Background
IASB has been diligently addressing the concerns raised by investors regarding Financial Statement disclosure requirements. On 9 April 2024, the IASB issued a new standard IFRS 18, titled “Presentation and Disclosure in Financial Statements,1” replacing the existing IAS 1 standard with the objective of improving comparability and transparency of entities’ performance reporting. In its continuous efforts to ensure that financial statements provide adequate and appropriate disclosures to the investors, on 9 May 2024, the IASB issued IFRS 19 Subsidiaries without Public Accountability: Disclosures. IFRS 19 is the culmination of the IASB’s Disclosure Initiative, a set of projects aiming to improve the effectiveness of disclosures in financial statements. The new standard allows eligible entities to elect to apply IFRS 19’s reduced disclosure requirements while still applying the recognition, measurement, and presentation requirements in other IFRS accounting standards.
Key Principles of reduced disclosure framework
1.Objective of the standard
The objective of the standard is to allow eligible entities a practical way of addressing the problems of over-disclosure by voluntary election of a reduced disclosure requirement framework set out in IFRS 19 while continuing to apply the recognition, measurement, and presentation requirements in other IFRS accounting standards. Unless otherwise specified, eligible entities that elect to apply IFRS 19 will not need to apply the disclosure requirements in other IFRS accounting standards.
2.Eligibility Criteria’s for entities permitted to apply condensed disclosure framework
An entity (or eligible entity) is permitted to apply IFRS 19 only if at the end of reporting period. An entity or Eligible entities can, but are not required to, apply IFRS 19 in their consolidated, separate, or individual financial statements. An intermediate parent that does not have public accountability and meets the other eligibility conditions may apply this Standard in its separate financial statements even if it does not apply this Standard in its consolidated financial statements.
One of the key questions on the assessment of eligibility criteria for the applicability of IFRS 19 relates to the timing of the assessment of the eligibility criteria. It is clearly specified that only a subsidiary without public accountability at the end of its reporting period can apply IFRS 19 in its financial statements for that reporting period. The principles of IFRS 19 are not applicable to entities that are subsidiaries at the start of, or at any time during the reporting period but cease to meet the eligibility criteria before the end of its reporting period.
3.Public Accountability
A subsidiary 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 (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets), or
- it holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses2 (for example, banks, credit unions, insurance companies, securities brokers/ dealers, mutual funds, and investment banks often meet this second criterion).
4.Developing the disclosure requirements- Underlying principles
Since subsidiaries without public accountability are a subset of small and medium sized entities (SMEs), therefore the Board considered the disclosure requirements in the IFRS for SMEs Accounting Standard as a starting point. The disclosure requirements in the IFRS for SMEs Accounting Standard are based on IFRS Accounting Standards, with appropriate omissions and changes to reflect the information needs of users of the financial statements of SMEs. IFRS for SMEs Accounting Standard provides for fewer disclosure requirements; however, its recognition and measurement requirements differ from those in IFRS accounting standards. Therefore, applying the disclosure requirements in the IFRS for SMEs Accounting Standard in its entirety would be inappropriate to achieve the objective of a reduced disclosure requirement for eligible entities. The underlying principles for IFRS 19 disclosure requirements represent the hybrid framework of principles of IFRS for SMEs Accounting Standard and IFRS Accounting Standards.
For topics where recognition and measurement requirements are the same, the disclosure requirements in the IFRS for SMEs Accounting Standard have been used in IFRS 19 with the wording aligned to that used in other IFRS accounting standards. In cases of different recognition and/ or measurement requirements in the IFRS for SMEs Accounting Standard, the disclosure requirements in IFRS 19 have been tailored applying the principles used in developing disclosure requirements in the IFRS for SMEs Accounting Standard.
In developing the IFRS 19, the IASB was guided by following broad principles regarding users’ information needs:
- users of the financial statements of eligible subsidiaries are particularly interested in information about. short-term cash flows and information about obligations, commitments, or contingencies, whether they are recognized as liabilities, liquidity, and
solvency.
