As we discussed last time, 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. The exposure draft proposes changing this to refer instead to “material” accounting policies, and to add guidance on making this determination. In practice, it appears the proposed amendments would lead to more concise and focused disclosures than is often the case at present. Among other things, the IASB proposes removing the current commentary that: “It is important for an entity to inform users of the measurement basis or bases used in the financial statements (for example, historical cost, current cost, net realisable value, fair value or recoverable amount) because the basis on which an entity prepares the financial statements significantly affects users’ analysis.” The new way of thinking is that if an entity is simply measuring a particular item on the basis required by the relevant standard, then that doesn’t render the underlying accounting policy material. Of course, the measurement basis will most often be communicated anyway, in the course of fulfilling the other disclosure items applying to a particular item.
To illustrate the point, one of the proposed amendments to the Practice Statement deals with a company for which intangible assets and property, plant and equipment are material to the financial statements. Here’s what it has to say:
- Having identified that assets that are subject to impairment testing are material to the financial statements, the entity assesses whether its accounting policy for impairment is, in fact, material.
- The entity’s impairment accounting policy relates to an area for which the entity is required to make significant judgements or assumptions as described in paragraphs 122 and 125 of IAS 1.
- However, the entity noted that it also makes disclosures about its impairment assessments and its significant judgements and assumptions (for example, the discount rate used to measure value in use) in meeting the disclosure requirements of IAS 36 Impairment of Assets and paragraphs 122 and 125 of IAS 1. The entity therefore concluded that there is no material information to include in a description of its impairment accounting policy that is not disclosed elsewhere in the financial statements.
- The entity concluded that disclosing a separate accounting policy for impairment would not provide information that could reasonably be expected to influence decisions made by the primary users of the entity’s financial statements based on those financial statements. This is because the accounting policy does not contain entity-specific information and only duplicates the requirements of IFRS Standards. However, the entity is still required to comply with the specific disclosure requirements of IAS 36 and paragraphs 122 and 125 of IAS 1, and provide information about how it has applied IAS 36 and those paragraphs of IAS 1 during the period, if that information is material.
One point arising from this example is that the changes should encourage companies to pay more attention to the clarity of their disclosures. The example notes that regardless of the absence of a disclosed accounting policy, it may be appropriate to disclose the discount rate used to measure value in use. I don’t think it would be very helpful simply to throw out that item of data in complete isolation, without any reminder to a reader of what “value in use” means or any indication why they should care about it. But the proposed changes allow more flexibility in providing information which is coherent on its own terms without purporting to constitute a mini-guide to IFRS.
The proposals contrast this with an entity operating in the telecommunications industry, entering into contracts with retail customers to deliver both a mobile phone handset and data services: for the handset, it recognizes revenue when it has satisfied the performance obligation (i.e. when it provides the handset to the customer); for the data services, it recognizes revenue as it satisfies the performance obligation (ie as the entity provides data services to the customer over the three-year life of the contract). In this case, applying the standard to the entity’s own circumstances requires a greater degree of consideration and analysis, and a greater need to make significant judgments. Therefore: “the entity concluded that disclosing the accounting policies for revenue recognition is likely to be necessary for the primary users of its financial statements to understand information in the financial statements and could reasonably be expected to influence those users’ decisions. For example, understanding that some revenue is recognized at a point in time and some is recognized over time is likely to help users understand how reported cash flows relate to revenue.”
The concept of retrospective application doesn’t really apply here, so the proposal would be that the amendments apply prospectively, with earlier application permitted. To me, it would be just fine if issuers started applying the new mindset right away, but as I mentioned last time, their advisors may be reluctant to play along…
The opinions expressed are solely those of the author