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Disclosure initiative [IASB only]

Date recorded:

Principles of Disclosure—Better Communication in Financial Reporting projects (Agenda Paper 11A)

Background

The Board is currently undertaking several projects under the Better Communication in Financial Reporting headline (‘Better Communications projects’).

Those projects are:

  • Primary Financial Statements (PFS)
  • Disclosure Initiative (DI)
    • Principles of Disclosure (PoD)
    • Targeted Standards-level Review of Disclosures
    • Definition of Material
  • Management Commentary
  • IFRS Taxonomy

In March 2017 the Board published Discussion Paper DP/2017/1 Disclosure Initiative—Principles of Disclosure. Respondents to the DP expressed concerns about the boundaries between the PoD project and other Better Communications projects and asked the Board to clarify their interaction.

In this session the staff provided the background to, and current status of, those projects and asked the Board whether it is satisfied with the current interaction and distinction between the projects.

The PFS, DI and Management Commentary projects are focused on content while the IFRS Taxonomy project is focused on delivery. The staff think that the distinction between the PFS, DI and Management Commentary projects can be drawn based on the financial information they are primarily aiming to help improve.

Staff recommendation

The paper did not contain a staff recommendation. Instead, the staff asked the Board whether it is happy with the current interaction and distinctions between the Better Communication projects, and if not, what changes the Board would make.

Discussion

Board members generally indicated agreement with the interactions and distinctions of the project, however there was some confusion about the distinctions within the Disclosure Initiative project. The staff said that the PoD project has disappeared and, based on the feedback to the PoD DP, was spun off into ‘Targeted Standards-level Review’ and ‘Definition of Material’. Board members indicated that communication is crucial as constituents raised queries as to whether the Disclosure Initiative project had been discontinued.

One Board member warned of scope creep when doing the targeted standards-level review. Addressing the disclosure issues of a Standard might unearth broader issues with the recognition and measurement model of that Standard. There were also concerns that putting ‘Definition of Material’ under the Disclosure Initiative umbrella might indicate that materiality only applies to disclosures, while it applies to all items in the financial statements.

The Chairman suggested to communicate based on the Board’s 10-point plan for the Disclosure Initiative. Appendix A of the paper contains the completed points and based on that, clear communication as to which have been completed and which are still outstanding might address confusion amongst constituents.

Decision

There was no formal decision, but all Board members confirmed that they are happy with the current interaction and distinctions between the Better Communications projects.

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

Background

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

Those are:

  • The Board will base all disclosure requirements on one or more specific disclosure objectives
  • Draft all disclosure requirements in a way that explicitly states the underlying objective(s) and clearly links each specific item of information included in the disclosure requirements with the related objective(s)
  • Continue to use high-level disclosure objectives within individual IFRS Standards

Staff recommendation

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

Discussion

There was no discussion on this paper.

Targeted Standards-level Review of Disclosures—Guidance for the Board—Developing disclosure requirements (Agenda Paper 11C)

Background

In this paper, the staff presented an analysis and recommendations to the Board about the development of ‘Guidance for the Board’ to use when developing and drafting disclosure objectives and requirements.

The IFRS Taxonomy improves communication between preparers and users of general purpose financial reports. The IFRS Taxonomy team can provide crucial insight into the development of disclosure proposals as they are able to provide advice on whether the proposals can be effectively implemented in an electronic reporting environment. Further, they can also provide the project team with insight into how the disclosure proposals will interact with existing disclosure objectives and requirements and common reporting practice. The staff therefore believe that a member of the IFRS Taxonomy should be assigned to each of the Board’s active projects in an advisory capacity.

In addition, staff have developed a flexible approach to developing disclosure objectives and requirements that can be adapted to any project. The approach can be summarised as follows:

  • Step 1—understand the existing issue
  • Step 2—understand what stakeholders want and why
  • Step 3—understand what disclosures would be required to support proposed recognition and measurement requirements
  • Step 4—perform a cost/benefit analysis
  • Step 5—understand and document the effects of the proposed disclosure objectives and requirements

Staff recommendation

The staff recommended that, when developing disclosure objectives and requirements in the future, a member of the IFRS Taxonomy team should be assigned to each of the Board’s active projects in an advisory capacity. The staff also recommended that the Board should use the five-step approach set out above to develop disclosure objectives and requirements.

Discussion

There was strong support amongst the Board members for involving the IFRS Taxonomy team early in the standard-setting projects. However, some Board members questioned whether the level of resources in the team is sufficient and whether a formal assignment of a team member was necessary for every project.

One Board member asked how the Taxonomy team’s knowledge would be incorporated in cases where the team have found issues with disclosures in existing Standards. The staff replied that at the moment the focus was to get the Taxonomy team involved earlier in the process, which would also save their time later in the process.

