Exploring next steps (Agenda paper 11)

The purpose of the meeting was to analyse the possible courses of action available to the IASB to respond to the feedback provided by the Accounting Standards Advisory Forum (ASAF) on Exposure Draft ED/2021/3 Disclosure Requirements in IFRS Standards—A Pilot Approach.

The paper included the background and workstreams to the project as well as a summary of the proposals and feedback received.

Proposed approach to developing disclosure requirements

The widespread support for the proposed approach to developing disclosure requirements indicates a clear way forward. The IASB could decide to finalise the methodology explained in the ED or could also consider whether the methodology should include guidance on the boundary of information the IASB could require an entity to disclose in the notes.

Proposed approach to drafting disclosure requirements

While there is good support for drafting specific disclosure objectives as requirements, feedback suggests limited support for drafting overall disclosure objectives as requirements and little support for using non-prescriptive language when referring to items of information.

Given the mixed feedback on the proposed approach to drafting disclosure requirements, the following courses of action are available to the IASB:

• Finalise the approach to drafting disclosure requirements as proposed with limited changes
• Terminate the project
• Develop a middle-ground approach to drafting disclosure requirements

Finalise the proposed approach

The IASB could decide to finalise the proposed approach to drafting disclosure requirements mainly because of:

• Support for drafting specific disclosure objectives as requirements
• No new information about the disclosure problem or the potential ways to solving the disclosure problem

If the IASB were to decide to finalise the proposed approach, to resolve stakeholders’ concerns, it could consider making limited changes to the drafting of:

• Overall disclosure objectives
• Explanations of what the information that meets the specific disclosure objectives is intended to help users do

Terminate the project

The IASB could decide to finalise the proposed approach to developing disclosure requirements and discontinue the proposed approach to drafting mainly because:

• The feedback suggests that the proposed approach may not be effective in shifting entities from using a checklist approach to disclosing items of information specified in an Accounting Standard, to using judgement to identify and disclose information that meets disclosure objectives
• Even if the IASB were to make changes to the proposed approach to resolve stakeholders’ concerns—for example using prescriptive language when referring to items of information—feedback suggests that changing the proposed approach, or the way the IASB drafts the disclosure requirements, may not bring about the shift the IASB was aiming to achieve through the project

If the IASB were to decide to terminate the project, the IASB would publish a project summary.

Develop a middle ground approach to drafting disclosure requirements

The IASB could decide to develop a middle ground approach to drafting disclosure requirements with the aim of providing a better framework for entities to use judgement to identify and disclose useful information to users of financial statements.

Based on the feedback, the IASB could conclude that changing the way the IASB drafts disclosure requirements may not stop entities from applying a checklist approach to disclosing items of information specified in an Accounting Standard. The IASB could, however, provide a better framework for entities to apply paragraph 31 of IAS 1.

Feedback suggests that specific disclosure objectives that precisely describe detailed user information needs would help entities provide relevant information. If a specific objective is accompanied by a list of items of information that an entity would normally disclose to satisfy the specific objective, an entity would be able to apply paragraph 31 of IAS 1 within the context of each specific objective. To further strengthen its application, the IASB could also decide to include a requirement at the beginning of the disclosure section that an entity should consider paragraph 31 of IAS 1 in applying the specific disclosure objectives. The IASB could deliberate whether to include, in addition to the items of information that an entity would normally disclose, examples of other items of information that an entity could or might need to disclose to satisfy a specific objective. It may, however, be difficult to draw a distinction between items of information that an entity would normally disclose to satisfy a specific objective, and examples of other items of information. To resolve stakeholders’ concerns, the IASB could also decide to make limited changes to the drafting of overall disclosure objectives and explanations of what the information that meets the specific disclosure objectives is intended to help users do.

Proposed amendments to IFRS 13

Whether the IASB decides to finalise the approach to drafting disclosure requirements as proposed with limited changes, terminate the project, or develop a middle ground approach, it should decide whether to:

• Finalise the proposed amendments to IFRS 13 with any changes to respond to the feedback
• Not proceed with any further work on the disclosure requirements in IFRS 13

Finalise the proposed amendments to IFRS 13

The proposed amendments to IFRS 13 were developed based on feedback from users of financial statements and the findings of the PIR of IFRS 13. Consequently, finalising the proposed amendments would respond to that feedback and those findings. Feedback on the ED suggests that the disclosure proposals would help entities make effective materiality judgements in disclosing information about fair value measurements, although there have been concerns about the cost of collecting information. Given the mixed response to individual proposals in the ED for IFRS 13, the IASB could redeliberate each proposal separately when deciding whether to further develop the proposed amendments to IFRS 13.

If the IASB were to decide to finalise the disclosure proposals, it should: (a) perform outreach with stakeholders to gain an understanding of the likely effects of the changes to the proposals; and (b) consider the implications of any changes to the proposed approach to drafting disclosure requirements.

