Interim disclosures of new standards – make me disclose it twice, shame on you…?

Here ‘s another issue recently discussed by CPA Canada’s IFRS Discussion Group

  • A reporting issuer prepares Q2-2018 and Q3-2018 interim financial statements for the six months and nine months ending June 30 and September 30, 2018, respectively. The reporting issuer adopts IFRS 9 and IFRS 15 on January 1, 2018, and is considering the extent of disclosures required relating to accounting policies in order to comply with the minimum disclosure requirements under IAS 34.
  • … When the reporting issuer’s accounting policies under IFRS 9 and IFRS 15 have not changed relative to Q1-2018, can the reporting issuer cross-reference to the Q1-2018 interim financial statements when applying paragraph 16A(a) of IAS 34 in Q2 and Q3 of 2018 (that is, in providing a description of the nature and effect of the change in accounting policies, compared to the most recent annual financial statements)?

Readers may be inclined to shrug off the question and simply say why not? – that is, if the notes to an issuer’s first quarter interim statements contain appropriate narrative explanation of the impact of adopting IFRS 9 and IFRS 15 and fully quantify their impact on previously-reported annual and interim financial information, then why should it reproduce all of that (potentially voluminous) content in the notes to the second and third quarter interim statements as well?  But there’s a technical problem: while IAS 34 allows that an interim financial statement might provide certain required disclosures by cross-referencing to another document, it limits this to “some other statement (such as management commentary or risk report) that is available to users of the financial statements on the same terms as the interim financial statements and at the same time.”

This then becomes an interpretative challenge of the sort that demonstrates the wondrous neuroticism of technical accountants. When an issuer releases its (say) second quarter interim statements, is it appropriate to provide some of the required Q2 disclosures by linking to the previously-issued Q1 interim statements, on the basis that those previous statements are indeed “available to users…at the same time” (that is, they remain readily accessible to users on SEDAR or elsewhere). Or is it instead inappropriate to cross-reference to those Q1 statements, because they’re not being made available to users at the same time – that is, is the intent to allow cross-referencing only within an interim “information package” issued and filed at the same date (and so within which the cross-references can easily be followed)?

Here’s the discussion:

  • Some Group members supported (the view that cross-referencing to the earlier quarter is inappropriate), noting that the disclosures in Q1-2018 would be repeated and updated in Q2 and Q3 of 2018. Cross-referencing is generally used when referring to disclosures in the last annual report but not to interim financial reports.
  • Other Group members noted that (the view above) is a conservative approach but find it difficult to justify that (such cross-referencing) is not acceptable. This is particularly the case if the Q2 and Q3 disclosures are identical to the Q1 disclosures. A CSA representative did not object to the use of cross-referencing, but at the same time, entities should not assume cross-referencing is applicable in all circumstances. For example, if the disclosures are identical, it raises the question of how useful it is to duplicate the information from quarter to quarter. However, if there is a significant change in the quarter and including disclosures from Q1-2018 provides additional context, it might be helpful to users to have all the information in one place.

Summing that up, and not too surprisingly, it depends. The main practical problem with (as you might term it) the more liberal approach to cross-referencing in this case is that it might make things more difficult for readers, rather than making it easier. That’s because IAS 34 regards each of the Q2 and the Q3 interim reports as being a self-contained update to the most recent annual statements – it requires that each report provide an explanation of events and transactions that are significant to an understanding of the changes in the entity’s financial position and performance since the end of the last annual reporting period. Put another way, someone who starts to engage with a particular entity for the first time at the end of its third quarter and who reads that quarter’s financial statements and MD&A in conjunction with the most recent annual filings should have no need to worry about whether he or she is missing anything of continuing relevance by not looking at the first quarter statements as well. But the liberal approach to cross-referencing ensures they would be missing something – indeed, they’d be missing the entire bridge from pre-adoption to post-adoption financial information. This seems less helpful and progressive than eliminating duplication merely between the same period’s financial statements and MD&A, where an engaged reader is necessarily using one document in conjunction with the other, and so should take cross-referencing all in stride.

So on this occasion, my preference would actually be for what’s labeled above as the more conservative approach. This isn’t very often where I end up, so I should stop now to ensure it’s not a troubling sign of a broader personal evolution…

The opinions expressed are solely those of the author

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