Clarifying disclosures – a small first step

The IASB has issued an exposure draft of proposed amendments to IAS 1 resulting from its Disclosure Initiative, with comments to be received by July 23, 2014.

The proposed narrow-focus amendments “will clarify some of (the Standard’s) presentation and disclosure requirements to ensure entities are able to use judgment when applying that Standard… (responding) to concerns that the wording of some of the requirements in IAS 1 may have prevented the use of such judgment.” In themselves, the amendments don’t seem likely to accomplish that much (and the IASB likely wouldn’t claim otherwise) but they may prepare the way for larger anti-disclosure-overload steps to come.

This is one of the main proposed additions to the Standard:

  • “Some IFRSs identify information that is required to be presented or disclosed in the financial statements of an entity. Notwithstanding these specific requirements, an entity shall assess whether all of that information needs to be presented or disclosed, or whether some of the information is immaterial and presenting or disclosing it would reduce the understandability of its financial statements by detracting from the material information. An entity need not provide a specific disclosure required by an IFRS in the financial statements, including in the notes, if the information resulting from that disclosure is not material. This is the case even if the IFRS contains a list of specific requirements or describes them as minimum requirements. An entity shall also consider whether information about matters addressed by an IFRS needs to be presented or disclosed to meet the needs of users of financial statements, even if that information is not included in the specific disclosure requirements of the IFRS.”

Returning to an example I gave last time, this would confirm that even if an entity has a share-based payment expense that’s material to its profit or loss, it doesn’t therefore follow that every piece of information set out in IFRS 2 has to be disclosed for that expense. In theory, for instance, one might decide it’s sufficient to summarize the terms of the plan and to describe the options outstanding at the end of the year, without providing a full reconciliation of movements during the year, or specifying the inputs into the option pricing model and so forth. Or maybe the analysis would go another way. The problem is that as long as IFRS 2 sets out its two pages of minutiae as being relevant to enabling users to understand the nature and extent of share-based payments arrangements that existed during the period, it’s going to be hard for users to conclude which of the items do or don’t, in themselves, provide material information. The same point goes for many other areas, indicating that what the IASB really needs to do – if disclosure overload is indeed a problem – is to start chopping at the standards.

Line items and subtotals

The amendments also clarify that the minimum line items specified for the balance sheet and income statement should be disaggregated when relevant to a user’s understanding, providing the following example: “an entity might conclude that disaggregating ‘property, plant and equipment’, specified in paragraph 54(a), into separate line items in the statement of financial position for ‘property’, ‘plant’ and ‘equipment’ is capable of making a difference in the decisions made by users of financial statements.” It’s hard to imagine that too many practitioners were uncertain on this point, but there you go. The IASB has also taken a new look at the requirement to present additional line items, headings and subtotals in the balance sheet and income statement when such presentation is relevant to a user’s understanding, providing a few words on the appropriate presentation for such subtotals. These direct that the subtotals should be made up of items recognized and measured in accordance with IFRS; be presented and labelled in a manner that makes what constitutes the subtotal understandable; be consistent from period to period; and (a point applying only to the income statement) should not be displayed with more prominence than the subtotals and totals specified in IFRS. In Canada, these fall in line with the guidance already issued by regulators for presenting “additional GAAP measures.”

Ordering the notes

The proposed amendments also try to counter any notion that the notes have to be presented in a certain order: “When determining a systematic order for the notes, an entity may order notes in a way that gives prominence to disclosures that it views as more relevant to an understanding of its financial position or financial performance or makes the relationship between some disclosures more understandable. For example, an entity could order its notes by grouping those about financial instruments together, such as disclosures about changes in the fair value recognised in profit or loss, the fair value recognised in the statement of financial position and the maturities of such instruments.” It’s also clear that this might include presenting each significant accounting policy in conjunction with other disclosures about that item, rather than as a single summary: “An entity may present notes providing disclose information about the basis of preparation of the financial statements and specific accounting policies as notes in a separate section of the financial statements or as part of other notes.”

It’s hard to see why people would object to much of this: it seems entirely sensible, which also means it’s all somewhat obvious. But that’s fine: at least it’s a start…

The opinions expressed are solely those of the author

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