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Disclosure initiative

Date recorded:

Disclosure Initiative: Definition of Material (Agenda Paper 11A)

Background

The IASB’s Disclosure Initiative is focused on identifying ways to ensure that financial statements provide information that is relevant to investors that is communicated effectively. The Board thinks that the main problem is that preparers have difficulty in applying judgement when deciding what information to include in, or exclude from, the financial statements and the most effective way to organise and communicate it.

In March 2017 the Board published the Disclosure Initiative—Principles of Disclosure Discussion Paper (POD DP). The Discussion Paper identified three factors that contribute to the disclosure problem:

  • a) Not enough relevant information
  • b) Irrelevant information
  • c) Ineffective communication of the information provided

Respondents to the POD DP were concerned about:

  • a) Lack of specific disclosure objectives in Standards
  • b) c) Inconsistent or piecemeal drafting of disclosure requirements
  • Volume of prescriptive requirements

The Board decided, as a first step, to develop guidance for itself to use when developing and drafting disclosure requirements.

Staff analysis

The Board published the Definition of Material – Proposed amendments to IAS 1 and IAS 8 Exposure Draft (“the exposure draft”) in September 2017. The purpose of this paper is for the Board to decide if staff can begin the balloting process for the final amendments from the exposure draft.

Most respondents supported the proposals in the exposure draft which were intended to improve the understanding of the definition of material. The proposals did not constitute substantive changes to the definition of material and the Board do not expect them to affect how materiality judgements are made.

In the June 2018 Board meeting the Board decided to provide a clearer explanation of ‘obscuring information’ and examples of what might constitute ‘obscuring information’ within the explanatory paragraphs to IAS 1.

Details on the due process steps can be found in Appendix A to the paper.

Staff recommendations

  • a) Staff recommended that the consequential amendments to IAS 1 and IAS 8 are not re-exposed given that there are no substantive changes being made in addition to those in the initial exposure draft.
  • b) Staff requested permission to start the balloting process as all due process activities have been finalised.
  • c) Staff asked if any members of the Board plan to dissent from issuing the amendments.
  • d) Staff recommended the Board agree the proposed timetable of the amendments being effective for periods beginning on or after 1 January 2020.

Discussion

One Board member commented that the paper described the changes as having no effect on how materiality is interpreted in practice. This was disagreed with as the changes are expected to be useful and to help the application of materiality leading to behavioural changes. Inevitably, this will lead to changes albeit the changes are expected to be an improvement in quality. 

No further significant comments were made.

Decision

The Board unanimously approved all of the recommendations and no Board member planned to dissent from issuing the amendments.

Disclosure Initiative – Targeted Standards-level Review of Disclosures – Guidance for the Board - Overview (Agenda Paper 11B)

Staff analysis

This paper is an updated version of the June 2018 Agenda Paper 11B (see here for our summary). The information is updated for the tentative Board decisions on this topic to date.

Those decisions are:

  • When developing disclosure objectives and requirements the Board will assign a member of the IFRS Taxonomy team in an advisory capacity to each of the Board’s active projects with the objective of helping the project team fully understand and assess:
    1. current disclosure objectives and requirements;
    2. issues with current disclosure objectives and requirements;
    3. potential issues with the disclosure proposal(s);
    4. whether the disclosure proposal(s) can be incorporated into the IFRS Taxonomy;
    5. the relationship of the disclosure proposal(s) with other IFRS Standards, accompanying materials such as implementation guidance and illustrative examples and common reporting practice;
    6. whether any disclosure proposals are ‘technology neutral’; and
    7. stakeholder feedback on (1) – (6).
  • The Board will consider disclosure objectives and requirements within each of the following activities as part of the standard setting process:
    1. understanding the existing issue;
    2. understanding what stakeholders want and why;
    3. understanding what disclosures may be required to support proposed recognition and measurement requirements;
    4. performing a cost / benefit analysis; and
    5. understanding and documenting the effects of the proposed disclosure objectives and requirements.

Staff recommendations

The paper did not contain a staff recommendation or questions for the Board.