. information on measurement uncertainties and the entity’s accounting policy choices.
. disaggregation of amounts presented in the financial statements. - some disclosures in IFRS Accounting Standards are more relevant to investment decisions in public capital markets than to the transactions and other events and conditions encountered by typical eligible subsidiaries.
5.Disclosure requirements and interaction with other IFRS accounting standards
The disclosure requirements in IFRS 19 are a condensed version of the disclosure requirements set out in other IFRS Accounting Standards. Key principles for the application of IFRS 19 are summarized below:
Interaction of IFRS 19 with other IFRS Accounting Standards
- IFRS 19 is a disclosure-only standard.
- An eligible subsidiary that applies IFRS 19 is required to apply the recognition, measurement, and presentation requirements in other IFRS Accounting Standards.
- For disclosure requirements, it applies IFRS 19 instead of the disclosure requirements in other IFRS Accounting Standards, except in specified circumstances.
All disclosure requirements related to respective IFRS accounting standards located at one place
- The disclosure requirements related to individual IFRS accounting standards are organized in IFRS 19 into subheadings by IFRS accounting standards. For example, all disclosure requirements for business combinations included in IFRS 19 are organized under the subheading “IFRS 3 Business Combinations.”
- Some disclosure requirements in IFRS accounting standards (e.g., those embedded in paragraphs that include recognition, measurement, or presentation requirements) remain applicable. Their paragraph references are specified under the subheading of each IFRS accounting standard in IFRS 19. For example, the subsection related to “IFRS 1 First-time Adoption of International Financial Reporting Standards” includes a paragraph labeled “Disclosure requirements in IFRS 1 that remain applicable” with specific references to IFRS 1 paragraphs that are still applicable.
Principles of materiality to override the IFRS 19 disclosure requirements
- An eligible entity applying IFRS 19 is not required to provide a specific disclosure required by IFRS 19 if the information resulting from that disclosure would not be material
6. Compliance with IFRS Accounting Standard
- An entity whose financial statements comply with IFRS Accounting Standards and the requirements in IFRS 19 shall make an explicit and unreserved statement of such compliance in the notes.
- An entity that applies IFRS 19 shall, as part of that unreserved statement, state that it has applied IFRS 19. However, it shall not describe financial statements as complying with IFRS Accounting Standards unless the entity complies with the requirements in IFRS 19 and all applicable requirements in other IFRS Accounting Standards.
7. Electing or revoking an election to apply IFRS 19
An entity that meets the eligibility criteria of IFRS 19 may elect to apply IFRS 19 disclosure requirements on a voluntary basis. Once elected, an entity may revoke its election to apply IFRS 19 at any time, in which case, it would be required to prepare financial statements providing the disclosures set out in other IFRS accounting standards. IFRS 19 also allows an entity to elect to apply the standard more than once, enabling entities that have revoked their election to reapply for it in a later period, for example, an entity that applied this Standard in a prior period but not in the immediately preceding period may elect to apply this Standard in the current period.
Effective date and transition
Effective date
IFRS 19 is effective for reporting periods beginning on or after 1 January 2027. Earlier application is permitted. If an eligible entity chooses to apply the standard earlier, it is required to disclose that fact.
Transition
If an entity applies IFRS 19 in the current reporting period but not in the immediately preceding period, it is required to provide comparative information (that is, information for the preceding period) for all amounts reported in the current period’s financial statements unless IFRS 19 or another IFRS Accounting Standard permits or requires otherwise. If relevant, an entity will include comparative information for narrative and descriptive information. Similarly, an entity that revokes its election to apply IFRS 19 must provide comparatives for all amounts disclosed under the requirements in other IFRS accounting standards.
Suppose an entity that applied IFRS accounting standards in the immediately preceding period elects to apply IFRS 19 in the current period. In that case, the requirements in IFRS 1 First-time Adoption of International Financial Reporting Standards3 and the requirements for changes in accounting policies in IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors will not be applicable. Similarly, if an entity revokes its election (or is no longer eligible) to apply IFRS 19 but continues to apply IFRS accounting standards, the requirements of IFRS 1 and the requirements of IAS 8 for changes in accounting policies would not be applicable.
