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In the previous article, we discussed the upcoming amendments to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. This time, we continue to discuss another upcoming amendment – Amendments to IAS 1 Presentation of Financial Statements. The amendments are specifically on disclosure of accounting policies. The International Accounting Standards Board (“IASB”) expects to issue the amendments in December 2020 based on their work plan.
The upcoming amendments to IAS 1 is part of IASB Disclosure Initiative Project to improve the usefulness of disclosures in the financial statements. The project consists of several small projects following responses gathered from the public on the IASB’s Agenda Consultation 2011.
What is the issue in the current practice?
You may realise that it is common for financial statements to include pages and pages of accounting policy disclosures. And most of the time, they are boilerplate! They are merely an extraction of the requirements in the accounting standards. Consequently, they seldom give useful insights to the users of the financial statements on the entity’s specific transactions.
In other cases, some companies believed it is just necessary to include accounting policies for all transactions. This is regardless of whether they are material or not. The practice is due to the fear of being questioned when entities exclude some policies in the financial statements. This project is, however, aimed at addressing the concern that companies over-disclosing the accounting policies in the financial statements.
Disclosure of accounting policies – the proposal
The IASB’s proposal on Amendments to the Disclosure of Accounting Policies was issued back in August 2019 for public feedback. The proposals intended to help users to identify and determine the accounting policies that should be disclosed.
The proposed clarifications were as follows:
- Entities must disclose material accounting policies in the financial statements. Accounting policies are material if they can be reasonably expected to influence the decisions of primary users. Accounting policies are not material on their own. Instead, they are considered together with other information included in the financial statements for them to be material.
- Accounting policies for immaterial transactions, other events or conditions are themselves immaterial. Entities do not need to disclose them. Additionally, not all accounting policies are material just because they relate to material transactions, other events, or conditions.
- Accounting policies are material if they are needed to understand other material information in the financial statements. An accounting policy is likely to be considered material if that accounting policy relates to material transactions, other events or conditions and, for example:
- was changed during the reporting period and such change resulted in a material change to the amounts included in the financial statements;
- was chosen from one or more alternatives in the IFRS;
- was developed in accordance with IAS 8, in the absence of an IFRS that specifically applies;
- relates to an area for which an entity is required to make significant judgements or assumptions in applying an accounting policy; or
- applies the requirements of an IFRS Standard in a way that reflects the entity’s specific circumstances.
- The focus on accounting policies shall be on how an entity has applied the requirements in IFRSs to the entity’s own circumstances (i.e., entity-specific information). The focus should not be on standardised descriptions that only duplicate the recognition or measurement requirements of IFRSs.
- In a situation where an accounting policy is not material, an entity will still need to disclose other information as required by IFRSs, provided that they are material.
The exposure draft also proposed for entities to apply the amendments prospectively.
Updates to the IASB Exposure Draft
Following public comments on the proposal, IASB made further decisions as follows:
- In the IASB Update June 2020 meeting, the IASB tentatively decided:
- that accounting policy information that is standardised, or that duplicates or summarises the requirements in IFRS Standards, can be material and should be disclosed.
- all types of accounting policy information should be subject to materiality judgements, including whether to disclose standardised accounting policy information, or that duplicates the requirements in IFRS.
- to add an example to clarify that material accounting policy information could include standardised information or information that duplicates the requirements in IFRS Standards when the accounting required for a material transaction, other event, or condition is complex and may not otherwise be understood by users of financial statements.
- to add an explanatory paragraph to clarify:
- entities can provide immaterial accounting policy information as long as it does not obscure material accounting policy information; and
- prompt entities to consider whether they are obscuring material accounting policy information with immaterial accounting policy information.
- In the IASB Update July 2020 meeting, the IASB had tentatively decided for (i) an entity to apply the amendments to an annual period beginning on or after 1 January 2023 with an early application is permitted; and (ii) to require an entity to disclose in the period of the first application of the amendments material accounting policy information for that period. Comparative information would only be required if it is relevant to understanding the current period’s financial statements.
What does the proposed amendments mean to you?
If your current practice is to just roll-forward all the accounting policies in the financial statements from one year to another, the amendments would now require you to revisit and reassess your company’s accounting policies to determine whether they are material and should be disclosed in the financial statements.
In addition to the proposed guidance and clarification in IAS 1 above, the Practice Statement 2 Making Materiality Judgements is also a good source of guidance issued by the IASB (and adopted by MASB) to guide preparers on making materiality judgements when preparing general purpose financial statements in accordance with IFRS.
Over-disclosing the accounting policies are no longer acceptable, especially if it is read in conjunction with the new definition of material in IAS 1 which takes effect from 1 January 2020 which states that “Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.”
The keyword that should be emphasised here is “obscuring” – you should make sure that immaterial accounting policies do not obscure the material information, and if it does, will not comply with the requirements of IAS 1.