This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our cookie notice for more information on the cookies we use and how to delete or block them.
The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected. Please turn off compatibility mode, upgrade your browser to at least Internet Explorer 9, or try using another browser such as Google Chrome or Mozilla Firefox.

Disclosure initiative

Date recorded:

Agenda Paper 11A- Distinction between changes in accounting policies and changes in accounting estimates

The project manager introduced the agenda paper which included five papers for discussion. The staff introduced agenda paper 11A, he said that the paper discussed the distinction between changes in accounting policies and changes in accounting estimates, he said that in September 2014 the IASB had decided that the issue should be considered as part of the disclosure initiative project. He said that outreach activities had been completed and the findings of the activities were summarised in the agenda paper. The main concern identified was that the definition of accounting policy was too broad and overlaps with the definition of an accounting estimate. He said the staff proposed to amend IAS 8 to clarify that: a) changes in the measurement bases specified in relevant Standards would be changes in accounting policies; (b) changes in inputs, assumptions and methods used to make an accounting estimate would be changes in accounting estimates; and (c) changes in the methods used to determine different amounts of cost would be changes in accounting policies. He also said the staff proposed the issue should be included in the forthcoming Discussion Paper on principles of disclosure. He then opened the discussion to the Board.

There was general support for the objectives however there were several concerns raised about the lack of clarity in the wording of the definitions.

One Board member said he did not have objections to the proposal; however the issue was the disclosures that would be required which were to be discussed in agenda paper 11B. He was concerned about changes in methods being considered changes in accounting estimates, for example under IFRS 15 there were various methods of measuring progress towards completing a performance obligation, changes in those inputs would be presumed to be changes in accounting estimates, which he considered to be a critical issue.

Some Board members raised concern about the lack of clarity as to why a change from a FIFO to a LIFO method for cost accounting would be a change in accounting policy. The Staff responded that in his view changing the calculation of the cost was not an estimate; that it was an entity’s decision to calculate the cost in a different way. He said that for example in measuring an item at fair value an entity should get to the same result no matter what estimate it used. Another Board member asked about why changes in depreciation calculation would be a change in accounting estimate. The staff responded that the situation was considered in example 6 in the table on the agenda paper and changes in depreciation (a change in the depreciation method: from straight-line to the units-of-production method when the expected pattern of consumption had changed) would be a change to reflect how the asset was being consumed and not how the asset was being measured.

One Board member agreed with the staff interpretation about changes in FIFO to LIFO because those were options explicit in IFRS and both options were supposed to achieve a measurement objective. The staff clarified that sometimes there was no specific option given in IFRS so the principle about changes in accounting policies would also apply when there was an arbitrary decision made by the entity.

There were concerns raised about whether a Discussion Paper was needed. The Project manager responded that the Board would be required to decide on that as it was one of the questions raised in the agenda paper. The staff was proposing a Discussion Paper because it believed it was a fundamental issue.

As regards the wording of the proposal there were several concerns raised. One Board member did not agree with the proposal because it was creating new rules rather than clarifying the principle. He disagreed with considering changes in cost measurements as changes in accounting policies; there could be cases where marketability caused changes in obsolescence and an entity had to make strategic changes, in those cases a change would be a better estimate and not a change in accounting policy.

Some Board members also indicated their belief that the examples did not match the wording of the agenda paper. For example the thought process to arrive at the conclusion for each example discussed in the agenda paper was not clear.

One Board member said there was a risk of overlaps so it would be important to clarify the wording. Others pointed out the importance of analysing the implications with other standards.

One Board member said there was a need to move ahead and a new ED would not be necessary. He said that IFRIC was asked to look at this issue; he was not sure that by asking the same questions more information would be obtained.  He also said it would be important to define what a measurement basis was, for example in the oil & gas industry an entity could apply full cost or successful efforts cost accounting, changing between these he did not see as a change of accounting estimate, he believed it would be a change in the measurement basis. Further, cost could only be defined by what could be included as cost; however, fair value could be defined in isolation.

One Board member was concerned what the outcome might be; changes in accounting policies were expected to happen on very limited occasions while changes in accounting estimates happened on a continuous basis. He said that based on the changes proposed by the staff there would be more situations that would be considered changes in accounting estimates. Another Board member pointed out that the Board did not create barriers to changes in accounting estimates which would provide better information, it should focus first on the potential outcome that it wanted to achieve rather than the wording.