As regards the 5-step-process, the Board members agreed that disclosures should be considered at an earlier point in any standard-setting project, although there was no agreement as to how early is sensible. One Board member suggested to think about disclosure implications with every set of recommendations in the staff papers. Other Board members said that disclosures should be considered all the way through and tested once the recognition and measurement model is decided. Some Board members suggested to test the five steps in the current live projects on Dynamic Risk Management and Rate-regulated Activities.

The Chairman found the distinction between Steps 2 and 3 unclear. The staff said that Step 2 was to highlight the importance of stakeholder involvement early in the process and that Step 2 and 3 might overlap. The Vice Chair said that the IASB should take leadership when involving stakeholders to make sure the staff gets the answers they need to develop a model.

The Vice Chair also said that the five steps should not be a formal requirement, as the Board might be held accountable if it decides that a step is not appropriate for a certain project. One Board member said that the five steps should be taken for all elements of the standard-setting process and not only disclosures.

Some Board members mentioned that a Discussion Paper should not be seen as a first Exposure Draft and that the actual Exposure Draft should be seen as a done document with all requirements already set out.

Decision

All Board members agreed with the staff recommendation to assign a member of the IFRS Taxonomy team to each of the Board’s active projects in an advisory capacity when developing disclosure objectives and requirements in the future.

13 of the 14 Board members agreed with the staff recommendation to use the five-step approach set out in the agenda paper to develop disclosure objectives and requirements.

Targeted Standards-level Review of Disclosures—Selecting Standard(s) (Agenda Paper 11D)

Background

This paper summarised the work performed by the staff relating to the selection of one or two Standards for the Board’s targeted Standards-level review of disclosures. The staff received feedback from respondents to the PoD DP, investor outreach activities and the Board’s consultative groups. Based on this feedback, the staff identified a shortlist of nine Standards that the staff think the Board should consider as potential candidates for the targeted Standards-level review:

  • IAS 7 Statement of Cash Flows
  • IAS 12 Income Taxes
  • IAS 16 Property, Plant and Equipment
  • IAS 19 Employee Benefits
  • IAS 21 The Effects of Changes in Foreign Exchange Rates
  • IFRS 2 Share-based Payment
  • IFRS 3 Business Combinations
  • IFRS 8 Operating Segments
  • IFRS 13 Fair Value Measurement

The staff have included relevant details from previous staff papers and reports and feedback statements for each of the shortlisted Standards. The staff then categorised all disclosure issues identified into four broad categories:

  • Issues related to disclosure objectives
  • Issues related to disclosure requirements
  • Issues related to how disclosure requirements are communicated
  • Issues related to the adequacy of information provided in financial statements

The paper contained a table with a summary of disclosure issues identified through feedback and additional activities. The paper then described the following for the shortlisted Standards (where applicable):

  • Previous Board projects relating to the Standard’s disclosure requirements
  • Disclosure Issues relating to the Standard identified during the PoD project
  • Additional staff research
  • Post-implementation review
  • Maintenance projects

Staff recommendation

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

Discussion

There was some confusion amongst Board members about the process. It was unclear whether the staff aimed at improving the disclosure objectives and requirements in the selected Standards or at testing and improving the ‘Guidance for the Board’. The staff clarified that the primary objective was to test and improve the ‘Guidance for the Board’ but the identified disclosure deficiencies in the selected Standards would be rectified by way of an amendment. One Board member objected to the Board using the testing of the ‘Guidance for the Board’ to make improvements to a Standard. That Board member was of the view that only the process should be tested and not the disclosures themselves.

As regards which Standards to choose there was some discussion around several Standards. Most Board members said that one or two Standards should be selected. One Board member suggested not to select a disclosure-only Standard and considered IAS 7 to be such a Standard. IFRS 2 is also problematic as the result from the Financial Instruments with Characteristics of Equity (FICE) project might affect the Standard.

Some Board members thought IFRS 13 would be a good Standard as the post-implementation review (PIR) had revealed that the disclosure requirements in IFRS 13 are deficient and the Board had already decided to address those. There was some confusion as to whether IFRS 13 had already been pre-selected by the Board for the targeted standards-level review. The Research Director said that if IFRS 13 would not be selected for this process, the Board has to make a formal decision to drop the activities based on the results of the PIR.

IAS 12 was also identified as tax information, particularly with regard to deferred taxes, was poorly disclosed.

The Board essentially ruled out IFRS 8 as a candidate for the targeted standards-level review. Although investors have given strong feedback on its deficiency, this process would not result in helpful information to them. One Board member said that there would have to be communication as to why the Standard was not selected.

One Board member suggested to select one newer Standard that already had an overarching disclosure objective and an older Standard without an overarching disclosure objective.

Some Board members warned again to be cautious about scope creep (see above discussion on Agenda Paper 11A).

The Board will select the Standards at the July 2018 Board meeting.

