IAS 1 currently requires that “an entity shall disclose its significant accounting policies comprising: (a) the measurement basis (or bases) used in preparing the financial statements; and (b) the other accounting policies used that are relevant to an understanding of the financial statements.” Following the amendments, this will read instead as follows:
- An entity shall disclose material its significant accounting policy information. Accounting policy information is material if, when considered together with other information included in an entity’s financial statements, it can reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements
- Accounting policy information that relates to immaterial transactions, other events or conditions is immaterial and need not be disclosed. Accounting policy information may nevertheless be material because of the nature of the related transactions, other events or conditions, even if the amounts are immaterial. However, not all accounting policy information relating to material transactions, other events or conditions is itself material.
The thinking behind the change is likely largely self-evident, but here’s an extract from the basis for conclusions:
- The Board found that, because ‘significant’ is not defined in IFRS Standards, entities can have difficulty assessing whether an accounting policy is ‘significant’. The Board also noted that entities can have difficulty understanding the difference, if any, between ‘significant’ and ‘material’ accounting policies. The Board considered developing a definition of ‘significant’, but concluded that this approach could have unintended consequences for other uses of the term ‘significant’ in IFRS Standards.
- Because ‘material’ is defined in IFRS Standards and is well understood by stakeholders, the Board decided to require entities to disclose their material accounting policy information instead of their significant accounting policies.
- The Board observed that accounting policy information considered in isolation would rarely be assessed as material because it would be unlikely to influence the decisions of users of financial statements. However, accounting policy information may be considered material when that information is considered together with other information in a complete set of financial statements. In the Board’s view, accounting policy information is expected to be material if its disclosure were needed for primary users to understand information provided about material transactions, other events or conditions in the financial statements.
I’ve been harping on for years about the turgid excess of accounting policy disclosures, so I’m certainly in favour of any change that allows a bit more flexibility. As I put it in the past:
- 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.
The amendments to the practice statement make explicit, in case the point might still be missed, that such excess should no longer be necessary. For example, it addresses a situation where an entity has identified assets subject to impairment testing as being material to the financial statements, and then assesses whether the accounting policy information for impairment is, in fact, material:
- As part of its assessment, the entity considers that an impairment or a reversal of an impairment had not occurred in the current or comparative reporting periods. Consequently, accounting policy information about how the entity recognizes and allocates impairment losses is unlikely to be material to its primary users. Similarly, because the entity has no intangible assets or goodwill, information about its accounting policy for impairments of intangible assets and goodwill is unlikely to provide its primary users with material information.
In that particular case though, the entity still discloses material accounting policy information related to the significant judgements and assumptions it applied in its impairment assessments elsewhere in the financial statements.
One board member dissented from the amendments, citing in particular a newly-added comment that accounting policy information may be material when the accounting required for material transactions, other events or conditions “is complex and users of the entity’s financial statements would otherwise not understand those material transactions, other events or conditions.” The dissenting member appears to see this as too much spoon-feeding and subjectivity, noting that “investors are responsible for ensuring that their economic decisions are derived from a proper and knowledgeable understanding of an entity’s financial statements, which includes understanding the requirements of IFRS Standards,” and that the passage “(undermines) the overall aim of the amendments.” We can only hope she’s being overly cautious, and that preparers will take the amendments as a whole as a green light to shed unnecessary wording, rather than looking for loopholes which allow them, for whatever paranoid reason, to retain it…
The opinions expressed are solely those of the author