Decide project direction—Cover paper (Agenda Paper 11)

In March 2021, the IASB published Exposure Draft ED/2021/3 Disclosure Requirements in IFRS Standards—A Pilot Approach: Proposed amendments to IFRS 13 and IAS 19 which sets out a proposed new approach to developing and drafting disclosure requirements in IFRS Accounting Standards.

The purpose of this meeting was for the IASB to decide the next steps for the Targeted Standards-level Review (TSLR) of Disclosures project based on the feedback on the ED.

Decide project direction—Guidance for the Board (Agenda Paper 11A)

This paper analysed the courses of action available to the IASB and recommends a course of action to respond to the feedback on the proposed approach to developing and drafting disclosure requirements in IFRS Accounting Standards (Guidance for the Board), as set out in the ED.

At its meeting in July 2022, no IASB members expressed support for using the approach to drafting as proposed because of concerns from stakeholders about the significant cost of using judgement in applying the requirements drafted using that approach.

Consequently, this agenda paper discussed whether to:

• Discontinue work on the proposed approach to drafting disclosure requirements
• Develop a middle ground approach to drafting disclosure requirements

Discontinue work on the proposed approach to drafting disclosure requirements

The IASB could decide to discontinue work on the proposed approach to drafting disclosure requirements because 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, 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
• A checklist approach to disclosing items of information specified in an Accounting Standard may help entities provide comparable information

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. Applying such an approach, disclosure objectives would be accompanied by a prescriptive list of items of information that an entity should disclose to meet the objectives.

Staff recommendation

The staff recommended that the IASB develop a middle ground approach to drafting disclosure requirements because:

• Discontinuing the work on approaches to drafting disclosure requirements would not contribute to solving the disclosure problem
• A middle ground approach would improve the IASB’s approach to drafting disclosure requirements and help address the disclosure problem to some extent. By pursuing a middle ground approach, the IASB would be better placed to encourage other stakeholders to help address the disclosure problem.
• Stakeholders’ concerns about the proposals were primarily related to prescriptive overall disclosure objectives and less prescriptive language when referring to items of information. A middle ground approach that addresses these concerns would likely receive widespread support while still improving the IASB’s approach to drafting disclosure requirements

The staff further recommended the IASB publish the Guidance for the Board as a document posted on the IFRS Foundation website. As a reference, the IASB had previously published on the website a document which explains the objectives and process of post-implementation reviews (PIRs).

This recommendation would ensure that the Guidance for the Board:

• Would be publicly available—any stakeholder could access the document and understand how the IASB would develop disclosure requirements in IFRS Accounting Standards
• Would be flexible and iterative as the IASB intended, for example, whenever the IASB needs to amend the methodology based on feedback from stakeholders, the IASB can make changes immediately

IASB discussion

Many IASB members supported the staff recommendation to document the proposed methodology for developing disclosure requirements and use it when developing disclosure requirements in future standard-setting activities and to publish the Guidance for the Board as a separate document on the IFRS Foundation website. They stated that this would be a good document to share with the stakeholders to explain why the IASB are doing things a certain way and that it would be similar to a PIR. They stated that the IASB should share their understanding and conclusion of what can be put in place and that they should be transparent to stakeholders on what will be considered going forward with disclosure requirements.

Two IASB members mentioned that the document can be caveated to say that the document is subject to change based on the future learnings of the IASB.

One IASB member discussed about how this document must have an anchor or reference to some existing guidance such as the Conceptual Framework. To this, another IASB member mentioned that the topic of the next paper (11B) might be more closely linked to the Conceptual Framework than this document. She also suggested to add wording to suggest that this document must be read in conjunction with what is published as an outcome of Agenda Paper 11B.

One IASB member stated that it was not clear whether the document would be binding or authoritative. He suggested that it should not be a separate document but an appendix to the project summary. He also stated that the IASB may be questioned if there are departures from or changes to the methodology defined in the document and that it might be expected to seek feedback or comments on the document.

