Disclosures on future accounting policies – intermittently crucial

A European example of the importance of information about new standards issued but not yet implemented

Here’s another of the issues from some extracts of enforcement decisions recently issued by the European Securities and Markets Authority (ESMA) (for more background see here):

  • “The issuer’s annual financial statements have been prepared in accordance with IFRS as endorsed in the EU. In its financial statements it disclosed that it considered all new standards and interpretations and amendments to existing standards and interpretations that have been issued by the IASB and endorsed by the EU, but were not yet effective and were not early adopted in its financial statements, together with information relevant to assessing the possible impact when implemented for the first time. Therefore, only new standards and interpretations that were endorsed by the EU at the date of the approval of the financial statements were included in the issuer’s assessment of paragraph 30 of IAS 8. No information was included about standards issued but not yet endorsed by the EU.”

In this case, the enforcer (as ESMA likes to term it) disagreed with limiting the disclosure in the way described, and required disclosure on the omitted standards, regardless that they hadn’t yet been endorsed by the EU. Here’s the rationale:

  • “Paragraph 30 of IAS 8 requires an issuer to disclose new standards that have been issued but are not yet effective and estimate the possible impact of their application on the financial statements in the period of initial application.
  • In the issuer’s case, new standards of relevance that had been issued by the IASB but not yet endorsed by the EU included IAS 19 (2011) – Employee Benefits, IFRS 10 – Consolidated Financial Statements, IFRS 11 – Joint Arrangements and IFRS 13 – Fair Value Measurement. Given the nature of the issuer’s activities, it was probable that some of these standards could have a material impact on the issuer’s financial statements.
  • IAS 8 was endorsed by the EU and there is no amendment to paragraph 30 of IAS 8 as a result of the endorsement process. Accordingly, to limit application of this paragraph to those standards, interpretations and amendments that are already endorsed by the EU is inappropriate.
  • Furthermore, paragraph 112(c) of IAS 1 requires that the notes to the financial statements provide information that is not presented elsewhere in the financial statements, but is relevant to their understanding of any of them. Given the importance of the IAS 19 (2011) to this issuer, it was considered that the disclosure in the notes was relevant to understanding of the financial statements in accordance with paragraph 112(c) of IAS 1.”

Is disclosure always valuable?

The situation as described here wouldn’t likely arise in Canada, because we don’t have a local endorsement process that leaves comparable room for doubt about whether a Canadian entity would adopt any of the standards issued by the IASB. It’s still an interesting reference point though, because this is often one of the most technocratic aspects of the financial statements. It’s not unusual for instance to see entities that describe in some detail new standards issued but not yet effective, even though those standards plainly don’t have any relevance to the entity (for instance because it has no employee benefit plans, or anything that could even conceivably be construed as a joint arrangement). I suppose such disclosures send a message to regulators that the company is capable of compiling a list of what’s new from the IASB, but since every audit firm has such a list at its fingertips, that’s not saying much.

Some might argue that IAS 8.30, as cited above, refers only to situations where “an entity has not applied a new IFRS that has been issued but is not yet effective,” and doesn’t limit this by any discussion of the potential relevance of those new standards. But this would overlook that concepts of materiality, and in particular of omitting immaterial information, apply to everything in the statements. Certainly, these disclosures can sometimes be vitally important: for example, if there was any chance at all that some of your subsidiaries might have been deconsolidated when IFRS 10 became effective, then that was clearly a critical message.

Form and substance

But simply saying that something called IFRS 10 exists, but that it doesn’t have any impact, or that you don’t know whether it has an impact or not, is the epitome of information that no one can possibly use to any good purpose. The focus ought to be on whether the statements as currently presented might be compelled to change because of technical requirements. If there’s no realistic chance that they could, then a clear statement just stating that fact is as much as anyone could possibly need, and the best possible way of complying with both the form and substance of the IAS 8 requirement.

The ESMA summary seems to acknowledge the substantive aspect of the issue in saying “it was probable that some of these standards could have a material impact on the issuer’s financial statements” and that in this case the disclosure was relevant to understanding the financial statements. The implication seems to be that in situations not rising to this level of significance, this matter wouldn’t have warranted attention. And that seems like an entirely appropriate conclusion.

The opinions expressed are solely those of the author

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