IASB publishes discussion paper on disclosure principles
30 Mar 2017
The International Accounting Standards Board (IASB) has published a comprehensive discussion paper (DP) setting out the Board's preliminary views on disclosure principles that should be included in a general disclosure standard or in or in non-mandatory guidance on the topic. Comments are due 2 October 2017.
For the years 2017-2021 the IASB has chosen "Better communication" as its central theme, and in addition to the primary financial statements project and the IFRS Taxonomy this also includes the disclosure initiative. A related project is also the Conceptual Framework project. In fact, some concepts and financial reporting issues have been moved back and forth between different projects of this group.
The disclosure initiative itself is made up of a number of projects:
- Amendments to IAS 1 to remove barriers to the exercise of judgement and amendments to IAS 7 to improve disclosure of liabilities from financing activities have already been completed.
- Guidance on the application of materiality has been split into two projects and will see a final practice statement and an exposure draft of proposed amendments to IAS 1 and IAS 8 published in June.
- Of the two research projects that are included in the disclosure initiative, the principles of disclosure project is the one behind the DP published today and the standards-level review of disclosures is also involved to a degree as Section 8 contains a possible approach that could be explored further as part of the project and the appendix to the DP contains two examples of how existing standards could be re-drafted using the principles described in the DP.
The IASB's project on the principles of disclosure
The objective of the principles of disclosure project is to help preparers to communicate information more effectively, to improve disclosures for users of financial statements, and to help the Board to develop disclosure requirements in standards. Since IAS 1 Presentation of Financial Statements contains general requirements for disclosures in the financial statements, the project uses the IAS 1 requirements as a starting point to see whether parts of IAS 1 can be amended to reach the project's objective or whether a new disclosure standard should be developed to replace parts of IAS 1 (both options a subsumed under the expression "general disclosure standard" throughout the DP).
Summary of main proposals
Contents. The DP contains 110 pages and is divided into eight sections accompanied by an appendix. The paper is preceded by an executive summary describing the reasons behind publishing the DP, its reach, the main content of the document, the preliminary views of the Board, the terminology used, and the next steps. The paper itself is structured as follows:
|1||Overview of the ‘disclosure problem’ and the objective of this project|
|2||Principles of effective communication|
|3||Roles of the primary financial statements and the notes|
|4||Location of information|
|5||Use of performance measures in the financial statements|
|6||Disclosure of accounting policies|
|7||Centralised disclosure objectives|
|8||New Zealand Accounting Standards Board staff’s approach to drafting disclosure requirements in IFRS Standards|
|Appendix||Illustration of applying Method B in Section 7|
The key issues dealt with in each section are summarised below.
Section 1 (Overview of the ‘disclosure problem’ and the objective of this project). The first section offers background information on the disclosure initiative and discusses the "disclosure problem" that demonstrates the need for principles of disclosure. The section also outlines the objective of the project and the DP and describes the interactions with the other IASB projects.
Section 2 (Principles of effective communication). The core of this section are the principles the Board believes entities should apply when preparing financial statements. Seven principles are identified ranging from the principle that the information provided should be entity-specific to avoid generic, ‘boilerplate’ language or information to the principle that the information should be provided in a format that is appropriate for that type of information. Except for one, these principles were originally included in the 2013 Conceptual Framework DP. The Board has come to the conclusion that these principles should be provided either in a general disclosure standard or in non-mandatory guidance on the topic, not in the Conceptual Framework. New is the principle on formatting as the Board has received feedback that more effective use of formatting would improve how entities communicate information.
Section 3 (Roles of the primary financial statements and the notes). This section contains a discussion of the roles of the different financial statements as the Board has received feedback that information in the primary financial statements is used more frequently and is subject to more scrutiny from users, auditors, and regulators. Entities also state that they find it difficult to decide what information should be presented in the primary financial statements instead of being disclosed in the notes, not least because of the inconsistent use of the terms ‘present’ and ‘disclose’ in IFRSs. Therefore, this section identifies and describes the role of the primary financial statements based on the objective of financial statements in the 2015 Conceptual Framework ED and sets out the implications of that role. It also describe the role and content of the notes based on the proposals in the Conceptual Framework ED. The Board has also concluded that going forward it will also specify the intended location as being either ‘in the primary financial statements’ or ‘in the notes’ when it uses the terms 'present' or 'disclose' to indicate a location.