Discussion

No discussion or decisions were made in relation to this paper.

Decision

No decisions were made.

Disclosure Initiative – Targeted Standards-level Review of Disclosures – Guidance for the Board – Drafting Disclosure Requirements (Agenda Paper 11C)

Staff analysis

This paper is the final of three staff analysis papers about the Guidance for the Board and focusses on the drafting of disclosure objectives and requirements.

Staff have focussed on three areas:

  1. Use of language - including the use of prescriptive language, which can be seen to inhibit materiality judgements, and consistency across standards.
  2. Formatting and presentation – including the placement and presentation of high-level disclosure objectives, use of bold type and presentation alternatives to a list of disclosures in order to ensure the requirements can be easily understood and effectively applied by a broad range of stakeholders.
  3. Leveraging requirements and guidance in existing IFRS Standards in order to reduce duplication, promote consistency and ensure the relationship between individual disclosure objectives and the concept of materiality is consistent and clear.

Staff recommendations

  • (1) Staff recommended that, when drafting disclosure objectives and requirements, the Board should:
    • a) use prescriptive ‘shall’ language to require entities to comply with disclosure objectives in the Standards;
    • b) use less prescriptive ‘shall consider’ language when referring to specific items of information for disclosure;
    • c) avoid using prescriptive language if and when the Board makes any reference to formatting considerations within disclosure sections of Standards;
    • d) take the following steps to maximise the use of consistent language across the disclosure requirements in the Standards:
      1. seek advice from the IFRS Taxonomy team at the drafting stage to help identify any inconsistencies between the way terms and concepts are described in the disclosure proposals and other places in the Standards;
      2. consider defining terms and concepts which are being introduced for the first time in a disclosure section of an IFRS Standard;
      3. avoid using the same term or concept in different ways across the Standards. If this is unavoidable, consider drafting additional guidance, such as an explanatory paragraph, to explain the use of the term and/or concept in that context and clearly link each use of the term or concept to the relevant explanation; and
      4. state the intended location when using the terms ‘present’ and ‘disclose’ in IFRS disclosure requirements.
  • (2) Staff recommended that, when drafting disclosure objectives and requirements, the Board should:
    • a) present high-level, ‘catch-all’ objectives at the end of the relevant disclosure section in an IFRS Standard;
    • b) present specific disclosure objectives in bold type; and
    • c) organise disclosure sections in the Standards based on similar information needs that disclosure objectives and requirements are intended to satisfy. In many cases, we expect this approach to result in disclosure sections that are organised based on groups of similar or related disclosure objectives.
  • (3) Staff recommended that, when drafting disclosure objectives and requirements should:
    • a) seek advice from the IFRS Taxonomy team to identify relationships between the disclosure proposal(s) and existing (i) requirements in IFRS Standards; or (ii) guidance in other Board publications;
    • b) minimise duplication across disclosure requirements when drafting IFRS Standards. Where similar disclosure requirements exist in different Standards, those requirements should be linked together instead of duplicated, to the extent possible; and
    • c) not make reference to materiality in the disclosure sections of individual IFRS Standards.

Discussion

Language

One Board member opened by clarifying that the use of ‘shall’ language only applies to material items in terms of disclosure.

The Vice-Chair agreed with the route that staff had taken but had reservations on recommendations (1)(b) and (c).  She expressed concern around areas where the Board felt there was only one disclosure that would be appropriate and should be mandated whenever material, e.g. disclosure of the period expense for short term leases under IFRS 16. Being able to mandate specific disclosures, and use ‘shall’ wording, still would support enforceability and comparability and take away unnecessary decision points for preparers. The Board should be able to use prescriptive language where they deem it necessary.

Another concern was on the removal of prescriptive language around formatting where for some specific quantitative disclosures the Board may wish to mandate that a table is used, again to help with ease of decision-making and comparability. Other Board members added that there was a risk that preparers may remove tables and replace with narrative if they considered that this would meet the disclosure objective.

The staff clarified that they hoped to try and make the objectives sufficiently specific that when there is only one way of presenting a disclosure this would be clear. However, in testing they may find that mandating a disclosure is a more sensible route.

