THE IASB’S PRINCIPLES OF DISCLOSURE INITIATIVE
The International Accounting Standards Board (IASB) has published a comprehensive discussion paper (DP) setting out the Board’s preliminary views on disclosure principles that should be included in a general disclosure standard or in or in non-mandatory guidance on the topic.
For the years 2017-2021 the IASB has chosen “Better communication” as its central theme, and in addition to the primary financial statements project and the IFRS Taxonomy this also includes the disclosure initiative. A related project is also the Conceptual Framework project. In fact, some concepts and financial reporting issues have been moved back and forth between different projects of this group.
The disclosure initiative itself is made up of a number of projects:
- Amendments to IAS 1 to remove barriers to the exercise of judgement and amendments to IAS 7 to improve disclosure of liabilities from financing activities have already been completed.
- Guidance on the application of materiality has been split into two projects and will see a final practice statement and an exposure draft of proposed amendments to IAS 1 and IAS 8 published in June.
The IASB’s project on the principles of disclosure
The objective of the principles of disclosure project is to help preparers to communicate information more effectively, to improve disclosures for users of financial statements, and to help the Board to develop disclosure requirements in standards. Since IAS 1 Presentation of Financial Statements contains general requirements for disclosures in the financial statements, the project uses the IAS 1 requirements as a starting point to see whether parts of IAS 1 can be amended to reach the project’s objective or whether a new disclosure standard should be developed to replace parts of IAS 1 (both options a subsumed under the expression “general disclosure standard” throughout the DP).
Summary of main proposals
Contents. The DP contains 110 pages and is divided into eight sections accompanied by an appendix. The paper is preceded by an executive summary describing the reasons behind publishing the DP, its reach, the main content of the document, the preliminary views of the Board, the terminology used, and the next steps. The paper itself is structured as follows:
|1||Overview of the ‗disclosure problem‘ and the objective of this project|
|2||Principles of effective communication|
|3||Roles of the primary financial statements and the notes|
|4||Location of information|
|5||Use of performance measures in the financial statements|
|6||Disclosure of accounting policies|
|7||Centralised disclosure objectives|
|8||New Zealand Accounting Standards Board staff‘s approach to drafting disclosure requirements in IFRS Standards|
|Appendix||Illustration of applying Method B in Section 7|
The key issues dealt with in each section are summarised below.
Section 1 (Overview of the ‘disclosure problem’ and the objective of this project). The first section offers background information on the disclosure initiative and discusses the “disclosure problem” that demonstrates the need for principles of disclosure. The section also outlines the objective of the project and the DP and describes the interactions with the other IASB projects.
Section 2 (Principles of effective communication). The core of this section are the principles the Board believes entities should apply when preparing financial statements. Seven principles are identified ranging from the principle that the information provided should be entity-specific to avoid generic, ‗boilerplate‘ language or information to the principle that the information should be provided in a format that is appropriate for that type of information. Except for one, these principles were originally included in the 2013 Conceptual Framework DP. The Board has come to the conclusion that these principles should be provided either in a general disclosure standard or in non-mandatory guidance on the topic, not in the Conceptual Framework. New is the principle on formatting as the Board has received feedback that more effective use of formatting would improve how entities communicate information.
Section 3 (Roles of the primary financial statements and the notes). This section contains a discussion of the roles of the different financial statements as the Board has received feedback that information in the primary financial statements is used more frequently and is subject to more scrutiny from users, auditors, and regulators. Entities also state that they find it difficult to decide what information should be presented in the primary financial statements instead of being disclosed in the notes, not least because of the inconsistent use of the terms ‗present‘ and ‗disclose‘ in IFRSs. Therefore, this section identifies and describes the role of the primary financial statements based on the objective of financial statements in the 2015 Conceptual Framework ED and sets out the implications of that role. It also describe the role and content of the notes based on the proposals in the Conceptual Framework ED. The Board has also concluded that going forward it will also specify the intended location as being either ‗in the primary financial statements‘ or ‗in the notes‘ when it uses the terms ‘present’ or ‘disclose’ to indicate a location.
Section 4 (Location of information). This section discusses providing information that is necessary to comply with IFRSs outside the financial statements and providing non-IFRS information within the financial statements. The Board‘s preliminary view is that a general disclosure standard should include a principle that an entity can provide information that is necessary to comply with IFRSs outside of the financial statements if the information it is provided within the entity‘s annual report and this location makes the annual report as a whole more understandable and if is clearly cross-referenced. Similarly, the Board has concluded that a general disclosure standard should not prohibit an entity from including nonIFRS information in its financial statements as long as such information is clearly identified as not being prepared in accordance with IFRSs and the entity explains why the information is useful and has been included.
