Disclosure initiative — PS Materiality and disclosures about restrictions on cash and about liquidity

Date recorded:


The objective of the session was to discuss agenda papers 11A and 11B

Agenda paper 11A  Feedback Summary on Exposure Draft: IFRS Practice Statement Application of Materiality to Financial Statements. The agenda paper provided a summary of the feedback received on the materiality practice statement.  The staff would present more detailed analysis of the feedback in May 2016 at which time the IASB would be asked to make decisions on the project.  The purpose of the session was to outline the general comments received in anticipation of those more detailed discussions.

Agenda paper 11B  Disclosures about restrictions on cash and about liquidity. The agenda paper provided background information on the topic. The Board was not asked to make any decisions at this meeting. The staff indicated that they would discuss at future meetings whether a project on cash restrictions or liquidity should be added on the agenda.

Materiality — Feedback Summary on Exposure Draft: IFRS Practice Statement Application of Materiality to Financial Statements — Agenda paper 11A

Summary of the feedback provided by respondents to the ED

The staff indicated that there was general support for the project and there were no technical issues raised. The staff presented the feedback separated by each question presented in the ED.

  1. The Practice Statement would not be a Standard and would not be mandatory. The majority of respondents supported this proposal. The respondents indicated that the Practice Statement would not be a new requirement but an expansion on the principles in the Standards aimed at guiding preparers when making materiality judgements.  Others respondents indicated that the guidance should be mandatory. They argued that it would allow for less bias in the application of the concept. It would also provide management with a stronger footing in discussions with auditors and regulators and clearer requirements when materiality is the focus of litigation.
  2. Use of application examples in the ED: The majority of respondents supported using examples as part of the guidance. However, a large majority of respondents were critical of how the examples were currently written in the ED because in general they failed to describe the thought process leading to materiality judgements.
  3. The structure of the proposed Practice Statement: There was general agreement with the technical content of the ED although some issues were raised, including for example, (i) whether, in some places, the guidance was an interpretation of IFRS Standards; and (ii) whether the discussion of the needs of the primary users should be included in the Practice Statement.
  4. The timing of the materiality project: The majority of respondents agreed with the Board’s reasoning and were supportive of the guidance on materiality to be published before the Principles of Disclosure project was complete.


The Board did not make any decision about how to move forward on the project. Discussions would continue in May 2016. The discussion was primarily focused on the mandatory vs non- mandatory status of the Practice Statement. The majority of the Board members indicated that they did not have strong views. However, some of them indicated that they would prefer the Practice Statement to be mandatory. The reasons provided were that:

  1. The practice statement intended to give guidance on judgement about materiality and materiality is an IFRS mandatory requirement. It was suggested that the Practice Statement could be included as part of IAS 1 (mandatory status) with non-mandatory examples as illustrative examples.
  2. Materiality is at the core of how to apply IFRS.  The Chairman supported the view for making the guidance mandatory for this reason.
  3. The guidance could be endorsed by national standard setters and gain more prominence.

One main concern discussed was whether there would be a need for re-exposure if it were decided that the guidance should be mandatory. In that regard there were mixed views.  Some Board members indicated that the feedback received was enough to make a decision because there was a specific question asked in the ED.  Others expressed that the change would be fundamental and it would be necessary to re-expose. On that regard, one common concern raised was that it would be necessary to discuss the implications for the guidance being mandatory.

Other comments were on the following issues:

  1. Feedback received from small entities: the staff indicated that the feedback was similar to large entities. Also small entities indicated that they believed the guidance would be very useful in their discussion with auditors. The feedback also indicated that small entities usually go along with auditors instead of preparing their own assessment about materiality.
  2. View from regulators: there was concern expressed that the agenda paper did not discuss in detail feedback received from regulators. Particularly, some Board members wanted to know their view on the mandatory vs non-mandatory status and potential implications with endorsements. The staff indicated that the feedback received was limited and no views were expressed on those topics.
  3. Examples: There was no support for adding more examples; although it was accepted to provide more discussion about the thought process. The staff indicated that in principle it would be very useful to explain the thought process; however, they believed it would be difficult to implement.

Disclosure Initiative — Disclosures about restrictions on cash and about liquidity — Agenda paper 11B


In December 2014 the Board published an Exposure Draft Disclosure Initiative— Amendments to IAS 7 (‘the Exposure Draft’) which included proposals for the disclosure of restrictions that affect the decisions of an entity to use cash and cash equivalents. As a result of the comments received, the Board decided to further test the issue and consider the feedback obtained from the 2015 Agenda Consultation.

The staff would provide additional information to the Board and discussions would continue at future meetings to decide:

  1. whether to continue with the proposal as a stand-alone project;
  2. whether to expand the scope of project to address investors’ requests for liquidity disclosures (including restrictions on cash). In that regard, the project could be either a stand-alone project or part of the Primary Financial Statements research project; or
  3. discontinue work on the cash restrictions proposals.

The agenda paper included a summary on the feedback that was obtained from the ED. In terms of the Agenda Consultation, the staff indicated that some investor groups asked for more disclosures about liquidity.  They particularly asked: (i) how much cash and cash equivalent balances were freely available to be used by the parent company at the reporting date and about the existence of potential restrictions on the transfer of cash and cash equivalent balances; (ii) additional disclosures on financial debt; and (iii) a more detailed maturity analysis.

The staff also indicated that the FASB initiated a project in 2012 with similar objectives although the project was not finalised and the FASB had no plans to finalise it.

Staff analysis

After having performed further research, the staff concluded that investors want to understand how much cash, cash equivalents and other liquid assets are available at the reporting date for an entity to use, for two different purposes: (a) to meet the financing needs of the group; and (b) to be freely used in the whole group by management for strategic purposes such as merger and acquisitions activity and capital management activity.


The Board did not make any decision about how to move forward on the project. The discussions will continue at the next meeting in May 2016. The staff indicated that in May the discussion would focus on whether the Board should go for a comprehensive project or pursue quick wins. However, the staff indicated that at this stage there was not enough information to establish whether they could attempt the latter.

There was general agreement that the issue was very important and the project should continue. However, there were mixed views about how to move forward. Some Board members indicated that they would prefer a comprehensive project on liquidity. That project should include discussions about liquidity, cash management, cash restrictions (beyond legal restrictions) and identification of economic disincentives. There was also agreement that the Board should not wait for the completion of the Principles of Disclosures project to move forward. On the other hand, some Board members were concerned in having this discussion without the proper context of priorities, resources and the agenda consultation. Another concern raised was the potential interaction between this project and the PIR on IFRS 12.

One Board member pointed out to a very extensive document published by the SEC. In that document the SEC explored areas of future focus which included disclosure, cash, capital structure, liquidity and so on. The Board member believed that this document would influence other regulatory bodies and also believed that the Board should be leading rather than following on these matters. 

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