Some Board members did not agree that technology restraints would be an issue for presentation requirements being in Standards.

A few Board members expressed a preference for describing the list of ‘shall consider’ items as what would be ‘normally expected’ to meet the disclosure objective to make it clear that this is a judgement for preparers and it is not sufficient for them to simply say that they did consider the list.

Objectives must be well written and make it clear to preparers what users need, also clarify that it is not limited to the list.

One Board member expressed their support for the recommendations as written. If the objectives are written in a specific way then preparers should be able to provide meaningful disclosure without prescriptive language for recommendation (1)(b) and (c), however, an exception may be required for certain Standards which already include prescriptive language.  The new approach will require a change of attitude of preparers but this is at the heart of the project.

One Board member expressed concern that by not prescribing formatting this runs counter to the frustrations of users who can struggle to find information because it is not comparable.

Some Board members raised concerns around translation difficulties under this approach as ‘shall’ and ‘shall consider’ may not be sufficiently different once translated. Furthermore, it may be challenging to avoid using the same term in different ways as recommendation (1)(d)iii. proposes given that some languages have a less broad range of words for e.g. likeliness. It may be simpler to provide explanatory guidance for the use of the same word in different Standards.

Formatting and Presentation

One Board member asked staff to clarify that the objectives being relocated were the high-level overarching ones that are already included in the Standard, as opposed to the specific ‘shall’ language ones which staff confirmed as correct. 

One Board member suggested as an alternative to relocation a reference at the end of the disclosures to the overarching objective at the beginning of the Standard. Another Board member suggested that these overarching objectives could be removed and there should be a reference to the IAS 1 Presentation of Financial Statements catch-all objective which is broad and may be less confusing than those in individual Standards.

One Board member expressed concern that high level and catch all are not the same, but recommendation (2)(a) appears to say this. Staff clarified that in an earlier meeting the Board have determined that the current high level objectives are not sufficiently specific to be useful except as a catch all for preparers to consider any disclosure they may have missed.

Leveraging existing guidance

Some Board members expressed concern that duplication of requirements in recommendation (3)(b), which refers to the ‘shall consider’ lists, would be confusing if they were cross-referenced. Where the disclosure objective is hierarchical with the specific objective followed by the ‘shall consider’ list this order should be clear even if it results in duplication.

One Board member agreed with the recommendations but expressed a view that the reference to materiality may depend on the Standard. Another Board member agreed and went further to suggest that all Standards should reference materiality to avoid any confusion over whether it should be applied.

Decision

The Board voted in favour of recommendation (1)(a) (14 out of 14), (1)(b) (9 out of 14) and (1)(d) (13 out of 14). Recommendation 1(c) was rejected. With the caveat of deleting the words ‘high level’ 10 Board members voted in favour of recommendation (2)(a) and unanimously in favour of (2)(b) and (2)(c). The Board voted unanimously for recommendations (3)(a) and (3)(b) and with 11 out of 14 for (3)(c).

Disclosure Initiative – Targeted Standards-level Review of Disclosures – Selecting Standards (Agenda Paper 11D)

Staff analysis

The purpose of this paper was to set out and review the potential standards to be selected for the targeted standards-level review of disclosures. Staff have worked through each of the standards initially proposed and the feedback received from the Capital Markets Advisory Committee (CMAC) and the Global Preparers Forum (GPF) and identified 4 of the 9 standards that would be most useful for this purpose. The four standards shortlisted are IAS 19 Employee Benefits, IFRS 2 Share-Based Payment, IFRS 3 Business Combinations and IFRS 13 Fair Value Measurements

The paper contains a detailed review of the pros and cons of each standard.

Staff recommendations

The staff recommended that the Board select IAS 19 Employee Benefits and IFRS 13 Fair Value Measurement. They think these Standards provide an effective opportunity to comprehensively test all aspects of the draft Guidance and would also benefit individually from improvements to their disclosure requirements.

