Policy Proposals Business Law Comments on the IASB Exposure Draft "Disclosure Requirements in IFRS Standards -- A Pilot Approach: Proposed amendments to IFRS 13 and IAS 19"
To the International Accounting Standards Board (IASB)
Subcommittee on Corporate Accounting
Committee on Financial and Capital Markets
Keidanren (Japan Business Federation)
In response to the public comments on the IASB Exposure Draft Disclosure Requirements in IFRS Standards—A Pilot Approach: Proposed amendments to IFRS 13 and IAS 19 (the "ED"), Keidanren submits the following comments:
Against a backdrop of disclosure requirements in IFRS Standards being applied like a checklist, the ED proposes demanding compliance with overall and specific disclosure objectives rather than with the disclosure requirements themselves. On this basis, it proposes that Standards make the disclosure of certain items mandatory but, in principle, limit themselves to providing examples of items of information entities may disclose, and that each entity determines what to disclose specifically in light of the needs of financial statement users.
First of all, we share the Board's concern about the issue of disclosure requirements in IFRS Standards being applied like a checklist. We consider it a problem that preparers and, more importantly, auditors use those requirements as a checklist and place emphasis on the completeness rather than the relevance of information in their disclosure practices. However, the root cause of this problem lies in the way the disclosure requirements in IFRS Standards are applied, not the way the disclosure requirements are worded. Hence, the ED's proposals would not fundamentally solve the problem.
On the contrary, the ED's proposals would impose undue burdens and costs on preparers and inevitably lead to confusion in practice, by regarding user needs and disclosure objectives as the same and by having preparers determine disclosures that meet the information needs of users in accordance with the disclosure objectives. Every user has different needs and requires different information for analysis purposes. If preparers were nonetheless to be tasked with identifying such user needs, not only would that be difficult to accomplish but it would also confuse auditors and regulators about their audits and enforcement. It is incumbent upon the IASB, the IFRS Standard-setting body, to analyze diverse user needs and narrow down items required to be disclosed in financial statements in view of relevance from the perspective of prioritization while also considering the disclosure burden on preparers. Such responsibilities should not be transferred to preparers. The right approach would be for the Board to properly narrow disclosures down and, based thereon, for preparers to determine the information to disclose after giving appropriate consideration to materiality to the entity and other factors.
The proposed amendments to IFRS 13 and IAS 19 add, as non-mandatory disclosures, a considerable number of new items that go beyond the current disclosure requirements, but the reasons therefor are not clear. Given the difficulty preparers would have in determining what to disclose based on user needs, these amendments would simply encourage entities to apply disclosure requirements like a checklist, resulting in the opposite of the project's intended goal of effective and efficient disclosure.
Contrary to the Board's expectation stated in paragraph BC181, entities do not "already hold most of the information needed to comply with the proposed amendments to IFRS 13 and IAS 19." The IASB should bear in mind that these amendments would impose a significant cost burden on entities because they, as well as their group companies, would have to gather additional information and implement the necessary arrangements including systems to that end.
In light of the above, we object to the ED's proposals, or a pilot approach to disclosure requirements, in their entirety. This project should be cancelled as it would lead to confusion in practice about how to disclose information in compliance with IFRS Standards.
Specific disclosure objectives merely provide nonspecific descriptions that are not much different in content from descriptions of mandatory and non-mandatory disclosures.1 As such, they do not seem to help preparers identify user needs and accurately determine what to disclose.
In regard to Question 3(b), even if the ED's approach that distinguishes between mandatory and non-mandatory disclosures were to be adopted, entities using disclosure requirements like a checklist would unlikely decrease unless a rule provided in paragraph 31 of IAS 1—namely, "An entity need not provide a specific disclosure required by an IFRS if the information resulting from that disclosure is not material"—is thoroughly operated in practice. Rather, it is highly possible that the ED's approach might encourage entities to apply disclosure requirements like a checklist, as stated in our response to Question 4 below. Reducing the reliance on this checklist approach calls the IASB to (1) develop Standards whereby entities are required to disclose material items only that truly meet user needs, and (2) ensure the operation of the rule provided in paragraph 31 of IAS 1.
In regard to Question 3(d), it is easy to imagine that the ED's approach, which requires preparers to determine whether to disclose non-mandatory items in many cases, would not only add a significant burden on preparers but also make audits and enforcement more difficult for auditors and regulators. In any event, we do not think it would be easy for preparers to determine whether to disclose individual items in accordance with the specific disclosure objectives, as commented in our response to Question 2 above.
