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 the January 2023 meeting, the IASB continued its redeliberations of the feedback on aspects of the proposed draft Standard set out in the ED.

Transition matters—interaction between IFRS 1 and the Standard (Agenda Paper 31A)

Background

This agenda paper discussed the feedback on the interaction between IFRS 1 and the draft Standard.

Staff analysis

Including reduced disclosure requirements for IFRS 1

The staff are of the view that the IASB should include reduced disclosure requirements for IFRS 1 because:

  • Consistent with its approach to developing the proposed disclosure requirements in the draft Standard, the proposed reduced disclosure requirements for IFRS 1 are based on Section 35 Transition to the IFRS for SMEs of the IFRS for SMEs Accounting Standard. The approach ensures the disclosures are sufficient to meet the information needs of users of eligible subsidiaries financial statements
  • The eligible subsidiaries should not be burdened by the cost (even if one-off) to provide all the disclosures of IFRS 1 when providing reduced disclosures would be sufficient to meet their users’ information needs
  • The reduced disclosures proposed in the draft Standard considered the information needs of users of eligible subsidiaries’ financial statements. As such, the subsidiary does not avoid providing the disclosures, but is required to provide those disclosures that are sufficient to meet the needs of its users. Furthermore, the transition requirements to IFRS Accounting Standards set out in IFRS 1 are unchanged, except for its disclosure requirements. The transition requirements related to recognition, measurement and presentation remain applicable

Interaction between IFRS 1 and the draft Standard

The staff are of the view that there is no compelling feedback suggesting that the IASB should remove or modify paragraphs 12-14 of the draft Standard, which are:

  • An entity that applies the Standard when preparing its first IFRS financial statements shall apply the disclosure requirements of the Standard, not those of IFRS 1
  • Electing or revoking an election to apply the Standard does not, on its own, result in an entity meeting the definition of a first-time adopter of IFRS Accounting Standards as defined in IFRS 1
  • An entity revoking the election to apply the Standard does not apply IFRS 1 in the current period if in its previous period it provided an explicit and unreserved statement of compliance with IFRS Accounting Standards

Application of the Standard does not preclude a subsidiary stating compliance with IFRS Accounting Standards, therefore electing or revoking an election to apply the Standard does not, on its own, result in an entity meeting the definition of a first-time adopter of IFRS Accounting Standards in IFRS 1.

A few respondents said that it would be easier for a first-time adopter of IFRS Accounting Standards to use the same IFRS Accounting Standard, IFRS 1. However, the staff think otherwise because:

  • Locating the reduced disclosure requirements for IFRS 1 in the Standard is consistent with the approach used for all other reduced disclosure requirements
  • Locating the clarifications on the interaction of the Standard with IFRS 1 in the Standard is helpful because those clarifications do not only apply to eligible subsidiaries applying IFRS Accounting Standards for the first time. They also apply to eligible subsidiaries that applied IFRS Accounting Standards in the prior period

Staff recommendation

The staff recommended that the IASB proceed with the proposal to:

  • Include reduced disclosure requirements for IFRS 1 in the Standard
  • Explain the interaction between IFRS 1 and the Standard, as set out in paragraphs 12-14 of the draft Standard

IASB discussion

All IASB members supported the staff recommendation regarding including reduced disclosure requirements for IFRS 1 in the Standard and the explanation of the interaction between IFRS 1 and the Standard. This is consistent with the approach that used for other Standards.

IASB decision

All IASB members agreed with the staff recommendation.

Transition matters—changes in accounting policies (Agenda Paper 31B)

Background

This agenda paper discussed the feedback on whether electing or revoking an election to apply the draft Standard requires an eligible subsidiary to apply the requirements on changes in accounting policies in IAS 8 and present a third statement of financial position as at the beginning of the earliest period presented as required by IAS 1.

Staff analysis

In the December 2020 IASB meeting, the staff observed that the disclosures in a subsidiary’s financial statements when it elects, or revokes an election, to apply the draft Standard would not differ from the disclosures required by IAS 8 for changes in accounting policies. The IASB’s tentative decisions during its redeliberations of the proposals in the draft Standard do not change either the staff’s December 2020 observation or the IASB’s statement.

In considering the feedback on the ED, the staff noted that respondents did not disagree with the IASB’s view but sought clarity in the Standard itself.

Similarly, the IASB noted that a ‘third statement of financial position’ is unnecessary because it would not change the recognition or measurement of items or amounts presented in the primary financial statements.

The staff support the view of respondents that it would assist the application of the Standard if clarity was provided in the Standard itself. The staff have not identified a problem that would arise if clarity was provided in the Standard itself.