The Vice Chairman concluded there was general concern about the wording while there was agreement with the direction of the project. He called a vote on whether to move towards a Discussion Paper, the proposal was only approved by five Board members; accordingly, it would move towards an Exposure Draft.

Agenda Paper 11B- Changes in accounting estimates: new disclosures

The Staff introduced Agenda paper 11B – He said the agenda paper proposed new disclosure requirements when an entity changed an accounting estimate. When an entity changed an accounting estimate and the change had a material effect on the entity’s financial statements, the proposal would require the entity to provide disclosures similar to those required in paragraph 93(d) of IFRS 13 (for changes in valuation techniques) and paragraph 29 of IAS 8 (changes in accounting polices). He said the staff did not see a basis for having a disclosure difference between a change in policy or a change in estimate if the effect is material. An entity would be required to disclose the reasons for making a change in an accounting estimate.

There were general concerns raised during the discussion. One Board member said he disagreed with the staff proposal because it would result in boiler plate explanation; he said the focus should be on the nature of the change and the amount of the change because the reason for the change would always be a better estimate. Another Board member said for example in an estimate about a litigation the reason for the change would be derived from new facts and circumstances.

One Board member pointed out that the agenda paper in paragraph 11 stated that if the change were not material no disclosures would be necessary; he said that the conclusion should be clarified in the wording.

Another Board member asked based on the requirements stated in paragraph 9 of the agenda paper; whether retrospective application would be required. The staff clarified that it would not be required.

One Board member was also concerned about the potential boiler plate disclosures; she said IFRS 7 currently required changes in significant assumptions to be disclosed but she did not see it relevant to apply the same requirement to all changes in estimates, there should be detailed consideration as to specific requirements that already exist in other standards.  Another Board member agreed and said the disclosure requirements should be narrowed down to a smaller population.

The Vice Chairman concluded the discussion and asked the staff to work on the drafting by considering the concerns raised during the discussion.

[Note: Agenda paper 11C was not discussed during the meeting as it only provided reference material]

Agenda Paper 11D- Disclosure of accounting policies

The staff introduced Agenda Paper 11D.  He said the agenda paper related to accounting policies disclosures as a continuation of the Board discussions held in September 2014. The agenda paper described in paragraph 13 the main issues related to accounting policies:  (a) Content: (i) which accounting policies should be disclosed; and (ii) the extent of details that should be included (b) Location: (i) the appropriate place to disclose those accounting policies; and (ii) whether judgements, assumptions and accounting estimates should be disclosed alongside accounting policies.

He then said paragraph 14 of the agenda paper described the possible categorisation of accounting policies (a) accounting policies with choice, change or application of judgements, assumptions and accounting estimates; (b) accounting policies that were necessary for understanding the financial statements; and (c) other applicable accounting policies. The discussion focused on accounting policies relevant for an entity. He said only material accounting policies should be disclosed, and it was a matter of judgement what separates material accounting policies from the others.  He said IFRS should include further guidance on accounting policies disclosures. As regards location of accounting policies, the location of accounting policies depended upon on the categories of accounting policies. Further guidance should be included in IFRS. He also said that the proposal was to allow cross referencing for immaterial information outside the financial statements. As regards location of significant accounting estimates and judgements, users generally did not differentiate between them. The staff recommendations were as follows: Content: (a) a general disclosure Standard (IAS 1 or equivalent) should include further guidance on determining when accounting policies should be disclosed; and (b) with respect to disclosure of entity-specific accounting policies, no further guidance is necessary, as discussed in paragraph 41. Location: (a) a general disclosure Standard (IAS 1 or equivalent) should include further guidance by way of listing various alternatives for locating accounting policy disclosures; (b) a general disclosure Standard (IAS 1 or equivalent) should allow cross-referencing of immaterial accounting policies from an entity’s financial statements to somewhere outside the financial statements or annual report, eg on its (or the group’s or the IASB’s) website or in a separate document; and (c) a general disclosure Standard (IAS 1 or equivalent) should give preference to locating judgements, assumptions and accounting estimates along with accounting policies wherever relevant to the understanding of the accounting policy. Finally, as discussed in paragraph 48, in IAS 1 (or equivalent), the IASB should require entities to clearly signpost up front in the financial statements the policies referred in paragraph 14(a) of the agenda paper. He then opened the discussion to the Board.

