Disclosure initiative: proposed amendments to IAS 1

Comments from ACCA to the International Accounting Standards Board.
23 July 2014

General comments

Overall, ACCA supports this first step in the Initiative. For some time, we have been aware of a problem with disclosure ‘clutter’, where the detail presented in financial statements is either excessive or insufficiently informative.

We believe that regulators and external auditors have a contribution to make in reducing ‘clutter’. Presently, preparers fear adverse comments where under-disclosure is perceived. Changes are needed both to the approach of regulators, and to requirements in individual areas. The IASB should tackle the latter through reviews of specific Standards.

Equally, preparers must also be willing to make and justify judgements, based on a sound knowledge of IFRS. We consider that the ED maintains sufficient scope for the use of judgement by preparers.

The IASB’s plans for the Initiative show the extent of the work which it intends to do in this area. The proposal to consider guidance on materiality is welcome. Looking ahead, we would prefer that there is one guidance statement on materiality, applicable across all Standards. We also see the need for a broader examination of the presentation of accounting policies than is within the scope of this ED (Question 1(d)).

We have also considered whether the increasing electronic tagging of financial statements is likely to have an impact on the issues with which the Initiative is concerned. It is unclear to us whether, overall, this will help or hinder the moves to reduce ‘clutter’. The use of XBRL will make it easier to search the financial statements, but will not by itself result in a focus on key disclosures. Nor might it have an effect on the ‘tick-box’ mind-set, which is often engrained in the approach of preparers.

Specific comments

Question 1 - Disclosure Initiative amendments
The amendments to IAS 1 arising from the Disclosure Initiative aim to make narrow-focus amendments that will clarify some of its presentation and disclosure requirements to ensure entities are able to use judgement when applying that Standard. The amendments respond to concerns that the wording of some of the requirements in IAS 1 may have prevented the use of such judgement.

The proposed amendments relate to:

(a) materiality and aggregation (see paragraphs 29–31 and BC1–8 of this Exposure Draft);

(b) statement of financial position and statement of profit or loss and other comprehensive income (see paragraphs 54, 55A, 82, 85A and 85B and BC9–BC15 of this Exposure Draft);

(c) notes structure (see paragraphs 113–117 and BC16–BC19 of this Exposure Draft); and

(d) disclosure of accounting policies (see paragraphs 120 and BC20–BC22 of this Exposure Draft).

Do you agree with each of the amendments? Do you have any concerns about, or alternative suggestions for, any of the proposed amendments?

(a) Materiality and aggregation

ACCA welcomes the emphasis on the use of judgement in applying materiality, and in making decisions on aggregation and disaggregation when preparing the financial statements. We believe that preparers need to be clear as to how they apply materiality and aggregation principles, and to do so consistently across the Standards which are applicable to their entity. We note that materiality will be examined in the next stage of the Initiative. We believe that guidance on the application of materiality is needed to reduce diversity in practice, and that the guidance should be general, so that it is relevant to the Standards as a whole.

ACCA believes that the proposed changes represent a necessary reinforcement of what should be good practice (and which is already implicit in Standards), but which has been impeded by the adoption of an over-cautious or mechanical approach to the preparation of financial statements. As we believe that to some extent, the problem is due to the influence of regulators and external auditors, it will be important for these groups to be supportive of the proposed changes. For preparers, there is also the need to have the mind-set, resources and skills to apply judgement and produce improved disclosures, which comply with the principles in the Standards.

With respect to immaterial items, we welcome the confirmation (in proposed amended para. 31) that the minimum requirements stated in individual IFRS are also subject to materiality considerations. However we note that this implies a hierarchy where one standard (IAS1) is to override the requirements of others. In order to avoid confusion in this regard, the IASB needs to revise the wording of existing Standards on disclosures to make them less prescriptive, consistent with the revised IAS1 and more conducive to the application of judgement. This should be done as part of the IASB’s intended review to improve the usefulness of disclosure requirements in existing Standards.

A final comment relates to the concerns have arisen over the ‘clutter’ which has developed in financial statements. In view of these concerns, we would support a clearer discouragement in proposed para 30A from the over-disclosure of immaterial information. In addition to overwhelming useful information, excessive immaterial disclosures can go so far as to obscuring the key overall messages which the financial statements should be giving to users.

(b) Statements of financial position, profit/loss and other comprehensive income (disaggregation and sub-totals)

ACCA supports the clearer role for judgement in the area of disaggregation and the presentation of sub-totals. We also agree with the additional statements of requirements for sub-totals in proposed paras 55A and 85A-B. Whilst these may appear prescriptive, they provide a discouragement to the presentation of ‘non-GAAP’ measures, including those which might give a more favourable view compared to the information required by IFRS.

We note the IASB’s explanation, in para. BC15 of the ED, that it has not given examples of sub-totals, as it does not want to imply that some have greater importance than others. We believe that the same issue can apply to disaggregation, of which an example is given in proposed amended para. 54 with respect to the Statement of Financial Position. Furthermore, this example is self-evident, which is another reason why on balance, we believe that it should not be included in an amended Standard.

The wording of proposed para. 85B also needs to be amended, so that its meaning is clearer and more accordance with para. BC14(c) of the ED. It is presently difficult to understand what is meant by the wording ‘…presenting each excluded item in the statement(s) of profit or loss or other comprehensive income’.

(c) Notes structure

Overall, ACCA also supports the changes which are intended to encourage a more informative structure to the notes (as described in proposed para. 113A), whilst retaining the overall requirements for systematic presentation, understandability and comparability (proposed amended para. 113). Whilst the IASB sees a trade-off between understandability of the reporting entity and comparability between entities (para. BC19), we believe that entities with similar characteristics are unlikely to adopt very different note structures.

(d) Disclosure of accounting policies

ACCA supports the deletion of the example accounting policies set out in para. 120 of IAS 1. We agree that little, if any judgement would be required over the disclosure of these, and that the examples discussed in para. 119 are more useful in this respect.

However, we believe that there is a case for retaining the general provision set out in the first sentence of para. 120. In our view, this does remain relevant, pending any amendments resulting from further work as part of the Initiative.

This question relates to one particular issue with respect to accounting policies. We would support a broader consideration of the presentation of accounting policies, as part of the Initiative. Matters for consideration could include the merits of stating all policies within the one note, as is usually done at present. Presentation could also vary, depending on whether a policy is generally applicable across entities (such as taxation) and allows no options, or is more specific to the entity’s circumstances. Finally, it might also be valid to confirm in the financial statements which Standards are not applicable to the circumstances of the reporting entity.

Question 2 - Presentation of items of other comprehensive income arising from equity-accounted investments

Do you agree with the IASB’s proposal to amend IAS 1 for the presentation of items of other comprehensive income arising from equity-accounted investments amendments (see paragraphs 82A, BC1–BC6 and the Guidance on implementing IAS 1)?
If not, why and what alternative do you propose?

ACCA agrees with the proposed amendments, in view of the explanations given in the Basis for Conclusions. We welcome the clarification which the amendments will provide.

Question 3 - Transition provisions and effective date

Do you agree with the proposed transition provisions for the amendments to IAS 1 as described in this Exposure Draft (see paragraphs 139N and BC23–BC25)?

If not, why and what alternative do you propose?

We agree that it is both appropriate and possible to permit the amendments to be applied early, and that any changes resulting from them should be reflected in previous periods presented as comparative information. As pointed out in para BC24 of the ED, the proposed changes affect the presentation of figures in the financial statements, but not their recognition and measurement. Consequently, the requirement to amend comparative information should not be burdensome for preparers.