The International Accounting Standards Board (“IASB”) issued an exposure draft proposing a simplification of disclosures requirements for subsidiaries without public accountability. The exposure draft issued in July 2021 is currently opened for public comments by 31 January 2022.
This time, we bring to you the objective and the proposal included in the exposure draft.
Why is the IASB proposing the disclosures simplification?
The current IFRS disclosures require significant effort from the preparers to satisfy to common information needs of the primary users. These disclosure requirements may be a burden to some entities especially those without public accountability. To address this, the IASB proposes to provide a simplification to the disclosures requirements for subsidiaries that are applying IFRS.
You may then wonder why entities without public accountability do not apply IFRS for SMEs. IFRS for SMEs provides not only reduced disclosure requirements but also certain simplification to the recognition and measurements as. For some of these entities, they are subsidiaries of other companies where their parents apply IFRS. For consolidation purposes, it is more beneficial for these subsidiaries to use the same framework as the parents. This is in order to reduce the burden of maintaining two sets of financial accounting records.
By introducing the proposed standard, those subsidiaries can continue to apply the recognition and measurement requirements similar to the parent companies but with more simplified disclosures.
The proposed disclosures simplification for subsidiaries without public accountability
Take note that the proposal is not for the issuance of a new financial reporting framework. It is rather a proposal to issue a specific standard within the IFRS framework. The proposed standard sets out:
- The disclosure requirements for entities electing to apply the proposed standard; and
- The disclosure requirements in IFRS Standards that it replaces.
The approach in developing the simplified disclosure requirements in the proposed standard
In developing the disclosure requirements in the proposed standard, IASB consider the disclosure requirements in the existing IFRS for SMEs. Where the recognition and measurement principles in the IFRS for SMEs are consistent with the IFRS Standards, IASB adopts the disclosure requirements in the IFRS for SMEs with minor tailoring.
However, where the recognition and/or measurement principles in IFRS for SMEs are different from IFRS, IASB tailored the disclosure requirements in IFRS Standards. The simplified disclosures are tailored by applying the principles used to develop the disclosure requirements in the IFRS for SMEs.
Eligible entities
Next, let us see which entities can apply the proposed draft standard. An entity is eligible to apply the proposed standard only if at the end of its reporting period, it:
- is a subsidiary,
- does not have public accountability; and
- has an ultimate or intermediate parent that produces consolidated financial statements available for public use that comply with IFRS Standards.
What is public accountability? The proposed standard states that an entity has public accountability if:
- its debt or equity instruments are traded in a public market or it is in the process of issuing such instruments for trading in a public market; or
- it holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses.
Election on when to apply the proposed standard
For entities meeting the conditions above, they can elect to apply the proposed standard in either their consolidated, separate or individual financial statements. Entities may elect to apply the proposed standard and revoke that election at a later stage. This proposed standard also allows entities to elect to apply it more than once. For example, an entity elected to apply the proposed standard in a prior period but not in the immediately preceding period, may elect to apply again the proposed standard in the current period.
If an entity elects to apply the proposed standard, it must make a disclosure of that fact together with the statement of compliance with IFRS.
Disclosures of comparative information when an entity elects to apply the proposed standard
The following explained the disclosure required when an entity elects to apply the proposed standard:
#1. Apply the proposed standard in the current period
If an entity applies the proposed standard in the current period but not in the immediately preceding period, it must provide comparative information of the preceding period for all amounts reported in the current period’s financial statements, unless required or permitted otherwise. Essentially, entities apply the disclosure requirements in the proposed standard to determine the disclosures required for the immediately preceding comparative period.
#2: Apply the proposed standard in the preceding year
If an entity applies the proposed standard in the preceding period but not in the current period, entities must provide comparative information of the preceding period for all amounts reported in the current period’s financial statements, unless required or permitted otherwise. This means, entities are still required to disclose all amounts required for the current year and the preceding year. The fact that entities applied this proposed standard in the preceding year (and hence did not disclose the amount) is not enough to justify the omission of comparative information.
Regardless of the scenarios above, entities include comparative information for narrative and descriptive information. It is included if it is relevant to the understanding of the current period’s financial statements.
Other clarification on the election to apply the proposed standard
Firstly, the proposed standard clarifies that electing or revoking an election to apply the standard does not result in an entity meeting the definition of a first-time adopter of IFRS Standards in IFRS 1 First-time Adoption of International Financial Reporting Standards.
Secondly, no simplified disclosure requirements are provided in the proposed standard for the following three standards:
- IFRS 8 Operating Segments
- IFRS 17 Insurance Contracts
- IAS 33 Earnings per Share.
Entities apply the disclosure requirements in the above standard in full even if entities are applying the proposed standard.
As required by IAS 1 Presentation of Financial Statements, entities do not need to apply the disclosures requirements in the proposed standard if the information resulting from that disclosure is not material.
On the other hand, entities should also consider providing additional disclosures when compliance with the specific requirements in the proposed standard, including the requirements in other IFRS Standards that remain applicable, is insufficient to enable users of financial statements to understand the impact of particular transactions, other events and conditions.
The exposure draft on disclosure simplification for subsidiaries without public accountability is available on the IASB website for comment. We will update you on the new development of this exposure draft in due course.
Meantime, you can read other relevant articles in the Financial Accounting section.