Discussion

One Board member opened by asking if the consideration of IFRS 3 as a Standard to be selected would be different if the Board had made a decision on IFRS 3 disclosures being put in to an Exposure Draft.  Staff explained that they have considered a number of Standards subject to other projects at this time and, having discussed with the teams working on those projects, come to the conclusion that it would be unhelpful to do two projects on one Standard at the same time.  One Board member argued that IFRS 3 would benefit from the disclosure project, however, did not think it was the best placed Standard to meet the learning objectives for this project.

The majority of Board members were in favour of testing two Standards and were happy with the Standards selected by staff based on their analysis. One Board member was concerned that IFRS 13 is relatively industry-specific to financial institutions, however, it was felt by other members that this would be a useful test of how to make it more applicable to other entities.

There were slight concerns about the challenges that addressing IFRS 13 may face and whether it was appropriate to select this first. However, it was felt that this Standard would allow staff to test the relevant risk areas, e.g. tabular formats, disclosures that the Board feel should be required etc.

Decision

13 Board members voted in favour of the staff recommendation.

Disclosure Initiative – Principles of Disclosure – Project Next Steps – Accounting Policy Disclosure (Agenda Paper 11E)

Staff analysis

The objective of this paper was to support the Board in determining the next steps of the principles of disclosure project, in particular, whether guidance or requirements should be developed to help entities determine which accounting policies to disclose.

The paper focuses on two areas:

  • replacing the concept of significance with materiality in IAS 1 to avoid inconsistent application due to the lack of definition for the term ‘significant’; and
  • developing guidance for entities about which accounting policies to disclose.

In relation to the developing of guidance, staff have considered 3 approaches for the Board to deliberate on:

  • defer development of guidance decisions until the Board has more information on the practical effect of amendments and recent publications on materiality;
  • develop mandatory explanatory paragraphs for inclusion in IAS 1 about the application of materiality to accounting policy disclosure in order to promote a consistent, albeit potentially prescriptive, approach; and
  • develop additional guidance and examples for inclusion in the Materiality Practice Statement including application of the four-step materiality process to accounting policy disclosures.  

The paper also includes an extract from the Materiality Practice Statement and feedback from the Accounting Standards Advisory Forum (ASAF) as appendices.

Staff recommendations

Staff recommended that the Board:

  • a) develop an amendment to paragraphs 117 to 124 of IAS 1 to require entities to disclose their material accounting policies rather than their significant accounting policies; and
  • b) develop additional guidance and examples for inclusion in the Materiality Practice Statement. These would explain and demonstrate the application of the four-step materiality process to accounting policy disclosure.

Discussion

Several Board members were concerned about the unintended consequences that a change from ‘significant’ to ‘material’ may bring. Most Board members were more supportive of developing examples to understand if there would be any change in advance of any changes to authoritative guidance.

Other Board members expressed concern about how the concept of materiality in its current form could be applied to accounting policies and did not think there was an issue with the application of the term significant.

The Vice-Chair added to this by asking if this use of material would be consistent with the definition. If an accounting policy were left out, would it really affect investment decisions? Another Board member argued that this was possible if the accounting policy were not boilerplate but communicated information that helped users to interpret the numbers in the financial statements.

Other concerns on the use of the word material included whether, if material policies were obscured by non-material policies, this would result in a material error that would require restating and that ‘significant’ is a higher bar than ‘material’ so the change may result in even more unnecessary policy disclosures.

One Board member clarified that without the change from ‘significant’ to ‘material’ the current guidance in the Materiality Practice Statement or other publications would not have an impact on disclosure because no literature currently specifically addresses the issue.

Some Board members noted that ‘significant’ and ‘material’ were translated into the same word in certain languages so the change may be challenging to explain in these jurisdictions.

One Board member agreed with the recommendations as ‘materiality’ is a word that is commonly understood and is clearly both quantitative and qualitative. Furthermore, they felt that it better reflects the Boards intention for what is disclosed for accounting policies. They also support inclusion of examples in the Materiality Practice Statement to help communicate the Board’s intentions.