Another IASB member mentioned that the project summary cannot be updated whereas this document could be updated in the future and thus should be maintained separately from the project summary. The Chair mentioned that if the document is created separately, the IASB must also think about the process around updating it. Another IASB member stated that the IASB should explain in the Basis for Conclusions (BC) if the proposed methodology is not followed. The document as such helps to add discipline and a reasonably consistent process to the disclosure requirements.

Most IASB members agreed with developing a middle ground approach to drafting disclosure requirements. One IASB member stated it might be relevant to address what would be considered the right level of required disclosure when developing the approach.

IASB decision

10 of the 11 IASB members voted in favour of documenting the proposed methodology and using it when developing disclosure requirements in future standard-setting activities.

11 of the 11 IASB members voted in favour of developing a middle ground approach to drafting disclosure requirements.

10 of the 11 IASB members voted in favour of publishing the Guidance for the Board as a document posted on the IFRS Foundation website.

Decide project direction—A middle ground approach to drafting disclosure requirements (Agenda Paper 11B)

This paper analysed the recommended middle ground approach to drafting disclosure requirements.

Staff recommendation

Should the IASB decide to proceed with developing a middle ground approach to drafting disclosure requirements, the staff recommended that the IASB, when drafting disclosure requirements:

• Provide context-setting, non-prescriptive overall disclosure objectives that describe the overall information needs of users of financial statements
• Not include a cross-reference to paragraph 31 of IAS 1 at the beginning of the disclosure section of each Accounting Standard
• Require entities to comply with specific disclosure objectives that describe the detailed information needs of users of financial statements
• Support specific disclosure objectives with explanations of the assessments that users make that rely on information disclosed applying the specific disclosure objectives
• Use prescriptive language when referring to items of information that an entity should disclose to meet a specific disclosure objective, subject to the requirements of paragraph 31 of IAS 1

IASB discussion

Many IASB members were supportive of the staff recommendation that a middle ground approach should include context-setting, non-prescriptive overall disclosure objectives that describe the overall information needs of users of financial statements. A few IASB members stated that it would be good to see an example of how the middle ground approach should be applied.

One IASB member stated that the approach gives the preparers an understanding of what the users require and would be a tool to help better linkage between materiality and various disclosure requirements that will be set. Another IASB member stated a preference for the use of the wording “context-setting”.

Many IASB members were supportive of the staff recommendation that a reference to paragraph 31 of IAS 1 should not be included at the beginning of the disclosure section of each Accounting Standard. One IASB member said that this reference should not be added as it would be a repetition and would not be neutral, and that it also seemed to be one-directional to remind preparers of the concept of materiality. Another IASB member said that it might not be a bad idea to have the reminder but did not seem to be something that should be done for every standard.

One IASB member said that the reference should not be included because there may be an unintended consequence of preparers sticking to that paragraph of the standard and not the standard as a whole. She also mentioned that this can be referenced in the BC related to disclosure requirements. Two IASB members initially disagreed with the staff recommendation. One IASB member mentioned that adding the reference to paragraph 31 of IAS 1 acts as an intermediary step as a reminder and also suggested that this should be done consistently across all standards. Another IASB member mentioned that paragraph 31 of IAS 1 is very important and linkage with that seemed appropriate.

The Chair reminded IASB members that the materiality concept is not working well and there needs to be a more robust approach. He also mentioned that they have an obligation as standard-setter to develop this approach. A few IASB members acknowledged that there is an issue related to materiality but adding it as a reminder to one standard is not likely to resolve the issue.

Most IASB members agreed with the staff recommendation on requiring entities to comply with specific disclosure objectives that describe the detailed information needs of users of financial statements and supporting specific disclosure objectives with explanations of the assessments that users make that rely on information disclosed applying the specific disclosure objectives.

One IASB member mentioned that this approach addressed the materiality issue to some extent as it explains the user needs and how that information will be used. Another IASB member stated that adding examples seemed like a lot of information was being added and it was becoming more prescriptive and that perhaps should be reconsidered.

Most IASB members agreed with using prescriptive language when referring to items of information that satisfy a specific disclosure objective, subject to the requirements of paragraph 31 of IAS 1. One IASB member stated that they should formalise the periodic review of disclosures as part of the PIR of new standards as they would need to know which disclosures are working as well as whether the manner in which the disclosures were written affected performance. Another IASB member stated that the application of materiality requires time, effort and resources and it is typically easier for some entities to take the list of disclosures to meet their requirements.