Section 5 (Use of performance measures in the financial statements). The fifth section is dedicated to the fair presentation of performance measures in the financial statements. The Board‘s preliminary views are that the presentation of an EBITDA subtotal using the nature of expense method and the presentation of an EBIT subtotal under both a nature of expense method and a function of expense method comply with IFRSs if such subtotals are relevant to an understanding of the financial statements. The Board also believes that it should develop guidance in relation to the presentation of unusual or infrequently occurring items. However, the Board notes that both issues (EBITDA/EBIT and unusual items) will be dealt with within the Board‘s project on primary financial statements. On fair presentation of performance measures, the Board notes that this information must be displayed with equal or less prominence than the line items in the primary financial statements, reconciled to the most directly comparable IFRS measure, accompanied by an explanation of its relevance and reason, be neutral, free from error and clearly labelled, include comparative information, be classified, measured and presented consistently, and indicate whether it has been audited. This is entirely in line with guidelines already published by various securities regulators but now finds its way into IFRS literature.
Section 6 (Disclosure of accounting policies). In this section, the IASB takes a closer look at how entities should disclose their accounting policies. The Board‘s preliminary views are that a general disclosure standard should include requirements to explain the objective of providing accounting policy disclosures. It should describe the categories of accounting policies, which are accounting policies that are always necessary for understanding information in the financial statements, accounting policies that also relate to items, transactions or events that are material to the financial statements, and any other accounting policies. The Board has also come to the conclusion that there are alternatives for locating accounting policy disclosures, but that it can be presumed that entities disclose information about significant judgements and assumptions adjacent to disclosures about related accounting policies.
Section 7 (Centralised disclosure objectives). This section discusses the development of a central set of disclosure objectives that consider the objective of financial statements and the role of the notes. Such centralised objectives could be used by the Board as a basis for developing disclosure objectives and requirements in standards that are more unified and better linked to the overall objective of financial statements. The DP identifies two methods that could be used for developing centralised disclosure objectives: Method A would entail focusing on the different types of information disclosed about an entity‘s assets, liabilities, equity, income and expenses; Method B focusing on information about an entity‘s activities. The appendix to the DP provides two examples that illustrate the application of Method B to develop disclosure objectives and requirements. The DP notes that Board has not yet formed any preliminary views about the two methods. Finally, the DP asks whether respondents think that the Board should consider locating all disclosure objectives and requirements in IFRSs within a single standard (or set of standards) for disclosures.
Section 8 (New Zealand Accounting Standards Board staff’s approach to drafting disclosure requirements in IFRS Standards). The eighth section describes an approach that has been developed by the staff of the NZASB for drafting disclosure objectives and requirements in IFRSs. The main features of the approach are: an overall disclosure objective for each standard with subobjectives for each type of information required, a two-tier approach that would see the amount of information provided depend on the relative importance of an item or transaction to the reporting entity, greater emphasis on the need to exercise judgement, and less prescriptive wording in disclosure requirements. The DP notes that Board has not yet formed any views about the approach but would nevertheless welcome feedback as it could be used in the project on standards-level review of disclosures.
DISCLOSURE INITIATIVE (AMENDMENTS TO IAS 1)
As a result of the IASB‘s Agenda Consultation 2011, the IASB received a request to review the disclosure requirements within the existing standards and to develop a disclosure framework.
The IASB has considered elements of presentation and disclosure as part of its revision of the Conceptual Framework for Financial Reporting. In addition, and to complement the work being done in relation to the Conceptual Framework project, the IASB started its Disclosure Initiative project during 2013. The Disclosure Initiative is a portfolio of projects affecting existing IFRSs, as well as other implementation and research projects.
The amendments to IAS 1 have resulted predominately from decisions made during the Disclosure Initiative project, with one additional proposal, regarding the presentation of an entity‘s share of other comprehensive income (OCI) from equity accounted interest in associates and joint ventures, arising from a submission received by the IFRS Interpretations Committee.
Summary of the proposals
The amendments made to IAS 1 are designed to address concerns expressed by constituents about existing presentation and disclosure requirements and to encourage entities to use judgement in the application of IAS 1 when considering the layout and content of their financial statements.
In addition, an amendment is made to IAS 1 to clarify the presentation of an entity‘s share of other comprehensive income (OCI) from its equity accounted interests in associates and joint ventures. The amendment requires an entity‘s share of other comprehensive income to be split between those items that will and will not be reclassified to profit or loss, and presented in aggregate as single line items within those two groups.