Definition of Material—Project deliberations (Agenda Paper 11E)

Background

In September 2017, the Board published Exposure Draft ED/2017/6 Definition of Material (Proposed amendments to IAS 1 and IAS 8). The proposed amendments to IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors refine the definition of material and clarify its application to:

  • (a) Align the wording of the definition in IFRS Standards and the definition in the Conceptual Framework—the wording is currently similar but not identical—and make some minor improvements to that wording
  • (b) Incorporate some of the existing supporting requirements in IAS 1 into the definition to give them additional prominence
  • (c) Improve the clarity of the explanation accompanying the definition of material

Almost all respondents to the ED supported the proposed amendments. However concerns were raised related to the following:

  • Including the concept of ‘obscuring information’ in the definition of material
  • The location of the definition of material and explanatory paragraphs
  • The existing terminology in the Conceptual Framework
  • Replacing the threshold ‘could influence’ with ‘could reasonably be expected to influence’

The paper contained an analysis of these concerns and a discussion on effective date, ‘immaterial’ vs. ‘not material’, materiality practice statement, use of the term ‘material’ and the definition of material of the International Auditing and Assurance Standards Board (IAASB).

The staff anticipate the bold definition of material in IAS 1 being that proposed in the ED:

“Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of a specific reporting entity’s general purpose financial statements make on the basis of those financial statements.”

Staff recommendation

Including the concept of ‘obscuring information’ in the definition of material

The staff recommended that the Board should retain the proposal to include the concept of ‘obscuring information’ in the bold definition of material and replace the proposed wording explaining ‘obscuring information’ in the explanatory paragraphs with a clearer description and examples.

The location of the definition of material and explanatory paragraphs

The staff recommended that the Board should replace the definition of material and explanatory paragraphs in IAS 8 with a reference to the definition of material and explanatory paragraphs in IAS 1.

The existing terminology in the Conceptual Framework

The staff recommended that the Board should retain the proposed amendments that align terminology in the definition of material with existing terminology in the Conceptual Framework

Replacing the threshold ‘could influence’ with ‘could reasonably be expected to influence’

The staff recommended that the Board retain the proposed amendment to replace the threshold ‘could influence’ with ‘could reasonably be expected to influence’ in the definition of material.

Effective date

The staff recommended that the effective date of the amendments be for annual periods beginning on or after 1 January 2020 with early application permitted.

‘Immaterial’ vs. ‘not material’

The staff recommended that the Board should not take any further action in response to feedback about the use of the terms ‘immaterial’ and ‘not material’.

Materiality Practice Statement

The staff recommended that the Board should not incorporate any of the Materiality Practice Statement in IAS 1 or the Conceptual Framework, including via reference, at this time.

Use of the term ‘material’

The staff recommended that the Board should not take any further action in response to feedback about the varying use of the term ‘material’.

Definition of material of the IAASB

The staff recommended that the Board should not take any further action in response to feedback about the interaction between the definition of material and the description of materiality in the context of an audit in ISA 320.

Discussion

The main part of the discussion focused on the inclusion of the concept of ‘obscuring information’ in the definition of material. The Board broadly agreed with the staff recommendation, however one Board member objected to including as one of the circumstances of obscuring ‘material information being hidden, or clouded, by immaterial information to the extent that a primary user is unable to determine what that material information is’. The Board member said that the notes should only contain material information and the IASB would not send a clear message by implying that there could be immaterial information in the notes. The other Board members did not share this concern as, in practice, preparers could not be prohibited from putting immaterial information in the notes. Sometimes, the inclusion of certain pieces of immaterial information was even required by regulators. The Board member was worried that in a large set of financial statements with several hundred pages, every piece of information could be perceived as ‘obscured’ and regulators could enforce on that basis.

There were mixed views about whether ‘obscuring’ would be a subset of ‘omitting’ and ‘misstating’ or whether it should be seen alongside the both.

When asked by a Board member, the staff said that the wording included in the Agenda Paper was not the final drafting proposal.

There was no significant discussion on the other staff recommendations.

Decision

13 of the 14 Board members supported the proposals on ‘obscuring information’.

13 of the 14 Board members agreed to replace the definition of material and explanatory paragraphs in IAS 8 with a reference to the definition of material and explanatory paragraphs in IAS 1.

All Board members agreed:

  • To retain the proposed amendments that align terminology in the definition of material with existing terminology in the Conceptual Framework.
  • To retain the proposed amendment to replace the threshold ‘could influence’ with ‘could reasonably be expected to influence’ in the definition of material.
  • That the effective date of the amendments be for annual periods beginning on or after 1 January 2020 with early application permitted.
  • Not to take any further action in response to feedback about the use of the terms ‘immaterial’ and ‘not material’.
  • Not to incorporate any of the Materiality Practice Statement in IAS 1 or the Conceptual Framework, including via reference, at this time.
  • Not to take any further action at this time in response to feedback about the varying use of the term ‘material’.
  • Not to take any further action in response to feedback about the interaction between the definition of material and the description of materiality in the context of an audit in ISA 320.

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.