A pilot approach to disclosure – the ride’s still bumpy!

We recently looked at some of the comments received on the IASB’s exposure draft Disclosure Requirements in IFRS Standards—A Pilot Approach: Proposed Amendments to IFRS 13 and IAS 19, for which comments were requested by a revised date of January 12, 2022

In a nutshell, the draft guidance would require entities to comply “with overall disclosure objectives that describe the detailed information needs of users of financial statements.”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.”

Based on our previous summary, many commentators were skeptical that this approach would work as intended. The comment letters from major accounting firms took a similar view. This is from KPMG’s response:

  • …we don’t believe the proposed approach is fit for purpose to achieve the intended objective and may not be effective in addressing the ‘disclosure problem’.
  • We believe that the ‘disclosure problem’ is largely behavioural, and that the emphasis of any new approach should be on empowering entities to make effective materiality judgements in relation to disclosures with a focus on the provision of information that is material to financial statements users.
  • It is therefore key that entities are equipped with guidance to apply materiality as a filter and be able to assess what disclosures are needed. While we acknowledge that IFRS Practice Statement 2: Making Materiality Judgements provides guidance on how to make materiality judgements when preparing financial statements, we believe it would be helpful if the Board provides more guidance on the application of materiality specifically to disclosures – e.g. more illustrative examples on how entities can decide when disclosure of specific information is or isn’t material to users.

KPMG proposed an alternative approach under which each individual standard would contain its own clearly articulated overall and specific disclosure objectives; a single set of disclosure requirements (as informed by the Board’s extensive outreach with various user groups to identify and/or confirm what information users of general-purpose financial statements need); and a requirement for the entity to consider whether any required disclosures are not material and therefore do not need to be provided, and whether any additional disclosures are needed to meet the disclosure objectives.

PricewaterhouseCoopers similarly suggested an approach in which “all disclosures would be mandatory, unless they are not considered material to the users of the financial statements.” They went on:

  • Additional, supplemental disclosures based on specific disclosure objectives, incorporating the information ‘through the eyes of management’ could then be included. This combination would ensure that the minimum disclosures capture the information relevant to the user. It would also allow entities to provide more information if this is considered relevant based on the disclosure objectives and management’s view of the entity. In following such an approach, we believe that the right balance between mandatory requirements and application of judgment will be achieved as well as an appropriate balance between addressing the overall objective and the specific requirements. In turn this will help to manage the gap between what management perceives relevant compared with the views of the users.

Grant Thornton also “do not support the removal of detailed disclosure requirements from accounting standards. Instead, we believe there should be a detailed list of disclosures that should be given if assessed to be material.” GT added for good measure:

  • we do not see this ED as an operational imperative. Instead, we would like to see the Board spend its time on more pressing matters such as the recognition, measurement and disclosure of crypto-currencies and emissions trading schemes. We are also not convinced that high quality disclosures cannot be provided using the standards that currently exist provided sufficient attention is given to (a) being professionally sceptical about the judgements being made by management and (b) materiality being properly assessed to determine what disclosures will be relevant to the users of financial statements.

GT didn’t clarify though whether it thinks those two conditions are generally met at present or, if not, on what might be done to more often achieve that. Anyway, overall, it doesn’t look good for the proposals. On the other hand, Deloitte didn’t submit a comment letter. Maybe that means they loved it!

The opinions expressed are solely those of the author

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