Section 4 (Location of information). This section discusses providing information that is necessary to comply with IFRSs outside the financial statements and providing non-IFRS information within the financial statements. The Board’s preliminary view is that a general disclosure standard should include a principle that an entity can provide information that is necessary to comply with IFRSs outside of the financial statements if the information it is provided within the entity’s annual report and this location makes the annual report as a whole more understandable and if is clearly cross-referenced. Similarly, the Board has concluded that a general disclosure standard should not prohibit an entity from including non-IFRS information in its financial statements as long as such information is clearly identified as not being prepared in accordance with IFRSs and the entity explains why the information is useful and has been included.
Section 5 (Use of performance measures in the financial statements). The fifth section is dedicated to the fair presentation of performance measures in the financial statements. The Board’s preliminary views are that the presentation of an EBITDA subtotal using the nature of expense method and the presentation of an EBIT subtotal under both a nature of expense method and a function of expense method comply with IFRSs if such subtotals are relevant to an understanding of the financial statements. The Board also believes that it should develop guidance in relation to the presentation of unusual or infrequently occurring items. However, the Board notes that both issues (EBITDA/EBIT and unusual items) will be dealt with within the Board’s project on primary financial statements. On fair presentation of performance measures, the Board notes that this information must be displayed with equal or less prominence than the line items in the primary financial statements, reconciled to the most directly comparable IFRS measure, accompanied by an explanation of its relevance and reason, be neutral, free from error and clearly labelled, include comparative information, be classified, measured and presented consistently, and indicate whether it has been audited. This is entirely in line with guidelines already published by various securities regulators but now finds its way into IFRS literature.
Section 6 (Disclosure of accounting policies). In this section, the IASB takes a closer look at how entities should disclose their accounting policies. The Board’s preliminary views are that a general disclosure standard should include requirements to explain the objective of providing accounting policy disclosures. It should describe the categories of accounting policies, which are accounting policies that are always necessary for understanding information in the financial statements, accounting policies that also relate to items, transactions or events that are material to the financial statements, and any other accounting policies. The Board has also come to the conclusion that there are alternatives for locating accounting policy disclosures, but that it can be presumed that entities disclose information about significant judgements and assumptions adjacent to disclosures about related accounting policies.
Section 7 (Centralised disclosure objectives). This section discusses the development of a central set of disclosure objectives that consider the objective of financial statements and the role of the notes. Such centralised objectives could be used by the Board as a basis for developing disclosure objectives and requirements in standards that are more unified and better linked to the overall objective of financial statements. The DP identifies two methods that could be used for developing centralised disclosure objectives: Method A would entail focusing on the different types of information disclosed about an entity’s assets, liabilities, equity, income and expenses; Method B focusing on information about an entity’s activities. The appendix to the DP provides two examples that illustrate the application of Method B to develop disclosure objectives and requirements. The DP notes that Board has not yet formed any preliminary views about the two methods. Finally, the DP asks whether respondents think that the Board should consider locating all disclosure objectives and requirements in IFRSs within a single standard (or set of standards) for disclosures.
Section 8 (New Zealand Accounting Standards Board staff’s approach to drafting disclosure requirements in IFRS Standards). The eighth section describes an approach that has been developed by the staff of the NZASB for drafting disclosure objectives and requirements in IFRSs. The main features of the approach are: an overall disclosure objective for each standard with subobjectives for each type of information required, a two-tier approach that would see the amount of information provided depend on the relative importance of an item or transaction to the reporting entity, greater emphasis on the need to exercise judgement, and less prescriptive wording in disclosure requirements. The DP notes that Board has not yet formed any views about the approach but would nevertheless welcome feedback as it could be used in the project on standards-level review of disclosures.
The IASB allows constituents an extended six months period to work their way through the document and to respond to the questions raised; hence, comment letters are to be submitted by 2 October 2017.
- Press release on the IASB's website
- Discussion Paper DP/2017/1 Disclosure Initiative — Principles of Disclosure (link to IASB website)
- Snapshot introducing the DP (link to IASB website)
- IFRS in Focus newsletter explaining the preliminary views in the DP