The European Securities and Markets Authority (ESMA) has urged the International Accounting Standards Board (IASB) to adopt a tougher line with pensions accounting disclosures.
In a comment letter on the board’s March 2021 proposals for a shake-up of disclosure requirements under International Financial Reporting Standard (IFRS), ESMA said the board’s non-mandatory approach was the wrong way to tackle the issue.
The IASB issued its exposure draft (ED) detailing a new framework for making disclosures in financial statements in March 2021.
The board argued: “[T]he approach proposed by this ED strikes the right balance between disclosure objectives and detailed disclosure requirements.”
As a test bed for the approach, which is intended to address the problem of boilerplate disclosures, the board decided to trial its methodology on its pensions and fair value accounting standards.
Critics of the board’s approach to disclosures say it omits relevant information and leads to the disclosure of irrelevant information.
Critics blame this on preparers failing to exercise proper judgement and treating disclosure as a checklist.
In response, the board launched its disclosure project in May 2019, which led to it drawing up draft guidance to assist it when drafting disclosure requirements.
The board then applied that guidance to IAS 19 and IFRS 13 and suggested a series of specific disclosure requirements for those standards.
In summary, the board’s proposals would require preparers to comply with both overall and specific disclosure objectives, and then to identify individual disclosure items.
The board also wants preparers to supplement these specific disclosures with explanatory information – subject to a materiality test.
The ED also makes reference to the use of “prescriptive language”.
But in a 4 January comment letter, ESMA argued the non-mandatory approach is wrong.
Instead, ESMA said “the disclosure requirements proposed in the ED should contain more mandatory disclosure items” – subject to a materiality threshold.
The watchdog warned that non-mandatory disclosures will mean that auditors and regulators are unable to challenge issuers with sufficient force.
On the question of specific pensions disclosures, ESMA said in paragraphs 41 to 45 of its submission that it disagreed with the board’s non-mandatory approach to many of the specific disclosure items listed in paragraphs 147I, S, P and W of the exposure draft.
Paragraph 147I includes a suggestion for preparers to disclose “a description of the nature of the benefits provided by the plans”, whether a scheme is open or closed to new members, and a fair-value breakdown of plan assets according to risk and asset class.
Disclosure objective for DC plans
Meanwhile, former senior IASB staff member Peter Clark has criticised the board’s proposal in paragraph 54A of the ED to bring in an overall disclosure objective for defined contribution plans.
He wrote: “A contribution to a defined contribution plan is, in essence a cash payment made to a third party on behalf of the employee. Once the contribution is made, the employer bears no further risk.”
Interested parties have until 12 January to comment on the proposals.