In regard to Question 3(e), the ED's approach requires preparers to determine whether to disclose non-mandatory items in accordance with the specific disclosure objectives. However, as argued in our response to Question 2, specific disclosure objectives are not specific enough to enable entities to determine whether to disclose individual items and would thus likely cause the entity and auditor to have different views. Additional audit costs to resolve such differences, along with preparation costs in the event of ultimately disclosing items at issue, would impose a heavy burden on preparers.
The proposed amendments to IFRS 13 and IAS 19 enumerate many non-mandatory disclosures, which include items that go beyond the current disclosure requirements. Having preparers determine whether to disclose those items would impose heavy burdens on preparers, which specifically consist of the following:
- (1) An entity having decided not to disclose a non-mandatory item would be responsible for explaining the reason to the auditor and regulator. That would add a considerable burden to the entity. Furthermore, given that descriptions of disclosures are not specific as pointed out in our response to Question 2, it would take considerable effort for preparers to simply determine whether to disclose each item.
- (2) Due to the heaviness of the burdens described in (1) above, there is a strong likelihood that non-mandatory disclosures would also end up being used like a checklist, resulting in the disclosure of too much irrelevant information.
- (3) There is concern that the IASB, in the future when examining disclosures for Standards being developed or amended, might increase the number of non-mandatory disclosures. In fact, the proposed amendments to IFRS 13 and IAS 19 propose many non-mandatory disclosures that are not required by the current Standards.
Proposed Amendments to IFRS 13
Questions 7 and 8
Paragraphs 114 and 117 propose, as a non-mandatory item, the disclosure of significant reasons for changes in Level 1 and Level 2 fair value measurements from the beginning of the reporting period to the end of that period, despite not being required by the current Standard. This disclosure should not be proposed.
Another problem is that there is no clear distinction between specific disclosure objectives and the items of information to meet those objectives, in the first place. For instance, whereas paragraph 109 seemingly prescribes the item of information to meet the disclosure objective for measurement uncertainties associated with fair value measurements, preparers would have to refer to paragraph 107 that lays down the disclosure objective in order to understand what exactly they need to disclose.
Questions 9 and 10
Despite the mandatory disclosure here being limited to fair value measurements by level of the fair value hierarchy required in paragraph 120, the disclosure objective in paragraph 118 includes what goes beyond the current disclosure requirements. As this could encourage over-disclosure, we object to the disclosure objective set out in paragraph 118.
Paragraph 121, which specifies a non-mandatory disclosure, also includes what goes beyond the current disclosure requirements (which are limited to the disclosure of the items required in paragraph 120 of the ED and of the valuation techniques and inputs used for Level 2 and Level 3 fair value measurements). Therefore, we object to the proposed paragraph 121.
Proposed Amendments to IAS 19
Paragraph 147F(d), which requires the disclosure of the deferred tax asset or liability arising from the defined benefit plans, prescribes disclosures not for employee benefits but for taxes. Moreover, as paragraph 147F(d) overlaps with the disclosure for deferred tax assets and liabilities in notes to income taxes required by IAS 12, it should not be required as a disclosure under IAS 19.
Paragraph 147F(e), which requires the amounts in the statement of cash flows to be disclosed with their components identified, mandates the disclosure of cash flow items in accordance with the direct method. This requirement, though, contradicts the fact that the indirect method is allowed to be used in preparing statements of cash flows. Accordingly, the disclosure set out in this paragraph should not be required in the ED.
Paragraph 147W(a) refers to significant reasons for changes in reimbursement rights. Even though this is proposed as a non-mandatory disclosure, it is not required to be disclosed under the current Standard and hence should not be proposed.
With respect to disclosures for multi-employer plans, paragraph 148A should not require entities to comply with the specific disclosure objective on the nature of, and risks associated with, defined benefit plans in paragraph 147G. The reason is that this would lead to the disclosure requirements prescribed in paragraphs 147I and 148B of the ED, which goes beyond what is required by the current IAS 19.
- For example, of the proposed amendments to IFRS 13, the specific disclosure objective in paragraph 114 is not much different in content from the mandatory disclosure provided in paragraph 116 and does not seem to help preparers determine what to disclose.