Reducing disclosures for subsidiaries – why stop there?

IASB proposes reduced disclosure requirements for subsidiaries, announces a recent news release

Here’s the summary:

  • The proposals respond to feedback from stakeholders and are designed to ease financial reporting for eligible subsidiaries while meeting the needs of the users of their financial statements.
  • The proposed Standard would be available to subsidiaries without public accountability—companies that are not financial institutions or listed on a stock exchange—whose parent company prepares consolidated financial statements applying IFRS Standards.
  • These subsidiaries report to their parent company for consolidation purposes applying IFRS Standards. Electing to apply the proposed Standard would enable them to also use IFRS Standards when preparing their own financial statements but with reduced disclosures. 
  • The proposals would save subsidiaries time and money by:
  • eliminating the need to maintain an additional set of accounting records for reporting purposes—if the subsidiary currently does not apply IFRS Standards in its own financial statements; and
  • reducing the disclosures required to comply with IFRS Standards.
  • The Board has tailored the disclosure requirements in the proposed Standard to meet the needs of financial statement users of subsidiaries without public accountability.

The exposure draft sets out, standard by standard, the proposed disclosures to be required of eligible subsidiaries; in some cases it’s quite a bit less than what full-blown IFRS requires. For example, on share-based payments, the disclosures required by paragraphs 44 through 52 of IFRS 2 are replaced by about half a page of much more scaled-down requirements. In general, the board based all this on the disclosure requirements in the IFRS for SMEs Standard, taking recognition and measurement differences and various tailoring considerations into account; it’s all set out in some detail in the accompanying basis for conclusions. The board considered whether to expand the project’s scope – that is, to make the proposals available to all entities without public accountability, not just subsidiaries, but decided against it for a variety of reasons, among them: “the proposal to reduce disclosure requirements significantly is a new approach for the Board and its stakeholders. Restricting the scope to subsidiaries that are SMEs enables the Board and its stakeholders to test that approach. Should the proposals in this Exposure Draft proceed to a Standard, the Board could consider the approach in practice and collect stakeholder feedback to decide whether the Board should or could allow more SMEs to apply such a Standard.

For many readers, this might all not elicit much more than a shrug. As is often the case, one of the more interesting aspects of the proposal is the view of the one dissenting board member, who “agrees with designing disclosure requirements that are specific to entities without public accountability and that apply IFRS recognition and measurement requirements,” but disagrees with the specific approach arrived at. She notes among other things:

  • the IFRS for SMEs Standard, which contains reduced disclosure requirements, has been effective for 12 years. In its proposals for a reduced-disclosure Standard, the Board has either retained the disclosure requirements in the IFRS for SMEs Standard or used the same approach as it did when developing them. If this approach were likely to lead to negative outcomes, those outcomes would have already arisen from the application of the IFRS for SMEs Standard.
  • … any scope restriction should be fully justified from a financial reporting perspective, for example, if it were found that applying requirements outside the scope would be contrary to users’ needs. (The) current proposals have been designed without taking into account any characteristics of a subsidiary, so from a technical standpoint, the scope restriction is not relevant. Any non-publicly accountable entity using the draft Standard would provide disclosures that meet users’ needs, irrespective of whether that entity is a subsidiary of an entity applying IFRS Standards.

And there’s much more where that came from…

We’ve talked before about the neurotic mentality that leads regulators and standard-setters into such tinkering. For example, in the same week as the IASB’s proposal, the Canadian Securities Administrators proposed to introduce a new prospectus exemption, under which issuers could more easily raise up to the greater of $5 million or 10 per cent of the issuer’s market capitalization, to a maximum of $10 million, annually. The CSA Chair said: “The proposal would reduce regulatory burden, while maintaining robust investor protection,” and supporting material indicates that ”up to 21% of the short form prospectus filings between 2016 and 2020 were for amounts that could be replaced by distributions under the Exemption.” But of course, whether doing 21% of a particular population a favour (rather than 11% of it, or 31%, or 41%) represents an optimal fine tuning of “regulatory burden” (an annoyingly overused term) versus “robust investor protection” (a largely eye-rolling one) is more a matter of instinct than anything else. As the dissenting IASB opinion points out, the supposed conceptual rigour of such balancing acts may rapidly topple over when subjected to close examination…

The opinions expressed are solely those of the author

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