Disclosure initiative — Targeted Standards-level review of disclosures

Date recorded:

Cover Paper (Agenda Paper 11)

The purpose of this meeting was for the Board to make decisions about whether to amend its previous tentative decisions relating to information about drivers of change in fair value measurements and consider lessons learned to date from the process of testing the draft Guidance for the Board when developing and drafting disclosure sections of IFRS Standards in future.

Drivers of change in fair value measurements (Agenda Paper 11A)

This paper provided the background of the project and summarised the staff’s analysis and recommendations relating to whether the Board should amend its previous tentative decisions relating to information about drivers of change in fair value measurements.

Staff analysis

The staff’s analysis highlights the benefits of retaining a reconciliation requirement in IFRS 13 and the reasons of why avoiding reference to particular levels of the fair value hierarchy will be helpful for entities. The staff do, however, stress that the Board should clarify that the objective does not capture all drivers of change in all fair value measurements, but rather the material ones whose measurement is subject to judgement or uncertainty.

The staff also analyse the use of the term ‘significant’ in their recommendation in comparison to the use of the term in IAS 1 (particularly in light of the current project on accounting policies to replace the use of ‘significant’ with ‘material’) and other IFRS Standards and noted that it is reasonable for the Board to use this term in relation to a group of items.

Furthermore, the staff have provided in the paper the indicative disclosure objective and items of information to meet that objective, if the Board agrees with the staff recommendation.

Staff recommendations

The staff recommend that the Board:

  • (a) Make reference to significant drivers of change in the objective that requires an entity to disclose information that enables users to understand drivers of change in fair value measurements over the reporting period;
  • (b) In order to meet this objective, require an entity to disclose a reconciliation from opening to closing balances of recurring fair value measurements categorised within Level 3 of the fair value hierarchy.
  • (c) Identify an additional item of information that, while not mandatory, may enable an entity to meet the disclosure objective in (a). This item is an explanation of significant drivers of change, if any, in fair value measurements other than those classified in Level 3 of the fair value hierarchy.

Board discussion and voting

A Board member noted that the word ‘significant’ is used to describe drivers of change currently, whilst in the IAS 19 January meeting the word ‘main’ was used and pointed out that the wording should be consistent, with their preference being for ‘main’ to be used. They also noted that it should be made clear that the proposal around disclosing not mandatory but encouraged additional information refers to items in the grey area between Level 2 and Level 3, rather than Level 1 items.

Another Board member pointed out that it would not be possible to segregate the movements in fair value relating to foreign exchange rate differences, particularly for companies without foreign operations. The Vice-Chair noted that the intention is not to require this segregation, but rather it is an example of an explanation that might be useful to meet the disclosure objective. The staff clarified that disclosure of these items is required if they are material. The Board member also asked for clarification around which items are considered drivers of change, with the staff responding that these are drivers of movement from the beginning to the end of the financial period.

Another Board member noted that they are unclear around what the disclosure requirement around drivers of change is. The Vice-Chair pointed out that investors are interested in understanding whether the change relates to new items classified as Level 3 or the value of existing Level 3 items fluctuating during the period. They also noted that clarification around this point is needed in order to avoid different interpretations, with the staff noting that this will be actioned.

13 Board members voted in favour of the staff’s recommendation (subject to drafting suggestions and consistent wording used to describe drivers of change), with 1 Board member absent.

Lessons learned  from testing the draft Guidance to date (Agenda Paper 11B)

In this paper, the staff summarised the background of the project and the lessons learned to date from testing the draft Guidance for the Board. They also consider whether and how to update the draft Guidance in light of those lessons.

Staff analysis

The staff’s analysis covers lessons learned from testing each section of the draft Guidance:

  • (a) Using disclosure objectives
  • (b) Developing the content of disclosure sections of IFRS Standards, which includes:
    • i. working with the IFRS Taxonomy team
    • ii. implementing a tailored outreach programme with primary users of financial statements
    • iii. performing outreach with other stakeholders
  • (c) Drafting disclosure sections of IFRS Standards, which includes:
    • i. the use of language
    • ii. leveraging requirements and guidance across IFRS Standards and other IFRS publications
    • iii. further consideration around what the draft Guidance requires about the placement and presentation of high-level, catch-all disclosure objectives

The staff also note that the next stage of the project will be to issue an Exposure Draft for stakeholders to comment on.

