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IFRS Standards: a new approach to disclosures

Author: ICAEW Insights

Published: 07 Jul 2021

The IASB is calling for comments on a proposed new approach to developing disclosure requirements in IFRS Standards and proposed amendments to the standards on fair value measurement and employee benefits that were developed applying that approach.

The disclosure proposals aim to help companies enhance their judgment – especially around materiality – and deliver to investors more useful information. The new approach is written as draft guidance for use by the IASB when developing disclosure requirements in individual standards. The IASB has tested this new approach using two existing IFRS Standards – IFRS 13 Fair Value Measurement and IAS 19 Employee Benefits – and has proposed amendments to the disclosure requirements in those standards.

Why is a new approach needed?

Kathryn Donkersley, IASB Technical Staff, says the proposals address issues such as a lack of relevant information and an excess of irrelevant, or boilerplate, information, and that stakeholder feedback is vital to the process of developing the new approach. She points out that, if the proposals are adopted, they will bring about a potentially significant change for stakeholders. This potential change should be on all members’ radars.

“This issue has been discussed for many years and, now it's out there in consultation form, something major could happen, and everyone needs to be aware of it,” she says. “What the IASB is proposing is a whole new approach to disclosure requirements, and the consequences of that approach, if it is rolled out broadly, would be to require companies, auditors and regulators to do things differently. The board has proposed changes to two Standards as test cases because it's really important that we do our due diligence. We won't change things without checking whether the changes are going to be effective.”

She continues: “Even if companies are unaffected by the two test standards, they could still – in the fullness of time – be heavily impacted by this project if it were rolled out more broadly.”

Donkersley makes clear that issues with disclosure information today are not just about companies. Almost everyone involved in financial reporting – collectively – are doing things in a way that is not leading to the best reporting outcomes. That means everyone needs to play their part if a solution is to be found. 

“What often happens is that companies, auditors, regulators and so on are taking the list of disclosure requirements in an individual standard and they are applying them as if they are a black and white checklist. So they tend to tick down the list and they disclose something in response to everything. However, there is an overarching requirement across IFRS Standards that you must apply the concept of materiality,” she says.

“Essentially, no matter what the requirements say, if something is immaterial or irrelevant to the company, you don’t need to disclose it. Doing so just gets in the way of the useful information.”

Equally, she points out, if there is information you can make available that you know investors will value and that is material, that should be disclosed, whether or not it is captured by a particular reporting requirement. “You always have to apply this judgment overlay,” she says. “Ultimately, your financial statements should focus on what is genuinely relevant to the company. However, applying that judgment can be hard and the proposals are intended to give stakeholders tools to help them do that more effectively.”

For many years the IASB has been hearing feedback that disclosures need to improve and has tried to take a number of specific actions to assist – like developing guidance on the application of materiality – but the problem still exists. This project tackles the big picture and seeks to pursue an overarching solution. Donkersley points out that investors and other stakeholders don’t necessarily want more information, they want relevant information. “Like companies, investors want the relevant information, and they want it to be communicated in a concise way,” she says.

What is the IASB proposing?

The IASB’s first key proposal is to encourage a greater and earlier focus by companies on working with investors to understand exactly what they need, why they need it, and what they are going to do with the information should they get it. Companies will then understand the point of the disclosures and be able to react accordingly.

The second key proposal the IASB is seeking to implement is the development of detailed disclosure objectives. “What the objectives would do is explain investor needs and require companies to disclose information that enables those needs to be met. You couldn't comply with a requirement like that without applying judgment because you simply can't do a tick box exercise on investor needs,” she says.

The final key proposal is about minimising the use of prescriptive lists of requirements to disclose particular items of information. “The standards would still name items of information, but they would be linked to objectives and largely intended to help companies generate ideas about how they might meet those objectives,” she says.

Donkersley also commented on how the proposals might affect comparability across company reports. “If the same information is relevant and material to two companies, I would expect them both to disclose that information and therefore you would have comparability,” she says. “But uniform or identical information and comparable information are not the same thing. So, if you've got two companies that are genuinely the same, then having them disclose an identical set of information is good. But if those two companies are actually quite different, forcing them to disclose an identical set of information could actually give a potentially misleading impression about the completeness of the disclosures. You would assume that they were both complete if they were both the same, when actually one of them might have something unique going on that isn't represented, or be disclosing information that is largely immaterial and clouding what is really going on.”

She reiterates that the IASB’s proposals are aimed at helping companies to apply judgement so that they disclose meaningful information and that is where you will get that comparability. The IASB has also considered how the proposals would work in an electronic reporting environment, thinking about how the IFRS Taxonomy could be used to help ensure that when the same information is material to multiple companies it could be electronically tagged—and extracted—consistently.

How to input into the project

ICAEW’s Financial Reporting Faculty will be preparing a response to the IASB’s proposals and welcomes hearing member views at frfac@icaew.com. Alternatively look here to let the IASB know what you think about its proposals on the future of disclosures. 

You can find out more about IFRS requirements at icaew.com/financialreporting

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