IASB decision

11 of the 11 IASB members voted in favour of the middle ground approach including context-setting and non-prescriptive overall disclosure objectives that describe the overall information needs of users of financial statements.

9 of the 11 IASB members voted against including a reference to paragraph 31 of IAS 1 at the beginning of the disclosure section of each Accounting Standard.

11 of the 11 IASB members voted in favour of requiring entities to comply with specific disclosure objectives that describe the detailed information needs of users of financial statements.

11 of the 11 IASB members voted in favour of supporting specific disclosure objectives with explanations of the assessments that users make that rely on information disclosed applying the specific disclosure objectives.

11 of the 11 IASB members voted in favour of using prescriptive language when referring to items of information that satisfy a specific disclosure objective, subject to the requirements of paragraph 31 of IAS 1.

Decide project direction—Proposed amendments to IFRS 13 Fair Value Measurement and IAS 19 Employee Benefits (Agenda Paper 11C)

This paper analysed the courses of action available to the IASB and recommended a course of action to respond to the feedback on the proposed disclosure requirements in IFRS 13 and IAS 19 as set out in the ED.

This paper discussed whether the IASB should:

• Further develop the proposed disclosure requirements with or without using the middle ground approach to drafting
• Not proceed with any further work on the disclosure requirements in the two Accounting Standards

The IASB could make separate decisions in relation to the two test Accounting Standards.

Staff recommendation

The staff recommended that the IASB not proceed with any further work on the disclosure requirements in IFRS 13 and IAS 19 on the basis that:

• The PIR of IFRS 13 did not identify possible improvements to the disclosure requirements as high priority. On completion of the PIR, the IASB concluded that the information required by IFRS 13 is useful to users of financial statements. The IASB fed the PIR findings to the TSLR project and decided to conduct no other follow-up in response to findings from the PIR
• The PIR of IFRS 13 and the IASB’s work leading to the ED has highlighted that users of financial statements want information about material Level 2 measurements that are closer to Level 3. Therefore, in accordance with Paragraph 31 of IAS 1, if an entity concludes that information about its Level 2 measurements that are closer to Level 3 is material to its users of financial statements, the entity should be disclosing that information
• Making the disclosure requirements in IFRS 13 more explicit for Level 2 measurements close to Level 3 is unlikely to meet the prioritisation criteria the IASB set in its Third Agenda Consultation
• Improving the disclosure requirements in IAS 19 was not on the IASB’s work plan prior to its decision in the TSLR project to test the Guidance for the Board on IAS 19. The staff think it is unlikely that the IASB would have decided to explore amending the disclosure requirements of IAS 19 outside this project
• While it is possible for the IASB to make improvements to the disclosure requirements in IAS 19, feedback suggests that the benefits of amending the requirements may not outweigh the costs

To develop disclosure proposals for IAS 19 that stakeholders think would result in more useful information, the IASB would need to perform extensive outreach with stakeholders. However, improving the disclosure requirements in IAS 19 is unlikely to meet the criteria the IASB used in its Third Agenda Consultation for assessing the priority of potential projects.

IASB discussion

Most IASB members agreed with the staff’s recommendation to not proceed with any further work on the disclosure requirements in IFRS 13 and IAS 19. A few IASB members stated that it was not that the PIR of IFRS 13 did not identify possible improvements to the disclosure requirements as high priority, but that it was concluded in the PIR to address the issue as part of the TSLR project. However, based on the feedback received and the development of the middle ground approach, it did not seem like this project would address the issue appropriately such that the benefit would exceed the costs to it.

One IASB member noted that one of the key changes coming out of IFRS 13 was that of Level 2 investments close to Level 3, but that change was not just a disclosure change but a more substantial one. A few IASB members noted that the disclosure issue in these standards still exists and recommended that it may need to be considered in future agenda consultations.

IASB decision

11 of the 11 IASB members voted in favour of the staff recommendation.