application of materiality.

Eleven of the fourteen IASB members agreed with the staff recommendation that the IASB should include guidance on application of materiality in a practice statement, and in the Exposure Draft, ask constituents whether they thought that a practice statement was the best method of providing guidance on materiality.

Issue 3:  How should conflicting terminology be dealt with?

All fourteen IASB members agreed with the staff recommendation in the agenda paper that the IASB should wait until further work has been performed in the Review of Standards project before considering changes to address use of inconsistent and overly prescriptive wording within existing Standards.

One IASB member noted that when she looked at some of the places in the IASB’s literature where people had felt the IASB had used a word that meant materiality, she believed that the IASB had consciously used another word, for example, in IAS 32 - substantial was meant to be a big number, not just a material number.  She further noted that the current discussion was focused on materiality in the context of the financial statements overall, particularly in the context of disclosure, which required both qualitative and quantitative assessments; whereas with respect to individual standards, in a lot of cases it was very specifically a quantitative assessment the IASB had in mind.  Accordingly, she cautioned that in the exercise of making it clear what materiality meant in broader terms, it may become clear that it would not be right to use material as a substitute in some of these places, and that the IASB should definitely not be looking at this in the shorter term.

Issue 4:  Where to position materiality requirements?

There was no discussion with respect to this issue.

All fourteen IASB members agreed with the staff recommendation that including in each Standard a reminder that materiality applied was not needed.

11D Amendments to IAS 1: sweep issue

This agenda paper discussed a sweep issue on the final amendments of Disclosure Initiative: amendments to IAS 1. The sweep issue related to the proposed requirements for an entity to disclose if it had applied the amendments early.

The Technical Manager introduced the agenda paper, and asked the IASB members whether they agreed with the staff recommendation that an entity need not disclose that it had applied these amendments (whether through early or mandatory application), and that the Basis for Conclusions should explain the reasons for the change in requirement; as set out in paragraphs 11 and 12 of the agenda paper.

An IASB member questioned what potential amendments this change in requirement applied to.  The Technical Manager responded, and noted that the change in requirement applied to the entire package of IAS 1 amendments.

The Senior Director, Technical Activities highlighted the fact that this issue arose because an entity may look at the IAS 1 amendments, which may cause it to think differently and make changes to the way items were classified in its financial statements.  These changes were then required to be disclosed as a change in classification under IAS 8.  The changes were not necessarily directly attributable to the IAS 1 amendments.

The IASB member suggested that it could be helpful to have more emphasis on this in the Standard to avoid the risk of an entity changing the application of an accounting policy and not necessarily complying with IAS 8.  The Senior Director, Technical Activities confirmed that it was being made clear in the Basis for Conclusions that the consequences of applying the IAS 1 amendments were still subject to IAS 8 requirements.

Another IASB member questioned whether the change in requirement also applied to the disclosures required by paragraph 30 of IAS 8 with respect to disclosure of information about a new IFRS that has been issued but is not yet effective.  The Senior Director, Technical Activities responded and confirmed that the change also applied to such disclosures, and this was reflected in the wording of the ballot draft.

All fourteen IASB members agreed with the staff recommendations in the agenda paper.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.