09 July 2014

FRC´s response to the IASB on proposed amendments to IAS 1

The FRC has published its comment letter to the IASB on the ED ‘Disclosure Initiative (Proposed amendments to IAS 1)’. The proposed amendments to IAS 1 provide useful clarification on the application of materiality to IFRS financial statements.

FRC´s main comments on the ED are summarised below with the detailed responses to the consultation questions included in the appendix to the comment letter.

Materiality and aggregation

1. FRC anticipates that the proposed amendments will result in financial reporting that is clearer and more concise. FRC welcomes the emphasis placed on the need for judgement to be exercised regarding the level of disclosure that is appropriate. However, FRC believes that the IASB should ensure the language in IAS 1 consistently encourages entities to omit disclosures that are not material (either individually or in aggregate), as FRC believes that the disclosure of immaterial information can impair understandability and obscure useful information.

2. The term ‘material’ and related terms such as ‘significant’, ‘key’ and ‘critical’, are not used consistently within the Conceptual Framework and IFRSs. FRC notes that the IASB is considering the use of these terms as part of its ‘Materiality’ project, and also intends to provide clarification of the circumstances in which an accounting policy should be considered to be ‘significant’. FRC encourages the IASB to ensure that the definition of ‘material’ provided within the defined terms for IAS 1 is in line with the definition that will be included in the revised Conceptual Framework.

Presentation and disclosure

3. In paragraph BC7 of the ED, the definition of ‘present’ seems to be intended to differentiate it from ‘disclose’, in that ‘present’ is defined as a type of disclosure that relates only to the primary financial statements. This definition of presentation is incompatible with the definition provided for the term ‘disclose’, which states that ‘disclose’ refers only to information provided in the notes. In addition, the definition of ‘disclose’ in paragraph BC7 does not explain the concept as the definition provided is circular.

4. The use of these terms in the proposed amendments to IAS 1 and the paragraphs of IAS 1 for which amendments have not been proposed can also be confusing as they appear to be used interchangeably at times. FRC recommends that these definitions are reconsidered and further developed as part of the IASB’s review of the Conceptual Framework.

Structure of the notes

5. The proposed amendments to IAS 1 outline the flexibility permitted when structuring the notes to the financial statements; however, the ED does not provide any principles to guide entities on whether to prioritise understandability over consistency from year to year or the comparability of the financial statements with those of other entities when determining an appropriate structure. FRC believes that, while consistency and comparability are desirable qualities, understandability should take precedence as it is essential for meeting the objective of financial reporting.

6. FRC supports the IASB’s intention to clarify the objective of the notes to the financial statements as part of the ‘Disclosure Initiative’ project and FRC also notes that the IASB is considering the use of cross-referencing as part of the ‘Principles of Disclosure’ project. FRC believes that IAS 1 should state that disclosure requirements for the notes can be met by including a cross-reference in the notes to information provided elsewhere in the financial report. This would reduce the duplication of information in different components of the financial report. The FRC has recently published guidance on the placement of information, cross-referencing of disclosures and sign posting to complementary information in the Guidance on the Strategic Report.

Consistency

7. Finally, FRC requests that the IASB consider the consistency of the proposed narrow-scope amendments with the sections of IAS 1 for which the ED does not propose amendments, to ensure that revised terminology and definitions are applied consistently throughout the Standard. 

Full comment letter

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