Staff recommendation

The staff recommended that the IASB clarifies in the Standard that an eligible subsidiary that elects, revokes an election or is no longer eligible to apply the Standard:

  • Does not apply the requirements in IAS 8 on changes in accounting policies
  • Is not required to present a third statement of financial position as at the beginning of the earliest period presented

IASB discussion

All IASB members agreed with the staff recommendation. One IASB member pointed out that IAS 8 allows entities to provide an explanation when it is impracticable to determine and disclose the cumulative effect of accounting policy changes.  If an eligible subsidiary needs to revoke its election and to apply full IFRS and assume there is an accounting policy change while it is impracticable to provide comparable information, the entity should apply IAS 8 to explain the impact. Staff agreed that they would make it clear in the Standard that the limitation on retrospective application of an accounting policy in IAS 8 still apply.

All IASB members agreed that if an eligible subsidiary becomes not eligible and need to apply full IFRS, it is not a change in accounting policy. If an eligible subsidiary stops being a subsidiary and becomes a stand-alone entity, it may apply the IFRS for SMEs Standard or another GAAP. The entity will therefore not apply IAS 8 anyway.

IASB decision

12 out of 12 agreed with the staff recommendation.

Maintenance of the Standard (Agenda Paper 31C)

Background

This agenda paper discussed the timing for updating the Standard for new disclosure requirements or amendments to disclosure requirements arising from new IFRS Accounting Standards or amendments to IFRS Accounting Standards.

Staff analysis

Maintenance of the Standard

The IASB’s proposal in the ED to consider proposing amendments to the draft Standard when it publishes an exposure draft of a new or amended IFRS Accounting Standard is supported by most respondents who commented on this topic. The alternative would be to wait until after the amendments have been finalised and for there to be a separate consultation on amendments to the Standard.

Interaction with the IFRS for SMEs Accounting Standard

The proposed approach for ongoing maintenance of the Standard would mean that the Standard is updated regularly (as often as amendments are made to disclosure requirements in IFRS Accounting Standards) while the IFRS for SMEs Accounting Standard is updated periodically, not more frequently than approximately once every three years.

The staff understand the concern that entities applying the IFRS for SMEs Accounting Standard may need to track ongoing amendments to the Standard. However, all proposed amendments to the IFRS for SMEs Accounting Standard would be exposed for public comment as part of an omnibus exposure draft issued during each periodic review. The IASB could receive feedback on that exposure draft that it should reconsider the proposed disclosures for the IFRS for SMEs Accounting Standard, and also reconsider the disclosure requirements in the Standard. Therefore, the staff do not think that entities applying the IFRS for SMEs Accounting Standard need to track proposed amendments to the Standard. The staff also think that this approach provides the best flexibility to address the needs of all stakeholders rather than restricting the maintenance of either standard.

Staff recommendation

The staff recommended that the IASB confirm its proposal to consider amendments to the Standard when it publishes an exposure draft of a new or amended IFRS Accounting Standard as this facilitates consideration of the amendments to the Standard at the same time as the related amendments to IFRS Accounting Standards are being discussed.

IASB discussion

Most of IASB members agreed with the staff recommendation. Some members pointed out that every time when an IFRS Accounting Standard has been updated, the IASB will need to think about two sets of disclosures for the updated Standard, i.e. one for entities adopting full IFRS, and another for eligible subsidiaries using the new Standard. If there is time pressure to deliver updates to Standards, the IASB should be flexible to allow updates to either the new Standard or full IFRS first. Development of the reduced disclosure regime would not have to wait on developments in the full disclosure regime, and vice versa. It was suggested the language is updated to make this clear.

IASB members also debated the difference and linkage between this Standard and the IFRS for SMEs Standard.

Some IASB members pointed out that this Standard is a separate project to the IFRS for SMEs Standard. There should not be any linkage between the two Standards. The IFRS for SMEs Standard is subjected to periodic review which should be protected. When the IASB considers updating the IFRS for SMEs Standard, it may consider the reduced disclosures for the subsidiaries in the new Standard. However, the IASB may need to consider that the group requirements for the subsidiaries are different from those for stand-alone entities.

IASB members also discussed which stakeholders should provide feedback on this draft Standard. Some IASB members believe that the staff should liaise with the SME Implementation Group (SMEIG) on the development of the new Standard. Other members pointed out that the SMEIG may not have the right experience to provide feedback on issues relevant to subsidiaries within big groups. Some IASB members also suggested feedback should be sought from national standard-setters and auditors who understand and use both Standards.

Some IASB members pointed out that when the recognition and measurement requirements in the IFRS for SMEs Standard and the new Standard are the same, then the reduced disclosures should be expected to be the same as well. While other members pointed out that when this project started, the IFRS for SMEs Standard was used as a starting point. However, the IASB subsequently realised that there are many differences between the two Standards. The IASB decided that they should consider the two Standards as reference points, rather than inter-dependent Standards.

IASB decision

12 out of 12 agreed with the staff recommendation.

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