Disclosure Initiative—Subsidiaries without Public Accountability: Disclosures

Date recorded:

Cover Paper (Agenda Paper 31)

Background

At its June 2022 meeting, the IASB agreed on a project plan for redeliberating the Exposure Draft Subsidiaries without Public Accountability: Disclosures (ED) towards developing an IFRS Accounting Standard (Standard).

At their meeting, the IASB continued its deliberations, considering feedback received on different aspects of the draft Standard set out in the ED.

IFRS Accounting Standards without reduced disclosure requirements (Agenda Paper 31A)

Background

This agenda paper discussed the feedback on three IFRS Accounting Standards (IFRS 8, IFRS 17 and IAS 33) for which the IASB did not propose reduced disclosure requirements in the draft Standard.

Staff analysis

Disclosure requirements about insurance contracts

  • The staff are of the view that the IASB should confirm that the application of IFRS 17 is unchanged for a subsidiary applying the Standard because:
    • IFRS 17 introduces a new accounting model for insurance contracts which is supported by its disclosure requirements
    • Reduced disclosure requirements for IFRS 17 would only affect a small portion of subsidiaries eligible to apply the Standard
    • There is a lack of feedback on how the disclosure requirements in IFRS 17 can be reduced for eligible subsidiaries
    • Deferring proposing reduced disclosure requirements for IFRS 17 in the Standard for a period would enable the IASB to assess the effectiveness of IFRS 17 disclosure requirements
  • The IASB should continue to assess the effectiveness of disclosure requirements in IFRS 17 and consider proposing reduced disclosure requirements for IFRS 17 in the Standard at a future date, specifically when sufficient evidence and feedback surrounding the implementation of IFRS 17 have been obtained

Disclosure requirements about earnings per share and operating segments

The staff are of the view that the IASB should retain the proposals for IAS 33 and IFRS 8 as set out in the draft Standard, for the reasons sets out in the Basis for Conclusions accompanying the ED

The staff noted requests from a few respondents for the IASB to clarify whether the application of IAS 33 and IFRS 8 is mandatory for entities applying the Standard. The staff state that the draft Standard only reduces disclosure requirements that a subsidiary is required to provide. The 'scope sections’ of other IFRS Accounting Standards are left in situ in those Standards. Therefore, a subsidiary applying the draft Standard has to refer to the 'scope sections’ in other IFRS Accounting Standards to determine whether it is required to apply that Standard. Similarly, a subsidiary would also refer to other IFRS Accounting Standards for recognition, measurement and presentation requirements.

Nevertheless, the staff could consider whether the concerns raised by respondents could be alleviated in finalising the drafting of the Standard, such as: IAS 33 and IFRS 8 are not mandatory for an eligible subsidiary applying the draft Standard—that is, those Standards are only applicable if an eligible subsidiary applying the draft Standard chooses to disclose information about earnings per share and operating segments.

Staff recommendation

The staff recommended that the IASB confirmed its proposals in the draft Standard, that the application of the disclosure requirements in IFRS 8, IFRS 17 and IAS 33 remain applicable for a subsidiary applying the Standard.

IASB discussion

Most IASB members supported the staff recommendation. Several IASB members shared the view that issuers have limited experience with IFRS 17 given it is still a new Standard. IASB members agreed that the decision should be revisited in the future, subject to further discussions with stakeholders once there is more practical experience upon which to base the decision.

One IASB member pointed out that compared to IFRS 15 or IFRS 16 which applies to almost all entities, IFRS 17 will only apply to a relatively small number of entities so efficiency savings resulting from reduced disclosure requirements would be relatively limited. It was also pointed out that insurance regulators believe that IFRS 17 disclosures are helpful to users.

One IASB member pointed out that the fact that IFRS 17 is a new Standard that has not yet been fully implemented should not be a reason for not attempting to reduce the disclosure requirements as it is the first-time implementation where most cost are incurred. One of the main objectives for this project is increasing the cost-efficiency for eligible entities. However, all agreed that there should not be any reduction in IFRS 17 disclosure requirements because the project had not identified any suitable opportunities.

IASB members also discussed certain specific considerations related to captive insurers (a subsidiary that insures only risks of its parent or its fellow affiliates). Some IASB members believed that captive insurers might  benefit from this new Standard, however, all agreed that the IASB is not yet in a position to propose this for various reasons as summarised below:

  • Some captive insurers also hold policies with counterparties that are outside of their groups
  • Captive entities are often used to centralise/concentrate risks and it is therefore important that they provide sufficient disclosures around those risks
  • At the beginning of this project, the IASB did try to reduce the disclosures under IFRS 17, but several challenges were encountered

All IASB members supported the staff recommendations regarding not reducing the disclosures in IFRS 8 and IAS 33. These Standards are intended to provide very specific information. As the users of financial statements had specifically asked for such information for valid reasons, it would be inappropriate to reduce the disclosures required by those Standards.

IASB decision

12 out of 12 agreed with the staff recommendation.

