Disclosures – Does the International Accounting Standards Board have the right approach to disclosure in IFRS?

The International Accounting Standards Board (IASB)  proposes a new approach to develop disclosure requirements in IFRS Standards. These proposals are part of the IASB’s Disclosure Initiative – Targeted Standards-level Review of Disclosures project. They have also tested this approach and  proposes new disclosure requirements for IFRS 13 on Fair Value Measurement and IAS 19 on Employee Benefits.

Why change the approach?

Preparers struggle to provide the correct information and the right level of information, in their financial statements. This issue is pervasive in the public and private sector and has been noted as an issue for the public sector locally by the Accounting Standards Board in  several projects in recent years. The notes to financial statements often include unnecessary information or not the right level of information and omit relevant information.

Stakeholders told the IASB that the issue exists because the disclosure requirements in IFRS Standards are treated  as a checklist instead of entities applying judgement to decide what information is relevant for their users, including  what is material. The ASB heard the same from stakeholders locally. The solution, therefore, requires a change in behaviour by preparers in preparing financial statements. To assist preparers in addressing the issue, the IASB  proposes this new approach to improve how they develop disclosure requirements for IFRS Standards.

What is the new approach?

Objectives of the new approach

The IASB explained that disclosure requirements developed using the new approach are intended to provide more useful information to users (i.e. investors) by enabling preparers, auditors and others to make effective materiality judgements, reducing “boilerplate” information. The new approach is written as draft guidance for the IASB’s use when developing disclosure requirements in individual Standards. They noted that in applying this guidance, they aim to:

• “enhance investor engagement to ensure the IASB 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
• minimise requirements to disclose particular items of information, and instead to help companies focus on disclosing material information only “

Achieving these objectives

To achieve these objectives, the proposed approach focuses on disclosure objectives (overall and specific objectives), moving away from lists of requirements in IFRS Standards.

In applying this approach to IFRS 13, the IASB proposes an overall disclosure objective for assets and liabilities measured at fair value and those not measured at fair value but where fair value is disclosed in the notes. The specific objectives proposed for assets and liabilities measured at fair value include objectives for assets and liabilities within each level of the fair value hierarchy, measurement uncertainties associated with fair value measurements, and reasons for changes in fair value measurements.

The disclosure requirements in IAS 19 previously focussed on defined benefit plans. The proposals in the Exposure Draft include overall objectives for short-term employee benefits, defined contribution plans, other long-term employee benefits and termination benefits. The proposals for defined benefit plans include amending the overall objective and adding specific objectives for, among other matters, amounts in the primary financial statements relating to defined benefit plans, the nature of and risks associated with defined benefit plans, and expected future cash flows relating to defined benefit plans.

Commenting on the ED

The IASB is seeking feedback on whether the proposed new approach and proposed amendments to the two Standards would help improve the usefulness of the information disclosed.

Access the IASB Exposure Draft here. The comment deadline is 12 January 2022.

Disclaimer

The article has been prepared by the Secretariat of the ASB for information purposes only. It has not been reviewed, approved, or otherwise acted on by the Board.