Decision

The Board voted in favour of recommendation (b) with 10 votes and against recommendation (a). It was proposed that examples be developed prior to any changes being made to authoritative guidance.

Disclosure Initiative – Principles of Disclosure – Project Next Steps – Location of Information (Agenda Paper 11F)

Staff analysis

The objective of this paper was to support the Board in determining the next steps of the principles of disclosure project, in particular, whether, and how, the Board should develop requirements about IFRS information outside the financial statements, and non-IFRS information inside the financial statements.

The paper discusses feedback on this topic from stakeholders which was discussed in the February 2018 meeting, see here for a summary of the discussion.

The paper summarises further feedback obtained after the March 2018 board meeting from regulators and national standard setters. In terms of requirements for IFRS information outside the financial statements consistent concerns were around use of specific terms such as ‘Annual Report’, consistency with auditing standards including ensuring users understand which information is and is not audited and use of cross referencing too broadly.

In relation to Non-IFRS information in the financial statements the primary concerns were around how to define ‘non-IFRS information’ in an operational way and if that is within the remit of the Board, how to audit non-IFRS information within the financial statements and the risk of discouraging voluntary disclosures by making them appear to be prohibited.

Also within the appendix is a list of IFRS Standards which permit IFRS information outside of the financial statements.

Staff recommendations

Staff recommended that the Board does not develop requirements about IFRS information outside the financial statements or non-IFRS information inside the financial statements.

Discussion

One Board member clarified that Management Performance Measures, as being proposed in the Primary Financial Statements project would not be impacted by the decision made on non-IFRS information inside the financial statements as part of this project.

Some Board members suggested that it may be wise to include a statement to say that IFRS information is only permitted outside the financial statements when specifically stated in IFRS Standards.

A few Board members dissented with the view that IFRS information should not be allowed outside the financial statements. They suggested that it may difficult to avoid duplication and present good information whilst disassociating IFRS information from other sources. If permission to do this was granted but not mandated there would be no risk for preparers being unable to comply with national regulations. Any permission would be conditional on an entity providing users with ongoing access to the information.

Decision

11 Board members voted in favour of not developing requirements about IFRS information outside the financial statements and 12 in favour of not developing requirements about non-IFRS information inside the financial statements.

Disclosure Initiative – Principles of Disclosure – Technology and Digital Reporting Considerations (Agenda Paper 11G)

Staff analysis

The objective of this paper was to support the Board in determining the next steps of the principles of disclosure project, in particular, whether, and how, the Board should consider the effect of technology and digital reporting within the scope of the project.

Based on feedback from ITCG and ASAF, staff determine that the Board would need to consider two broad types of users, traditional users who access financial information through paper/PDF and digitally sophisticated users who leverage new and emerging technologies when considering digital reporting in the scope of the project as well as those who are a mix of the two.

Staff also noted that technology is a means of delivery of information, however, the scope of the disclosure project and its focus is on the content of information. As such, rather than considering it directly, as part of this project the board should develop disclosure requirements in a ‘technology neutral’ way. 

In the paper staff consider each area of the disclosure project and conclude that the Board generally are already developing requirements in a way that is technologically neutral and, where they are not, have recommended in the relevant paper what to change. For instance, in Agenda Paper 11F staff have recommended that guidance on location of information is not developed partly because it may become obsolete due to digital reporting.

Staff recommendations

The staff recommended that the Board:

  • a) respond to feedback received about technology and digital reporting in the context of the Disclosure Initiative by including relevant considerations in the Guidance for the Board to use when developing and drafting disclosure objectives and requirements;
  • b) not take any further action to consider the effect of technology and digital reporting at this time in respect of the following topics within the Principles of Disclosure project:
    1. which accounting policies to disclose; and
    2. location of information, i.e. IFRS information outside the financial statements and non-IFRS information inside the financial statements; and
  • c) consider those issues relating to the broader implications of technology on financial reporting as part of the IFRS Foundation’s Technology Initiative.

Discussion

No significant discussion was held on this topic.

Decision

The Board voted unanimously in favour of all staff recommendations.

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.