This would result in amendments to various paragraphs of IAS 1:
Materiality and aggregation (paragraphs 29 to 31)
Statement of financial position (paragraphs 54 to 55A), and statement of profit or loss and other comprehensive income (paragraphs 82 and 85 to 85B)
Notes to the financial statements (paragraphs 112 to 116)
Accounting policies (paragraphs 117 to 121)
Equity accounted investments (paragraph 82A).
Materiality and aggregation
Information is not to be aggregated or disaggregated in a manner that obscures material information and reduces the understandability of financial statements (e.g. aggregating items that have different natures or functions or overwhelming useful information with immaterial information)
Materiality applies to all four primary financial statements and the notes to the financial statements.
Even when a standard contains a list of specific minimum disclosure requirements, preparers need to assess whether each required disclosure is material, and consequently whether presentation or disclosure of that information is warranted. This combines with the existing definition of materiality in IAS 1.7, which requires consideration of items both individually and collectively, because a group of immaterial items may, when combined, be material. Preparers also need to consider whether particularly significant items mean that disclosures, in addition to minimum requirements specified in IFRSs, are required to provide an appropriate amount of information.
Statement of financial position, and statement of profit or loss and other comprehensive income
It is clarified that the requirements to present specific line items in the ‗statement of profit or loss and other comprehensive income‘ and ‗statement of financial position‘ can be met by disaggregating these line items if this is relevant to an understanding of the entity‘s financial position and performance.
New requirements are introduced when an entity presents subtotals in primary statements in accordance with IAS 1.55 and 85. The amendments clarify that additional subtotals must be made up of items recognised in accordance with IFRSs, need to be presented and labelled in a manner that makes the subtotals understandable and consistent from period to period, and are not permitted to be displayed with more prominence than the subtotals and totals required by IFRSs.
It is emphasised that understandability and comparability of financial statements should be considered by an entity when deciding the order in which the notes are presented.
It is clarified that entities have flexibility for the order of the notes, which do not necessarily need to be presented in the order listed in IAS 1.114 (e.g. it may be decided to give more prominence to areas that the entity considers to be most relevant to its financial performance and position, such as grouping together
Disclosure of accounting policies
The examples in IAS 1.120 of accounting policies for income taxes and foreign exchange gains and losses have been removed, because the examples were unclear about why a user of financial statements would always expect these specific policies to be disclosed.
Equity accounted investments
This amendment clarifies the presentation of an entity‘s share of other comprehensive income (OCI) from equity accounted associates and joint ventures.
The amendment would require entities to include two separate line items in OCI for those items, being amounts that will and will not be reclassified to profit or loss.
What the amendments mean
Respondents to the IASB‘s Agenda Consultation 2011 asked the IASB to review the disclosure requirements of existing IFRSs and to develop a disclosure framework. A number of these requests arose from the increasing length of many financial statements prepared in accordance with IFRS, and disclosure overload in those financial statements.
In 2013, to complement work being carried out to revise the Conceptual Framework, the IASB started its Disclosure Initiative. This is made up of a number of short and medium term projects, and on-going activities, which are looking at how to improve presentation and disclosure principles in existing IFRSs.
The materiality requirements of IAS 1 have been amended to emphasise that information should not be aggregated or disaggregated in a way that obscures material information. The changes also highlight that materiality applies to all aspects of financial statements, including the primary financial statements, the notes and specific disclosures required by individual IFRSs. The purpose is to encourage entities (and others involved in the preparation and review of financial statements) to give careful consideration to presentation requirements, and to the items that need to be included in financial statements.
The content of primary statement line items has been clarified, including that as well as aggregating immaterial items, individual lines that contain significant items may need to be disaggregated. Additional guidance has also been added for the use of subtotals, requiring that these are derived using amounts that are reported in accordance with IFRS.
The amendment related to the submission to the IFRS Interpretations Committee and addresses uncertainty about, and diversity in, the presentation of an entity‘s share of other comprehensive income (OCI) from equity accounted associates and joint ventures. The effect is to include two separate line items in OCI for items that will, and for items that will not, be reclassified to profit or loss.
What should entities do in response to the amendments?
Disclosure overload and the increased complexity of financial reporting have been key drivers in the IASB‘s decision to start its Disclosure Initiative. The amendments are designed to encourage entities to improve the understandability, comparability and clarity of their financial statements.