Disclosure requirements if an entity applies IFRS 19 before applying IFRS 18
IFRS 18 Presentation and Disclosure in Financial Statements was issued in April 2024. IAS 1 Presentation of Financial Statements will be withdrawn from the effective date of IFRS 18, with some of the requirements from IAS 1 reproduced in IFRS 18 and others relocated to IAS 8 Basis of Preparation of Financial Statements. IFRS 18 has the same effective date as IFRS 19 Subsidiaries without Public Accountability: Disclosures, but IFRS 19 includes an appendix with requirements for eligible subsidiaries applying IFRS 19 before IFRS 18. A subsidiary applying IFRS 19 before IFRS 18 will apply disclosure requirements set out in an Appendix to IFRS 19, which are based on IAS 1 rather than IFRS 18.
“Catch-up” amendments to be published
IFRS 19 disclosure requirements are based on disclosure requirements in IFRS Accounting Standards as of 28 February 2021. Disclosure requirements in IFRS Accounting Standards that have been added or amended subsequently are included in IFRS 19 without any changes. For example, new disclosure requirements on Supplier Finance Arrangements (which amended IAS 7 and IFRS 7) apply to eligible subsidiaries applying IFRS 19.
Consequently, the Board indicated that it would publish an Exposure Draft, stating whether and how to reduce the disclosure requirements of these post-28 February 2021 amendments and additions to update IFRS 19. It will develop those proposed amendments to IFRS 19 by applying the principles for reducing disclosure requirements. The IASB plans to publish the exposure draft as soon as possible.
Uniqus’ perspective
Through this new disclosure-only standard, the IASB has taken a significant step to simplify reporting systems and processes for Companies, reducing the costs of preparing eligible subsidiaries’ financial statements while maintaining their usefulness for their users.
Benefits for Entities:
IFRS 19 allows entities to benefit from cost savings and reporting simplifications without compromising the usefulness of eligible subsidiaries’ financial statements for their users. These cost savings will extend from subsidiaries to their group and ultimately benefit their owners. The benefits will vary depending on the circumstance of the entity, including:
- the accounting requirements currently applied by an eligible subsidiary, i.e., whether an entity is presently applying IFRS for SMEs Accounting Standard or local GAAP or IFRS Accounting Standards;
- the set-up of the reporting systems and processes within the group; and
- other factors, such as applicable laws and regulations.
Entities transitioning to IFRS 19 from the disclosure requirements in other IFRS Accounting Standards will benefit from reduced disclosure requirements for eligible subsidiaries’ financial statements and, hence, reduced time, cost, and effort involved in preparing and auditing those financial statements. Since IFRS 19 provides a condensed disclosure requirement framework, therefore eligible entities electing to shift from disclosure requirements as per IFRS accounting standards may not need to put in much additional effort in terms of adjusting their accounting systems, processes, and controls. The allowance of electing, revoking, and re-electing the applicability of disclosure requirements under IFRS 19 anytime at a time of eligible entities’ choice makes the decision-making to elect IFRS 19 simple and easy.
Although IFRS 19 will benefit eligible entities by providing a condensed disclosure requirement framework, the fact that it makes reference to the specific disclosure requirements of other IFRS accounting standards that are applicable for the various subsections indicates that IFRS 19 cannot be applied independently without referring to relevant guidance of disclosure requirements stated in other IFRS Accounting Standards.
IFRS 19 will also invoke standard-setting changes in jurisdictions such as India, which are aligned to IFRS, however, where an IFRS 19 equivalent update may not have been initiated.
Meanwhile, until the standard becomes effective, the management and those charged with governance may educate the stakeholders, employees, investors, and other relevant financial statement users about the new condensed disclosure requirements framework as per IFRS 19 for their reporting entity.
