IASB’s Disclosure Initiative-Targeted Standards-level Review of Disclosures – Key Findings
The disclosure management process is getting increasingly intricate, and complex disclosure requirements have a lot to contribute to that complexity.
Businesses need to ensure that the quality of their disclosures meets the stakeholder’s definition of materiality and follows the accounting standards and taxonomies and the disclosure mandates stipulated by the regulatory bodies.
The International Accounting Standards Board (IASB), is the leading accounting standards body that sets the IFRS accounting standards used in over 140 countries. As a part of its commitment to maintaining the quality, consistency, and comparability of disclosure standards, IASB engages in exercises to constantly review and revise the existing standards and process.
IASB undertook a project in 2021, called the Disclosure Initiative—Targeted Standards-level Review of Disclosures, to improve its approach to developing and drafting disclosure requirements. The objective of the exercise was to develop accounting standards that will enable the companies to gain a deeper understanding of the materiality of financial information to author better quality disclosure reports that are useful and relevant to the investors.
IASB recently released the project and feedback summary of the project which will be discussed in this blog.
IASB based its disclosure requirement framework for developing and drafting disclosure requirements in IFRS Accounting Standards based on the guidance developed as a part of the project. Before we discuss the project in detail, it will be insightful to understand the purpose of the disclosure requirement as per IFRS’s Conceptual Framework for Financial Reporting.
It specifies that the financial statements should include “information about the entity’s assets, liabilities, equity, income, and expenses that is useful to users of financial statements in evaluating the prospects for future net cash inflows to the reporting entity and evaluating management’s stewardship of the entity’s economic resources.”
In addition to the above information, financial disclosures must include details about transactions that happen even after the reporting period if that information is necessary to meet the objective of financial statements or is useful to users of financial statements.
To make disclosures useful and relevant for the information users, IASB has undertaken several Disclosure Initiative projects over the years and the project in discussion is a continuation in the series.
The Exposure Draft – Disclosure Requirements in IFRS Standards-A Pilot Approach
As a part of the project, IASB published the Exposure Draft named Disclosure Requirements in IFRS Standards—A Pilot Approach, which proposes a new approach for developing and drafting disclosure requirements. As a part of the project, a new set of disclosure requirements for IFRS 13 Fair Value Measurement and the IAS 19 Employee Benefits, was attempted to test the efficacy of the proposed guidance.
Based on the research and the discussion paper feedback, IASB concluded that the disclosure problems can only be addressed by involving all the stakeholders including preparers, regulators, auditors, and users to collaborate with each other.
Discussing The Disclosure Problem
The information disclosed in the financial statements helps stakeholders gauge the financial performance of a business entity, and investors make their decisions based on that information. However, this is where most businesses and disclosure report face problems which are in ensuring the quality and effectiveness of the disclosures, referred to as the ‘Disclosure Problem.’
Instead of making materiality judgments, business entities use the IFRS accounting standards as a checklist to decide the disclosure requirement, and this led to the identification of three major problems:
- Lack of relevant information
- Excess of irrelevant information
- Ineffective communication
The feedback on the discussion paper further led to the understanding certain aspects of IFRS accounting standards might be contributing to the disclosure problem, like:
- Lack of specific disclosure objectives that the organizations find difficult to comprehend or evaluate its importance adequately to make effective judgments.
- The use of prescriptive language leads the stakeholders into using the accounting standards as a checklist to ensure compliance
- Stakeholders get lost in the maze of voluminous prescriptive requirements leaving them little or no time to apply materiality judgment
These observations led to the conclusion that the drafting of disclosure requirements IFRS Accounting Standards could benefit from a new approach and that the present disclosure requirements in the Accounting Standards needed a comprehensive review
It led to the decision that included IASB proposing to revise the disclosure requirements in IFRS 13 and IAS 19 and abstaining from a comprehensive review of the disclosure requirements for want of time and limited capacity of improvement in the short or medium term.
The Proposed Guidance for the IASB
IASB intends to improve its approach to developing disclosure requirements by ensuring:
- The early stages of the standard-setting process should call for engagements with financial statement users and relevant stakeholders.
- The disclosure requirements need to be integrated with the overall accounting model to dissuade using it as a checklist
- Entities use materiality judgment, IASB proposes to introduce disclosure objectives instead of prescriptive items of information for better clarity and compliance
Disclosure Requirements Based on Proposed Guidance
Disclosure Objectives – The disclosure objectives will consider the overall information needs of the users within an individual IFRS Accounting Standard. The entity needs to assess whether the information they are providing in the notes meets the overall user information requirement adequately and if not, the entity is required to disclose additional information to satiate the requirement. IFRS guidance suggests that the overall disclosure objective does not lose sight of the objective of financial statements and remains true to the purpose of the disclosure requirement.
Specific Disclosure Objectives – This describes the overall user information requirement within an individual IFRS Accounting Standard and meets it with additional information if it falls short and explains the usage of the information like for analyses and insights. For compliance, an entity must use its judgment to identify and disclose material information that satisfies those objectives and remains aligned with the objective of financial statements and the purpose of disclosure requirements.
Items of Information – This disclosure requirement can ensure better clarity and understanding as it helps entities with the specific details of what they may be required to disclose to satisfy each specific disclosure objective.
IASB received feedback from the respondents who advised a ‘middle-ground approach’ to draft disclosure requirements, neither getting too specific nor less prescriptive language than in the issued Accounting Standards.
This middle approach meant that the disclosure objectives should be accompanied by items of information that an entity would be required to disclose to satisfy the objectives.
Based on detailed feedback from respondents and IFRS guidance, IASB shared their approach to disclosure requirements.
IASB’s Revised Approach to Disclosure Requirements
- Understanding the information needs of users of financial statements
- Discussing user information needs with preparers and other stakeholders
- Understanding the disclosures that are required to support recognition and measurement requirements
- Performing a cost-benefit analysis
- Understanding and documenting the effects of disclosure proposals and requirements
- Considering the digital reporting implications when developing disclosure requirements
What Does It Mean for Businesses?
The proposed guidance and the new approach toward disclosure requirements will make it easier for businesses to understand the content of their financial statements better and view it considering how they can be useful to the users of the information. A better understanding of materiality within the context of accounting standards will add to the quality of the financial reports filed and make them relevant to the users who can compare and analyze them for improved and informed decision-making.
Disclosure objectives will also help the business in separating the wheat from the chaff so that important and relevant information does not get lost, and the effort-intensiveness of the financial reporting process is reduced.
Until the time IASB incorporates these proposed changes, these guidance parameters can also aid businesses in improving their disclosure policy and processes and strengthen their internal controls to ensure better quality financial disclosures that are relevant and compliant. The proposed new approach and guidance will also help auditors in performing more efficient audits.
In addition to the new approach, IFRS’s Digital Reporting Team will review the drafting of the proposed disclosure requirement and address the issues encountered in digital reporting which is a welcome move from the perspective of both filers and users of the financial information. Better disclosures and a transparent flow of information across the capital chain are beneficial for capital market stability and better capital allocation, which is beneficial for the economy.