Staff recommendation

In light of lessons learned from the testing to date, the staff recommended that the Board update its draft Guidance, such that:

  • a) The prescriptive ‘shall’ language is used to articulate a particular piece of information that is always essential to satisfy a specific disclosure objective. Otherwise, the less prescriptive language ‘while not mandatory, the following may enable an entity to meet this objective …’ is used.
  • b) High-level, catch-all disclosure objectives are presented at the beginning of the relevant disclosure section in an IFRS Standard.

Board discussion and voting

A Board member pointed out that the key parameters to consider during the field work are the clarity, auditability and enforceability of the requirements.

Another Board member noted that a big improvement in this project has been the drifting away from requirements in the form of a generic objective supplemented by a list of detailed requirements, but cautioned that the placement of the catch-all objective at the beginning of the disclosure section may lead to misunderstanding of its role and requirements. 

A Board member pointed out that further testing may need to be done with broader stakeholders, including regulators, auditors and some companies (e.g. big financial institutions) before the staff and Board can conclude on lessons learned. The staff pointed out that, whilst this is a fair point, they believe the right timing to discuss with other stakeholder groups is when an actual set of draft amendments is in place, in order to receive meaningful rather than hypothetical feedback.

Another Board member added that a clear expectation of what an entity should consider when the phrase ‘while not mandatory’ is used should be included and feedback from auditors and regulators around the auditability and enforceability of using this language in practice should be considered.

A different Board member noted that the draft guidance should be published and made available to people who would like to access it.

Another Board member raised a concern around some refinement required with regards to how the requirements are articulated, as they could not envision no objectives at all in place going forward.. They also agreed with the other Board member regarding a drafting guide being published and visible. They also stressed that there should be a constant reminder that the disclosures are subject to materiality. Regarding the catch-all objective, they were flexible with regards to where it should be presented, however noted that it should be clearly articulated that the focus of it is on material, unique anomalies rather than general items. They also pointed out that the expectation in the market was that there would be less disclosures as a result of this project, which they didn’t think would be achieved, hence expectations may need to be managed.

The Vice-Chair raised a concern around putting the draft guidance in the public sphere and noted the need to be very careful with messaging and consequences of how that might be used. With regards to next steps, they pointed out that, whilst they believe the right approach is being followed, caution should be exercised to ensure that they are not overcorrecting, by dramatically changing the way the requirements are drafted.  They also stressed that the staff and Board should ensure that the proposed approach will enable preparers to think about the information users want and result in the information actually being provided in practice. As this is harder to do with an Exposure Draft, all the tools available should be used above and beyond the normal processes, including reviewing recent Standards and discussing with preparers, auditors and regulators any outcomes that did not meet their needs, in order to use as a lesson for the current drafting.

A Board member pointed out that these procedures will require time and suggested speaking to other bodies about the best way to approach this and handle expectations. Another Board member noted that for credibility and effectiveness reasons, the Board should proceed with the Exposure Draft and fieldwork and, if the outcome is not satisfactory, a decision will need to be made regarding the next steps in the project then.

Another Board member requested clarification around what the Exposure Draft would look like. The staff responded that it would look like a set of amendments to IFRS 13 and IAS 19. The Basis for Conclusions would include the guidance and all the explanations demonstrating how the Board got to the amendments and why it developed the guidance in this way. The Board member raised their concern around comingling the two Standards and processes in one document, as it might make it more difficult for people to respond, and suggested either a segregated document or two associated documents.

The Board member also questioned whether research has been used in the project. The Vice-Chair ensured that relevant research will be taken into account, with another Board member adding that they have requested the academic community to look at IFRS 9 & IFRS 15 as they include disclosure objectives. No response has been received as of yet, however the research forum in Oxford has tentatively scheduled programme sessions on the 2 Standards. Some Board members will consider how these sessions can be used to extract information around the disclosure objectives and report back to the Board.

A different Board member noted that the fieldwork should not only focus on the disclosure contents, but on whether the project is actually leading to behavioural changes. They also highlighted that users should be re-engaged during the field work to ensure the disclosures meet their demands and that they understand them.

11 Board members voted in favour of updating the guidance to reflect current work, with 1 Board member absent.

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