Background

“Many subsidiaries are not publicly accountable; however, a subsidiary applying International Financial Reporting Standards (IFRSs) provides in its financial statements the same disclosures as those designed for publicly accountable entities.”

“The IFRS for SMEs standard may be unattractive to some subsidiaries because they report to their parent company using IFRSs, which have different requirements from the IFRS for SMEs standard.”

“Applying local generally accepted accounting principles (GAAP) or the IFRS for SMEs standard requires additional accounting records, this consumes resources and adds to the cost of preparing financial statements for these subsidiaries.” 

These are some of the feedback on the International Accounting Standards Board (IASB) Request for Views – 2015 Agenda Consultation. Stakeholders have asked the IASB to permit a subsidiary, which reports to a parent applying IFRSs in its consolidated financial statements, to apply the standards with reduced disclosure requirements.

In response to this feedback, the IASB has published Exposure Draft Subsidiaries without Public Accountability: Disclosures.

What issues does the draft standard address? 

The IASB aims to reduce the cost of financial reporting for subsidiaries that report to a parent applying IFRSs while maintaining the usefulness of the subsidiary’s financial statements to users.

Under the proposals, an eligible subsidiary could voluntarily apply the recognition, measurement and presentation requirements in IFRSs with reduced disclosure requirements. If the subsidiary currently applies local GAAP or the IFRS for SMEs standard a subsidiary may be incentivized by the draft standard to change to applying the full IFRSs with reduced disclosures. This would remove the need for the subsidiary to maintain two sets of records (e.g. local GAAP for its own financial statements and full IFRS for reporting to its parent for consolidation purposes).

Although a subsidiary would provide fewer disclosures than it would if it were to apply the full IFRSs, the usefulness of the financial statements would be maintained because:

• The disclosures would be tailored to the needs of the users of subsidiaries’ financial statements; and
• Disclosures designed for publicly accountable companies would be removed.

Who would be able to apply the draft standard?

The draft standard would permit a subsidiary to apply the reduced disclosure requirements provided that:
(a) The subsidiary does not have public accountability; and
(b) Its ultimate or any intermediate parent produces consolidated financial statements available for public use that comply with IFRSs.

The draft standard could be applied by an eligible subsidiary in its consolidated, separate or individual financial statements. It would not affect the information disclosed in the parent’s consolidated financial statements.

Summary of the exposure draft

The exposure draft proposes a new standard that would:
(a) Be optional for an eligible subsidiary;
(b) Set out disclosure requirements for a subsidiary that elects to apply the standard; and
(c) Specify the disclosure requirements in other IFRSs that do not apply and are replaced if a subsidiary elects to apply the draft standard.

Developing the disclosure requirements

In developing the proposed disclosure requirements, the IASB started with the disclosure requirements in the IFRS for SMEs standard and tailored them when the recognition and measurement requirements differed from those in the full IFRSs.

The IASB’s overall approach in developing the proposed disclosure requirements is summarized in the diagram below.

In a limited number of cases, the IASB made exceptions to the overall approach. For example, the IASB proposes to include a few recent improvements to disclosure requirements in the IFRSs that are expected to benefit the users of the financial statements.

Principles applied in tailoring disclosure requirements

In tailoring the disclosure requirements in the IFRSs, the IASB considered users’ information needs by applying the same principles as when the disclosure requirements in the IFRS for SMEs standard were developed, which are information about an entity’s:

• Short-term cash flows, obligations, commitments and contingencies;
• Liquidity and solvency;
• Accounting policy choices;
• Disaggregation of amounts; and
• Measurement uncertainty.

Cost-benefit analysis

The potential benefits of applying the draft standard include:

• Removing the need for some subsidiaries to maintain two sets of accounting records – one for reporting to the parent and one for the subsidiary’s own financial statements;
• Retaining usefulness of financial statements for users because disclosures are tailored to meet their needs; and
• Minimizing education and translation costs for stakeholders because, although it is a new standard, the proposed disclosure requirements are based on the IFRS for SMEs standard or full IFRSs.

The table below illustrates the potential first-time implementation and other transition costs of applying the draft standard depending on how the subsidiary previously prepared its financial statements.

The Institute is holding a roundtable discussion on 4 November via Zoom on the topic. Visit our website for more details. We strongly encourage interested parties to join and express their views. You can also express your views through a meeting with the Institute’s Standard Setting Department or by sending a comment letter to commentletters@hkicpa.org.hk. Take part so we can help steer the IASB in developing disclosure requirements that are fit for purpose.

This article was contributed by Anthony Wong CPA, Associate Director of the Institute’s Standard Setting Department. Visit the department’s “What’s new” webpage for our latest publications, and follow us on LinkedIn for upcoming activities.