Re.: IASB Exposure Draft 2014/1 Disclosure Initiative Proposed amendments

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1 Mr Hans Hoogervorst Chairman of the International Accounting Standards Board 30 Cannon Street London EC4M 6XH United Kingdom 21 July /602 Dear Mr Hoogervorst Re.: IASB Exposure Draft 2014/1 Disclosure Initiative Proposed amendments to IAS 1 The IDW appreciates the opportunity to comment on the IASB Exposure Draft ED/2014/1 Disclosure Initiative Proposed amendments to IAS 1. We agree that clarification on the application of judgement in areas such as materiality and aggregation, presentation, structure of notes and disclosure of accounting policies may result in clearer communication to users of financial statements. However, we are concerned that the proposals do not provide sufficient guidance as to the application of that judgement and, as such, are unlikely to lead to significant change in practice. In particular, to effect any meaningful change, a clear framework guiding the application of materiality to disclosures is needed. We therefore welcome the IASB s intention to undertake a project to assess the existing guidance on materiality. The IDW supports the aims of the Disclosure Initiative as the perception of a disclosure overload is widespread. In this context, a review of the specific disclosure requirements of both new and existing standards should be commenced as soon as possible. We would like to comment on certain matters as set out below.

2 page 2/6 IDW CL to Mr Hans Hoogervorst on ED/2014/1 Disclosure Initiative Proposed amendments to IAS 1 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) (b) (c) (d) materiality and aggregation (see paragraphs and BC1 8 of this Exposure Draft); 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); notes structure (see paragraphs and BC16 BC19 of this Exposure Draft); and 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 The IDW acknowledges the express confirmation that the concept of materiality applies not only to recognition and measurement, but also to the disclosure requirements. However, we believe that this notion is already generally accepted in practice. The issue on which there is a lack of clarity is not whether materiality applies to disclosures but how the determination of whether a disclosure is material should be made. Although we are convinced that materiality is always a matter of judgement and has to be assessed separately in each single case, a clear framework for the application of materiality to disclosures (covering both quantitative and qualitative considerations) is needed to support the practical application of judgement. We therefore recommend that the Board liaise with the International Auditing and Assurance Standard Board (IAASB) as well as seek input from securities and markets regulators and other constituents in order to develop such a framework. The IDW concurs with the Board s decision not to prohibit entities from disclosing immaterial information. Whilst it would be desirable for financial statements to exclude all immaterial disclosures, such a requirement in IAS 1 would not be practicable.

3 page 3/6 IDW CL to Mr Hans Hoogervorst on ED/2014/1 Disclosure Initiative Proposed amendments to IAS 1 Paragraphs of the ED contain some requirements on materiality and aggregation, e.g. an entity shall not aggregate or disaggregate information in a manner that obscures useful information, such as by aggregating items that have different characteristics or by overwhelming useful information with immaterial information [paragraph 30A]. We suggest the Board clarify whether an infringement of those requirements would result in financial statements that do not comply with IFRSs. The IASB states in paragraph 31 that an entity shall also consider whether information about matters addressed by an IFRS needs to be presented or disclosed to meet the needs of users of financial statements, even if that information is not included in the specific disclosure requirements of the IFRS. We question whether it is reasonable to encourage preparers to include disclosures in the financial statements that go beyond the disclosures required by the standards. According to this proposed general requirement, it would be at the discretion of preparers to come up with some disclosures (including non-gaap measures) if they believe that these disclosures meet the users needs. From our point of view, this requirement is counterproductive to the objective of the Disclosure Initiative as it opens the door to potentially extensive disclosures. We agree with the proposed changes in terminology. However, in our view, differentiating between the term presentation to mean disclosure as a line item on the primary financial statements and the term disclosure to mean disclosure in the notes will only be meaningful, if it is consistently applied throughout the IFRSs (e.g. we refer to paragraph 113 of the ED: An entity shall present notes in a systematic manner. ). (b) Statement of financial position and statement of profit or loss and other comprehensive income We agree that disaggregation of line items in the primary financial statements can provide useful information, but again note that little guidance is given on the assessment of when this might be the case. For instance, paragraph 30A of the ED refers to consideration of all relevant facts and circumstances but provides no indication of how to determine such relevance when considering presentation requirements. Moreover, we recommend the Board considering whether consistency of both proposed and existing guidance on disaggregation and presentation of additional line items could be improved. For example, according to the paragraphs 54 and 55 of the ED, an entity shall disaggregate line items (respectively present additional line items) if it is relevant to an understanding of the entity s financial position [emph. added]. Furthermore, an entity might conclude that disaggre-