Although the amendments do not introduce many new requirements to IAS 1 (and are not inconsistent with its existing guidance), they would encourage additional thought to be given to the content and layout of financial statements. Entities may wish to revisit:
- Their application of materiality
- The level of aggregation and disaggregation of line items in the financial statements
- The use of subtotals
- Presenting information in an orderly and logical manner
- The order of the notes to the financial statements
- The content and presentation of accounting policies
- The amount of information to disclose for material transactions so that the economic substance of the transaction can be adequately explained
- Which accounting policies are significant to users of financial statements in understanding specific transactions.
The focus on disclosing material and relevant information are likely to require on going application of judgement. Entities may also consider engagement with their auditors and shareholders as part of their process of determining which disclosures are material and relevant for the current reporting period.
Entities with interests in associates and/or joint ventures should note that the amendments may result in a different presentation of items within OCI.
FUTURE TRENDS IN SUSTAINABILITY REPORTING
Global Reporting Initiative (GRI) and international think tank and strategic advisory firm SustainAbility have published the latest insights from the GRI Corporate Leadership Group on Reporting 2025 which explored four key trends fundamental to the UN Sustainable Development Goals: climate change, human rights, wealth inequality, and data and technology.
ContentThe insights, captured in the report Future Trends in Sustainability Reporting provide practical guidance to reporting organizations working to respond to the risks and opportunities that we face on our path to a sustainable future.
The publication presents key information on each sustainability trend. Highlights from the report include:
Climate change: There was clear consensus in the group that it is not a matter of if business should or can act on climate change but how, and how fast they deliver change. Companies are solution providers: they are expected to be part of the solutions, from new energy models to efficiencies in the production and distribution of goods. Furthermore, clear and ambitious science-based targets are needed, and greater company and country engagement is expected.
Human rights: Expectations of corporate reporting on the many facets of human rights are growing: human rights due diligence is now the expected minimum. Investors, rating agencies and regulators are increasingly seeking this information. Key human rights issues set to receive greater focus include labor rights and issues linked to natural resources. The group highlighted that modern slavery is a new form of severe labor abuse and is leading to a broader movement from a focus on audit and compliance to due diligence and collaboration. Conflict over natural resource wealth is also becoming a more recognized issue with land rights increasingly disputed.
Wealth inequality: Various challenges for business related to wealth inequality were discussed, including radically increasing the share of value captured by workers and small-scale producers – for instance, achieving living wages for laborers and living incomes for small-scale producers. Eliminating economic gender inequality and gender discrimination is also becoming a key issue, as is tackling the race-to-the-bottom on public governance to attract investment. Calls to end the era of tax havens are increasingly expected, and breaking market concentration and addressing the unequal distribution of power will become imperative.
Data and Technology: When it comes to corporate reporting, data and technology are often seen as an opportunity and a challenge in equal measure. Challenges include securing sufficient internal buy-in; promoting the culture and creating awareness for good use of the internal systems that deliver highquality, comparable data; lack of availability of sensitive and confidential data; and a need for more analytical tools to better understand data. Opportunities include online reporting; embedding sustainability data into targets and performance management systems; monitoring and providing feedback loops to data providers; and better understanding the dynamics and other demands on the data to improve the information channels and lower the burden for colleagues.
EXPOSURE DRAFT 2016/01 DEFINITION OF A BUSINESS AND ACCOUNTING FOR PREVIOUSLY HELD INTERESTS
Defining a business is important because the financial reporting requirements for the acquisition of a business are different from the requirements for the purchase of a group of assets that does not constitute a business.
The Post-Implementation Review (PIR) of IFRS 3 Business Combinations carried out by the IASB identified difficulties in applying the definition of a business.
IFRS 3 resulted from a joint project between the Board and the FASB, and the requirements in IFRS and USGAAP regarding business combinations are substantially converged. The proposed amendments to IFRS 3 and the Proposed Accounting Standards Update Clarifying the Definition of a Business (issued by the FASB in November 2015) are based on substantially converged tentative conclusions.
The IASB was also informed that there is diversity in practice in accounting for previously held interests in the assets and liabilities of a joint operation in two types of transactions: those in which an entity obtains control of a business that is a joint operation and those in which it obtains joint control of a business that is a joint operation.
The proposed amendments to IFRS 3 Business Combinations and IFRS
11 Joint Arrangements are intended to clarify the definition of a business and the accounting for these types of transactions involving joint operations.
IFRS 3 BUSINESS COMBINATIONS ACCOUNTING FOR PREVIOUSLY HELD INTERESTS
The IASB proposes to clarify that, when an entity obtains control of a business that is a joint operation, the entity applies the requirements for a business combination achieved in stages, including remeasuring previously held interests in the assets and liabilities of the joint operation to fair value.