The Vice Chairman pointed out that the focus should be on the staff recommendations because it was a very broad topic.

One Board member agreed with the overall direction of the project; however he provided an example where a retail entity with material amounts of cash not invested would not have an accounting policy because there would be very little judgements and he would not expect an accounting policy to be disclosed. The staff responded that he agreed with his view and the staff did not intend to require those situations to be disclosed, he said that the wording would be improved. He clarified that even if an item were material it would not mean that the item was material for disclosure of its related accounting policies, he said that paragraph 21 of the agenda paper clarified that assessment.

One Board member had a concern about the wording of paragraph 37a) of the agenda paper because he could not thing of an accounting policy that did not involve an accounting estimate. The Project manager agreed with his comment but said that not all accounting policies would involve judgement for a particular entity.

One Board member said that in relation to paragraph 33 of the agenda paper he agreed with the staff proposal of not prohibiting disclosing immaterial financial information; however, he said it should also include a reminder about the understandability of the financial statements and the need for not overwhelming the financial statements with disclosures.

Another Board member was concerned with the requirements in paragraph 31 and 32 of the agenda paper by which an entity would determine who the primary users of its financial statements were. There could be potential investors analysing the entity’s financial statements of which the entity was not aware. He said that this requirement was not critical.

One Board member agreed with the proposed requirements in paragraph 37 a) and b), for example IAS 41 introduced changes for bearer plants and disclosing the accounting policy change would provide necessary information to understand the financial statements.  The Project manager said anything that was just a repetition of what was already required by an IFRS was not necessary for a user to understand the financial statement. The Board member disagreed; the actual problem was that entities were only repeating the wording of the standard instead of making it relevant to the entity.

One Board member asked for how long an entity should disclose an accounting policy if it were currently no longer relevant. The staff responded that if an accounting policy was relevant in the current period or in preceding periods presented it would be disclosed. He said that paragraphs 15 and 16 of the agenda paper made this clarification.

The Vice Chairman concluded that in relation to the question in paragraph 63 a) b) of the agenda paper (content of the financial statements) there was general agreement and the staff would consider the wording suggestions raised by the Board. He then moved the discussion to paragraph 64 a), b) and c) of the agenda paper (location)

There were some concerns raised with the proposal about whether immaterial accounting policies should be allowed to be cross referenced to outside the financial statement. The concerns related to the fact that there should not be disclosure of immaterial items. One Board member disagreed with the term “preference”. The staff responded that they did not mean to impose a specific location to preparers. Another Board member disagreed with the argument because the Board should indicate either a particular option or stay silent. The word preference provided no guidance.

One Board member asked whether the staff had been in contact with regulators to see how they perceived this proposal. The staff indicated that it had not been in contact with regulators.

One Board member was concerned because it had already been decided that an entity should disclose accounting policies that were relevant to the entity, he also said that disclosures depended on regulatory requirements. The Senior Director of Technical Activities said that an entity could choose to disclose non material accounting policies but would not be mandated to do so. Another Board member suggested that this discussion should be more helpful if put in educational material rather than in an accounting standard. Another Board member supported referencing information outside the financial statements because it was expected to enable better use of technology.

The Vice Chairman concluded that it would be important for an entity to have alternatives and it would be helpful to have more educational material; otherwise they would be moving outside the objective of the project. Other Board members agreed with his assessment. He then called a vote and the majority agreed with the staff recommendations in agenda paper 11D although they clarified that the discussion would either lead to amending IAS 1 or to providing educational material.

Agenda paper 11E- Presentation on the face or in the notes?

The staff introduced the agenda paper; it discussed whether specific line items should be mandated in the face or in the notes. She said materiality should be considered when deciding.  She also said there was a possible inconsistency with current IAS 1 because it includes guidance about specific line items that should be disclosed separately. The staff recommendation was that the fundamental review of paragraphs 54–111 of IAS 1 dealing with presentation in the primary financial statements should be dealt with in the Performance Reporting project.

No significant comments were made.

The Vice Chairman concluded that there was agreement to approve the staff recommendation.

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.