Proposed reduced disclosure requirements in IAS 34 (Agenda Paper 31B)

Background

This agenda paper discussed the feedback on the IASB’s proposal to include reduced disclosure requirements for IAS 34 in the draft Standard.

Staff analysis

The staff agree it is unlikely that a subsidiary which is eligible to apply the draft Standard will prepare interim financial statements compared to entities with public accountability. However, a subsidiary may be required to prepare interim financial statements to comply with a loan agreement with a bank or when raising new debt.

In developing the draft Standard, the IASB observed that an eligible subsidiary applying the draft Standard and preparing interim financial statements should not be required to provide disclosures in its interim financial statements that are not required in its annual financial statements. No comments were received on this observation.

The staff disagree with analogising to the IASB’s proposed approach for IFRS 8 and IAS 33. A subsidiary eligible to apply the Standard would not be in the scope of IFRS 8 and IAS 33. As such, the ED proposes that subsidiaries that choose to provide information required by IFRS 8 and IAS 33 has to apply those IFRS Accounting Standards including all their disclosure requirements. Whereas IAS 34 does not mandate which entities are required to publish interim financial statements.

Although a subsidiary applying the Standard is not precluded from disclosing additional information in either its annual financial statements or its interim financial statements, the staff do not consider a subsidiary applying the Standard should be required to provide disclosures in its interim financial statements that it is not required to provide in its annual financial statements. Not including reduced disclosure requirements for IAS 34 in the Standard and requiring an eligible subsidiary to apply all the disclosure requirements in IAS 34 (similar to the proposed approach for IFRS 8 and IAS 33) would result in a subsidiary providing disclosures in its interim financial statements that are not required in its annual financial statements.

Staff recommendation

The staff recommended that the IASB proceed with its proposal to include reduced disclosure requirements for IAS 34 in the Standard.

IASB discussion

Most IASB members agreed with the staff recommendation that IAS 34 disclosure requirements should be reduced. This is in line with the objective of the project. If some information is not required in an annual report, it should not be required in an interim report either.

Entities falling within the scope of IFRS 8 and IAS 33 are not likely to be in the scope of this Standard. This is different from IAS 34.

IASB decision

12 out of 12 agreed with the staff recommendation.

Proposed statement of compliance. (Agenda Paper 31C)

Background

This agenda paper discussed the feedback on the proposed statement of compliance with IFRS Accounting Standards and the statement that an eligible subsidiary has applied the draft Standard.

Staff analysis

The main concern from respondents is the perceived conflict of an eligible subsidiary asserting compliance with IFRS Accounting Standards when applying the draft Standard, because the draft Standard has reduced disclosures from IFRS Accounting Standards.

However, the Standard, if finalised, will be part of IFRS Accounting Standards. The proposals in the Standard provide relief from some disclosure requirements in IFRS Accounting Standards by not requiring those disclosures designed for users of the financial statements of publicly accountable entities. Therefore, the staff think that a subsidiary that elects to apply the Standard should be able to state compliance with IFRS Accounting Standards.

Stakeholder concerns on the perceived conflict of a subsidiary asserting compliance with IFRS Accounting Standards when applying the draft Standard could be because of the proposal that a subsidiary disclose the statement of compliance together with the fact that it has applied the draft Standard. Locating the two disclosures together might have raised questions that otherwise might not have arisen. To aid comparability and understandability, the IASB proposed that the two requirements be disclosed together.

A further concern raised relates to how to refer to the draft Standard in audit reports. Audit reports are prepared in accordance with auditing standards (for example, International Standards on Auditing issued by the International Auditing and Assurance Standards Board (IAASB)). The staff think this matter is best addressed by auditing regulatory bodies.

Staff recommendations

The staff recommended that the IASB proceeds with its proposal 

to require an eligible subsidiary that elects to apply the Standard to disclose it has complied with IFRS Accounting Standards together with the fact it has applied the Standard.

IASB discussion

IASB members emphasised the fundamental importance of the statement of compliance as it defines the accounting framework used to prepare the financial statements. It provides clarity and a frame of reference for both companies and users. For those reasons, it should be as precise as it can be.

IASB members also debated the need for consistency with IAS 34 as they both provided guidance on reduced disclosures. One IASB member pointed out that under IAS 34, entities still have a choice whether to apply full IFRS, i.e. if they have chosen to apply full IFRS, then they should confirm compliance with IFRS; if an entity has chosen to provide a condensed set of financial statements, then they would need to refer to IAS 34, but not full IFRS. This seems inconsistent with what is proposed by the staff for this new Standard.

Most IASB members expressed the view that the purpose of this project was not to create a new framework, but to allow certain eligible entities who apply full IFRS Standards to provide reduced disclosures.

Overall, most IASB members agreed with the staff recommendation. Some IASB members suggested that the wording in the draft Standard would need to be revisited to ensure no conflict with IAS 34. One IASB member also pointed out that the wording will also need to accommodate entities that may apply this new Standard and IAS 34.

IASB Members also agreed that they should liaise with the IAASB to obtain an audit perspective on this matter.

IASB decision

12 out of 12 agreed with the staff recommendation.

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