The IASB has issued for comment Disclosure of Accounting Policies, an exposure draft of proposed amendments to IAS 1 and IFRS Practice Statement 2, with comments to be received by November 29, 2019.
IAS 1 currently requires that an entity disclose its “significant” accounting policies, a requirement that often leads in practice to pages of repetitive, unilluminating excess, contributing to perceived “disclosure overload.” CPA Canada’s IFRS Discussion Group looked at the issue a few years ago, concluding:
- Group members supported the view that an entity is required to disclose all significant accounting policies. Financial statements are prepared for a wide range of investors that can have varying knowledge of IFRSs. Only disclosing accounting policies when a choice is made by an entity places heavy reliance on users to be well-versed with the requirements in IFRSs. It is essential that a user has sufficient information in a set of financial statements to understand all of the significant accounting policies adopted by an entity. Providing a description of the accounting policies directly in the financial statements also communicates to a user what components of the standards are significant to the entity…”
I was displeased with this, commenting:
- It’s an uninspiring and unprogressive conclusion, built on a wholly fanciful view of a financial statement user. Looked at rationally, if a user demands (say) a summary of income tax accounting within a particular set of financial statements, on the basis that he or she either doesn’t already know it or else doesn’t have the wherewithal to conduct a five-second Google search for the information, then he or she won’t have what it takes to engage with the complexities and nuances of the accounting anyway. Such labored, pointless repetition from one set of statements to the next only communicates to the world that the exercise is much more about technocratic compliance than about providing accessible, decision-relevant information.
Well, the new exposure draft might change the playing field a bit. It proposes referring to “material” rather than to “significant” accounting policies, and adding the following:
- Accounting policies that relate to immaterial transactions, other events or conditions are themselves immaterial and need not be disclosed. Furthermore, not all accounting policies relating to material transactions, other events or conditions are themselves material.
- An accounting policy is material if information about that accounting policy is needed to understand other material information in the financial statements. For example, an entity is likely to consider an accounting policy to be material to its financial statements if that accounting policy relates to material transactions, other events or conditions and:
- (a) was changed during the reporting period because the entity was required to or chose to change its policy and this change resulted in a material change to the amounts included in the financial statements;
- (b) was chosen from one or more alternatives in an IFRS Standard, for example, the option to measure investment property at either historical cost or fair value;
- (c) was developed in accordance with IAS 8 in the absence of an IFRS Standard that specifically applies;
- (d) relates to an area for which an entity is required to make significant judgements or assumptions in applying an accounting policy and discloses those judgements or assumptions in accordance with paragraphs 122 and 125 of IAS 1; or
- (e) applies the requirements of an IFRS Standard in a way that reflects the entity’s specific circumstances, for example, by explaining how the requirements of a Standard are applied to the facts and circumstances of a material class of transactions, other events or conditions.
- Information about accounting policies that focuses on how an entity has applied the requirements in IFRS Standards to its own circumstances provides entity-specific information that is more useful to users of financial statements than standardised descriptions or information that only duplicates the recognition or measurement requirements of IFRS Standards.
- If an entity concludes that an accounting policy is not material, the entity shall nevertheless disclose other information required by IFRS Standards if that information is material.
Although the exposure draft doesn’t put it in such terms, I take the underlying train of thought to be consistent with my earlier comments. It’s implicit in the dissent by one of the Board members:
- Not all primary users of financial statements are accounting experts (see paragraph 2.36 of the Conceptual Framework of Financial Reporting). Hence, the disclosure of accounting policies could help them to better understand an entity’s reported financial performance and financial position even if such accounting policies are not important enough to be assessed as material because they would not be expected to influence the investment decisions of users.
But the point (to me anyway) isn’t that users are all accounting experts – it’s that whatever their degree of knowledge and aptitude, the level of detail provided in standardized accounting policy disclosures isn’t going to give them anything they can’t readily get elsewhere. Assuming, that is, that they care about getting it at all…
More on the exposure draft next time…
The opinions expressed are solely those of the author