Concerns are common among stakeholders about disclosures in financial statements prepared under IFRS® Standards. Often described as the ‘disclosure problem’ – where financial statements provide too much irrelevant information, too little relevant information and ineffective communication – they have indicated that a ‘checklist approach’ to providing disclosures is one of the reasons why the problem persists. How disclosure requirements in IFRS Standards are developed and drafted can also be contributing factors.
To attempt to address these concerns, the International Accounting Standards Board (the Board) has developed draft guidance for setting disclosure requirements for individual standards in the future. As a pilot, it has applied this draft guidance in developing proposed disclosure requirements for IFRS 13 Fair Value Measurement and IAS 19 Employee Benefits.
Depending on the feedback received, the Board may use this approach in future to amend the disclosure requirements in other IFRS Standards.
This kick-starts the process to tackle the ‘disclosure problem’ by moving away from a checklist approach to one based on judging what information is material. But it will require all stakeholders to shift behavioural gears so that relevant, entity-specific information is communicated effectively and meets investors’ information needs.
Proposed new approach to address the disclosure problem
The Board is proposing a new approach to the way it develops and drafts the disclosure requirements in IFRS Standards, with the intention of providing information that is more useful to decision making.
This proposed new approach would introduce overall and specific disclosure objectives for each standard, as well as items of information that a preparer would consider disclosing to enable it to meet those objectives.
The aim is to help preparers to focus on disclosing material information rather than adopting a checklist approach and providing ‘boilerplate’ information. Preparers would need to exercise judgement in determining what information should be disclosed to meet both the overall and specific disclosure objectives of the particular standard in their particular circumstances.
The proposals are intended to equip preparers to make those judgements by explaining why information is important to investors and how investors might use that information in their analysis.
Piloting this new approach to disclosures – Proposed amendments to IFRS 13 and IAS 19
The IFRS 13 proposals focus on enabling investors to understand the company’s exposure to uncertainties associated with fair value measurement. To achieve this, companies will need to apply judgement to consider what information investors need and the level of detail that should be disclosed.
Some of the IAS 19 proposals would require greater focus on disclosure of the expected cash flow effects of employee benefits, especially defined benefit plans, and quantitative breakdowns of the information in the primary financial statements. This is to assist investors who often struggle to reconcile employee benefit disclosures to the primary financial statements. Preparers would also need to provide information to enable investors to assess the risks and uncertainties associated with defined benefit plans.
The comment period closed on 21 October 2021. The Board will consider the feedback on its proposals before deciding whether to finalize the proposed amendments to the disclosure sections of IFRS 13 and IAS 19.
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