4 page 4/6 IDW CL to Mr Hans Hoogervorst on ED/2014/1 Disclosure Initiative Proposed amendments to IAS 1 gating is capable of making a difference in the decisions made by users of financial statements [paragraph 54 of the ED; emph. added]. When an entity has decided to disaggregate line items, the subclassifications of the line items presented [shall be] classified in a manner appropriate to the entity s operations [paragraph 77 of IAS 1; emph. added]. We miss a pervasive principle on disaggregation and presentation of additional line items. The disaggregation of line items in the statement of profit or loss continues to be the subject of debate and has been under consideration by a number of parties, including the European Securities and Markets Authority (ESMA consultation paper Guidelines on Alternative Performance Measures ) and the International Federation of Accountants (IFAC ED Developing and Reporting Supplementary Financial Measures Definition, Principles and Disclosures ). However, we believe that the IASB is best placed to provide a globally accepted framework for the presentation of non-ifrs financial information (we refer to the April 2014 IASB Update). The IDW would welcome such guidance. Additionally, the Board should provide principles for deciding whether subtotals are to be presented in the primary financial statements or in the notes. Finally, we believe that many of the considerations on disaggregation of information in the statement of financial position and the statement of profit or loss are equally relevant to the statement of cash flows and recommend the Board also consider including guidance in IAS 7 Statement of Cash Flows. (c) Notes structure The IDW agrees that entities should have flexibility in determining the ordering of notes and believes that the guidance in the proposed paragraphs 113A and 114 will generally be useful in determining an appropriate approach. However, the Board should clarify in the main-body of the standard that the paragraphs 113A and 114 are examples of how an entity could order the notes and that entities have flexibility when determining the order of the notes. Otherwise the provisions in the paragraphs 113A and 114 could be misunderstood as constituting the only approaches. In addition, the Board should clarify the reference to the principle of comparability in paragraph 113 of the ED. In our view, it is unclear whether an entity should ensure comparability with its former financial statements or whether an entity should compare financial statements with other entities (e.g. peers) in determining a systematic approach for the notes to its financial statements.

5 page 5/6 IDW CL to Mr Hans Hoogervorst on ED/2014/1 Disclosure Initiative Proposed amendments to IAS 1 (d) Disclosure of accounting policies The IDW agrees that it is not reasonable to mandate a single summary of significant accounting policies as there are other appropriate ways of providing this information. However, this would also require an amendment to paragraph 10(e) of IAS 1. We generally concur with the proposed deletion of paragraph 120 and the statement in paragraph 22 of the Basis for Conclusions in the ED that additional work is needed on the determination of a significant accounting policy. However, from our point of view, a significant accounting policy can only be entityspecific. Therefore, we suggest the first sentence of paragraph 120 be retained. It is true that accounting policy disclosures are often lengthy and boilerplate in nature. The exclusion of some of this material could enable users to focus on those areas in which the preparer has made choices or exercised significant judgement. Nevertheless, it cannot be assumed that all users of financial statements are familiar with all the requirements of IFRSs. For this reason, we recommend the IASB consider engaging in a dialogue with securities and markets regulators on the use of standing data to address any reduced level of disclosure of standard accounting policies. 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? We agree with the Board s proposal. 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? The IDW concurs with the proposed transition provisions.

6 page 6/6 IDW CL to Mr Hans Hoogervorst on ED/2014/1 Disclosure Initiative Proposed amendments to IAS 1 We would be pleased to answer any questions that you may have or discuss any aspect of this letter. Yours sincerely Klaus-Peter Naumann Chief Executive Officer Uwe Fieseler Director International Accounting