The IASB has issued the exposure draft Disclosure Requirements in IFRS Standards—A Pilot Approach: Proposed Amendments to IFRS 13 and IAS 19, with comments requested by October 21, 2021.
Here’s a portion of how the accompanying news release sums it up:
- These proposals would enable companies to enhance their judgement and reduce ‘boilerplate’ information, giving investors more useful information.
- The notes in financial statements sometimes include too little relevant information, too much irrelevant information and information disclosed ineffectively. Stakeholders say this typically occurs when the requirements in IFRS Standards are treated like a checklist without applying effective judgement.
- Responding to stakeholder demand for the Board’s help in addressing these issues, the Board has set out a new approach to developing the disclosure requirements in IFRS Standards. Disclosure requirements developed using this approach are intended to better enable companies, auditors and others to make more effective materiality judgements and thus provide disclosures that are more useful to investors.
- The new approach is written as draft guidance for use by the Board when developing disclosure requirements in individual Standards. In applying this guidance, the Board aims to:
- enhance investor engagement to ensure the Board has an in-depth understanding of investors’ information needs and clearly explains those needs in the Standards;
- give greater prominence to the objective of disclosure requirements, requiring companies to apply judgement and provide information to meet the described investor needs; and
- minimize requirements to disclose particular items of information, and instead to help companies focus on disclosing material information only.
In a nutshell, the draft guidance would require entities to comply “with overall disclosure objectives that describe the overall information needs of users of financial statements” and “with specific disclosure objectives that describe the detailed information needs of users of financial statements.” These would be prescriptive requirements, indicated by the term “shall.” The specific disclosure objectives would be linked “with items of information an entity may, or in some cases is required to, disclose to satisfy the objective” – typically indicated by the language “while not mandatory, the following information may enable an entity to meet the disclosure objective.” The thinking is that this approach will make it implausible to achieve compliance through the dreaded “checklist” approach: “specifying that items of information are not mandatory should not result in material information being omitted. Instead, using this language to describe items of information would help entities to fully understand specific disclosure objectives and determine which information is material and therefore has to be disclosed.”
The Board applied the draft guidance to the disclosure sections of two test Standards— IFRS 13 and IAS 19 – and issued the resulting proposed changes as part of the publication. So for example, on the topic of measurement uncertainties associated with fair value measurements, the revised standard would set out the specific disclosure requirement:
- For recurring and non-recurring fair value measurements, an entity shall disclose information that enables users of financial statements to understand the significant techniques and inputs used in determining the fair value measurements for each class of assets and liabilities measured at fair value in the statement of financial position after initial recognition.
Such items as “a description of the significant valuation techniques used in the fair value measurements” and “quantitative or narrative information about the significant inputs used in the fair value measurements” would be included as items that “while not mandatory…may enable an entity to meet the disclosure objective,” allowing that it may be plausible to provide a sufficient understanding of the item without specifically addressing some or all of those matters. The basis for conclusions sets out some of the underlying thinking:
- Preparers of financial statements were concerned that disclosing information about all the valuation techniques and inputs they used to derive their fair value measurements might be excessively costly to prepare and result in voluminous disclosures that do not provide useful information.
- The Board does not expect an entity to disclose every technique and input used in deriving its fair value measurements. Instead, the Board expects an entity to provide information about the techniques and inputs that are significant to the entity’s fair value measurements and give rise to uncertainty in those measurements. This approach is consistent with paragraph 127 of IAS 1, which states that assumptions and other sources of estimation uncertainty to be disclosed should relate to the estimates that require management’s most difficult, subjective or complex judgements. The Board proposes to amend Illustrative Example 17 to eliminate any possible interpretation that an entity is required to disclose every technique and input used in deriving its fair value measurements.
It’s a worthy exercise, which at the very least, if implemented across all the standards, would result in greater consistency and systematicity of drafting, and provide a clearer basis for productive conversations. It’s a bit harder to know whether it would actually yield the desired outcome – three members of the IASB were sufficiently unsure on that to vote against publishing the exposure draft. We’ll look more at that in the future…
The opinions expressed are solely those of the author