It is proposed to apply the amendment to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after the effective date of the amendment, with early application permitted.
Definition of a business The Board proposes:
- To be considered a business, an acquired set of activities and assets must include, at a minimum, an input and a substantive process that together have the ability to contribute to the creation of outputs;
- To remove the statement that a set of activities and assets is a business if market participants can replace the missing elements and continue to produce outputs;
- To revise the definition of outputs to focus on goods and services provided to customers and to remove the reference to the ability to reduce costs;
- To consider a set of activities and assets not to be a business if, at the transaction date, substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets;
- To add guidance to help determine whether a substantive process has been acquired;
- To add examples to help with the interpretation of what is considered a business; and
- That an entity would not be required to apply the proposed amendments to transactions that occur before the effective date of the amendments.
Minimum requirements to be a business
The Board decided that to be considered a business, an acquisition must include, at a minimum, an input and a substantive process that together contribute to the ability to create outputs, i.e. it is not necessary for all of the inputs and processes needed to create outputs to be acquired for the set of activities and assets to be a business.
Market participant capable of replacing missing elements
It was noted that, currently, some sets of activities and assets may be considered to be a business for market participants who could integrate the set of activities and assets into their existing processes.
However, the same set of activities and assets may not be considered a business from the perspective of other market participants.
It is proposed that the ability of some market participants to integrate an acquired set of activities and assets should not be considered in determining whether the acquisition is a business combination. The Board believes that the assessment should be based on what has been acquired, rather than on how a market participant could potentially integrate the acquired activities and assets.
The proposed amendments would provide new tests to assess whether the minimum requirements for a set of assets and activities to be a business are met.
Definition of output
It is proposed to narrow the definition of outputs to focus on goods and services provided to customers.
The proposed definition excludes:
- Returns in the form of lower costs; and
- Other economic benefits provided directly to investors or other owners, members or participants.
This is consistent with how outputs are discussed in IFRS 15 Revenue from Contracts with Customers. However, the Board decided to include in the definition other types of outputs due to the fact that not all entities have revenues that are within the scope of IFRS 15.
The proposed changes to the definition of outputs would narrow the types of outputs to be considered.
Fair value of the assets acquired is concentrated in a single asset.
It is proposed to provide a screening test that will make it easier in some cases to determine, without further analysis, that a set of activities and assets acquired does not constitute a business.
It is proposed that further assessment of whether a set of activities and assets is a business would not be appropriate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets.
The Board decided that it was not necessary to provide further guidance for application of the term
It is important to note that the proposed screening test refers to the fair value of the gross assets acquired and not to the fair value of the total consideration paid or net assets. This is important, for example, when the net assets acquired include a significant component of debt or liabilities.
Evaluating whether an acquired process is substantive
Rather than trying to develop a single definition of what a substantive process is, it is proposed to add guidance to determine whether a process that has been acquired is substantive.
The clarifications propose two similar but distinct tests of acquired processes depending on whether the acquired set of activities and assets has outputs.
- The acquired set of activities and assets does not have outputs
In these cases, the definition of a business is met only if the inputs acquired include both an organised workforce that performs a process that is critical to the creation of output and another input (or inputs) that is (or are) intended to be developed into outputs. The Board believes that the intellectual capacity of an organized workforce, i.e. their capacity to perform a process even if the process is not documented, is a process.
- The acquired set of activities and assets has outputs
When the acquired set of activities and assets has outputs, there is more evidence that the acquired set is a business. Because inputs are already being converted into outputs, it is not important to consider the type of inputs acquired.
The IASB considers that it is only in some limited circumstances that an organised workforce is not required in order to conclude that the set of activities and assets is a business. These circumstances are: a) The set has outputs; and
- b) The acquired set includes a process (or a group of processes) that is unique or scarce, or is difficult to replace.
IFRS 11 JOINT ARRANGEMENTS
Accounting for previously held interests
The IFRS Interpretations Committee noted that there is diversity in practice in accounting for previously held interests in the assets and liabilities of a joint operation when an investor obtains joint control of a business that is a joint operation. The issue is whether an entity applies the principles on accounting for a business combination achieved in stages to those previously held interests when the investors obtains joint control.
The transaction subject to analysis is analogous to a transaction that results in an investment in an associate becoming an investment in a joint venture and vice versa. As stated in IAS 28 Investment in
Associates and Joint Ventures, an investor does not apply the principles on accounting for a business combination achieved in stages to those previously held interests.
The Board proposes that, when an investor obtains joint control of a business that is a joint operation, the entity should not remeasure previously held interests in the assets and liabilities of the joint operation.