A pilot approach to disclosure – for some it flies!

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In a nutshell, the draft guidance would require entities to comply “with overall disclosure objectives that describe the detailed information needs of users of financial statements.”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

In two previous posts, we laid out a selection of unenthusiastic reaction. For balance though, the proposals did have some supporters. This is from the Corporate Reporting Users’ Forum:

  • The majority of CRUF participants agree that the Board should use overall disclosure objectives within IFRS Standards in future because this should focus preparers on relevant user information needs rather than a checklist. In practice, it will be interesting to see how preparers try to find out from their users, like us, what relevant (material) information will satisfy those overall disclosure objectives. They also agree that overall disclosure objectives will help entities, auditors and regulators determine whether information provided in notes to financial statements meets overall user information needs because it should focus their attention on the objectives and not any checklist of requirements.
  • We agree generally that specific disclosure objectives should help entities apply judgements effectively when preparing financial statements to resolve the disclosure problem. However, entities will not be able to do this on their own or in isolation as they will need to obtain feedback from their users and auditors on what they think is relevant or not relevant information and what they think users would like to be able to do with relevant information. We recognize that IFRS cannot require entities and auditors to engage with users on disclosures but agree with the statement in the introduction to the ED that the disclosure problem is multi-faceted and that addressing it will require the input of all stakeholders. We would hope that the introduction of overall disclosure objectives, specific disclosure objectives and the identification of items of information to meet specific disclosure objectives in IFRS will prompt entities and their auditors to engage with users appropriately.

The CRUF did note that some of its participants held different views, more in line with what we covered previously.

The UK Shareholders’ Association and UK Individual Shareholders Society, in a joint comment letter, were also supportive:

  • In our opinion, anything that gets preparers of financial statements, through making appropriate materiality judgements, to provide relevant, not irrelevant and reasonably understandable information is good.
  • …We recognize that IFRS cannot require entities and auditors to engage with users on disclosures but agree with the statement in the introduction to the ED that the disclosure problem is multi-faceted and that addressing it will require the input of all stakeholders. We would hope that the introduction of overall disclosure objectives, specific disclosure objectives and the identification of items of information to meet specific disclosure objectives in IFRS will prompt entities and their auditors to engage with users appropriately

The Brazilian entity Banco Bradesco commented: “We agree that the overall disclosure objectives can help all involved, the entities, the auditor and the financial statements users…. We note that the standard maintains minimum requirements in specific disclosure objectives with the possibility of non-mandatory in some disclosures, so the entity evaluates this needs through relevance judgments (materiality). Anyway, the entities should comply the overall disclosure objectivies requirements. Therefore, we agree with the proposed changes.” And the Mexican accounting standard setter, CINIF, said: “We believe that the proposed pilot approach meets the expectations of disclosing what is truly relevant and not excessively disclosing immaterial items that do not impact decision making. In our opinion, we believe the stated objective of the project is fulfilled by identifying the bases of disclosures that are precise regarding in which cases judgment should be used by an entity to disclose what is relevant and not use the disclosure criteria as if it were a checklist of mandatory items to disclose.”

Still, in finding those, I had to click through a much greater portion of unenthusiastic, or at best qualified, responses. Given all the work, research and debate that precedes any IASB proposal, it might be argued that the process failed; the IASB should have been capable of identifying that the views in the exposure draft wouldn’t be sufficiently widely accepted. Maybe a checklist would have helped…

The opinions expressed are solely those of the author

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