Not proceed with any further work on IFRS 13 disclosure requirements

The IASB could decide not to proceed with any further work on IFRS 13 disclosure requirements on the basis that:

• The proposed amendments to IFRS 13 were developed to test the proposed Guidance for the Board to use when Developing and Drafting Disclosure Requirements in IFRS Standards (Guidance) and the feedback helped the IASB understand how disclosure requirements developed and drafted applying the proposed Guidance would be applied in practice
• Some stakeholders would prefer that the Guidance be applied prospectively to future Accounting Standards, should it be implemented. Therefore, the IASB could decide to apply the proposed Guidance only to new Accounting Standards to assess the effects of applying prescriptive objectives before amending existing Accounting Standards
• Providing guidance on which Level 2 measurements are close to Level 3 may be impossible without affecting how entities currently assess the significance of unobservable inputs. During the PIR, most respondents said they found the assessment of significance challenging and suggested the IASB provide further guidance
• Feedback suggests that the cost of collecting information, especially for Level 2 measurements close to Level 3 may exceed the potential benefits
• Amending the disclosure requirements in IFRS 13 would result in a divergence from US GAAP as the fair value measurement project was a joint project with the US national standard-setter, the Financial Accounting Standards Board (FASB)

Proposed amendments to IAS 19

Whether the IASB decides to finalise the approach to drafting disclosure requirements as proposed with limited changes, terminate the project, or develop a middle ground approach, it should decide whether to:

• Finalise the proposed amendments to IAS 19 with any changes to respond to the feedback
• Not proceed with any further work on the disclosure requirements in IAS 19

Finalise the proposed amendments to IAS 19

The proposed amendments to IAS 19 were developed based on feedback from users of financial statements. Consequently, finalising the proposed amendments would respond to that feedback. Feedback on the ED suggests that applying the disclosure proposals would result in:

• Disclosure of more relevant information, for example, future cash flows associated with defined benefit plans
• Better communication of information, for example, executive summary together with a reconciliation of net defined benefit liability that allow users to reconcile numbers in the notes with the numbers in the primary financial statements.

If the IASB were to decide to finalise the disclosure proposals, it should:

• Perform outreach with stakeholders to gain an understanding of the likely effects of the changes to the proposals
• Consider the implications of any changes to the proposed approach to drafting disclosure requirements

Not proceed with any further work on IAS 19 disclosure requirements

The IASB could decide not to proceed with any further work on IAS 19 disclosure requirements:

• For reasons similar to those in the first two bullets under the header above ‘Not proceed with any further work on IFRS 13 disclosure requirements’
• On the basis that feedback suggests that disclosures resulting from applying the proposed overall disclosure objective together with the proposed specific disclosure objectives would not be significantly more useful than those resulting from applying the current requirements of IAS 19. Therefore, the cost of further developing the disclosure proposals may outweigh the potential benefits

The IASB could conclude that applying the current disclosure requirements in IAS 19 already results in an entity indirectly providing information that helps assess future cash flows associated with defined benefit plans.

The IASB was asked for any comments, and whether there are any other courses of action they want to pursue. The staff also asked the IASB whether they need a further analysis before they are able to make a decision on next steps.

IASB discussion

Many IASB members noted that the middle ground approach seemed to be the most reasonable course of action related to this project. However, many of them also raised the point that it was important to establish what was meant by middle ground in this context and that it must be clearly defined.

A few IASB members also noted that the reality was that preparers tend to use a checklist and that this approach is likely to be applied going forward as well, irrespective of how the disclosure requirements are structured in the standards. One IASB member noted that the checklists are not a bad approach and help ensure completeness.

Some IASB members mentioned that the feedback suggests that people do not want objective-based disclosure requirements but would rather prefer a more prescriptive based approach where they are told what to do. One IASB member suggested that a prescriptive list of disclosures should be included in the standards along with a principle that allows entity to assess what is material to them. That would give entities a prescribed list and an option to apply materiality to it if they would have the resources and structure to do so.

A few IASB members noted that the language used in the proposed disclosure requirements was not received well and that this should be considered if the standards are updated.

Two IASB members did not support the suggestion to split the requirements between mandatory disclosures and those that while not mandatory, may enable an entity to meet the disclosure objective. It was discussed that it would be difficult to draw that line that would separate the two sections and make it more complicated.

Some IASB members also noted that there was a significant lesson to learn from this project for the standard-setters that must be considered going forward. One IASB member stated that they would be fine if the line is drawn at the point of taking away the lessons learned and not proceeding with the project.

One IASB member noted that some standards already include an explanation on the disclosure objectives for users’ needs and there was no need to have a new methodology, and that specific disclosure requirements were a good anchor to information being provided.

Some IASB members stated that it was important to consider materiality irrespective of how the disclosure requirements were drafted. However, one of them noted that merely cross-referencing to the materiality requirements is not likely to help.

One IASB member mentioned that the overall feedback seemed to indicate much support for specific requirements and more questions on overall objectives. They also mentioned that there must be due consideration to the cost benefit analysis, and it would be useful to discuss this with the Capital Markets Advisory Group (CMAC) to understand the feedback related to the benefits and if there was a high priority associated with such benefits.

It was also noted that if it was decided to not proceed with the project overall, the proposed changes to IAS 19 and IFRS 13 might also not be made. It was noted by a few IASB members that the findings of the PIR of IFRS 13 had identified some potential improvements to the disclosure requirements which were to be addressed through this project.

One IASB member noted that some of the proposed changes for IAS 19 were good, such as those on the executive summary and the reconciliations, and it seemed to be in line with the ongoing project on Primary Financial Statements. Another noted that there were not many key changes to be made for IAS 19 but there were some important ones such as those related to plans being closed to new entrants.

One IASB member suggested that the IASB should not proceed with the IFRS 13 project as it was making more fundamental changes rather than improving disclosures which was not the purpose of this project.

The Chair concluded the meeting by stating that there seemed to be little to no support for finishing the project and that there seemed to be more support for the middle ground with clearly defining such middle ground. He also noted that there were more reservations around IAS 19 and IFRS 13 that would need to be considered.

Summary of feedback from ASAF on the possible courses of action (Agenda Paper 11A)

This paper summarises the feedback from the ASAF at its July 2022 meeting on the possible courses of action and the next steps in response to the feedback on the ED.

IASB discussion

This paper was not discussed.