EFRAG Urges IASB to Reassess Proposed Changes to Cash Flow Disclosures

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By David R. Jones

May 11 — The International Accounting Standards Board's proposed changes to its standard on cash flows would create a “piecemeal and prescriptive requirement without first setting clear principle-based objectives,” the European Financial Reporting Advisory Group charged May 11.

EFRAG urged the board to first set clear objectives for cash flow statement disclosure requirements before settling on them.

In a comment letter submitted to IASB on the board's exposure draft—ED/2014/6—proposing amendments to International Accounting Standard 7: Statement of Cash Flows, EFRAG said it generally supports the ED's broad aim to require disclosures on movements in debt.

‘Establish Objectives First.'

This approach would satisfy users' need for a net reconciliation of debt, the comment letter said.

However, EFRAG urged IASB to “first establish the objectives for the disclosures” and then set requirements based on these objectives, “while allowing entities to determine the most appropriate way to provide the required information.”

Requiring Reconciliation Disclosures

Under the ED's proposed changes to IAS 7, entities would have to disclose reconciliation of amounts in their opening and closing statements of financial position.

This requirement would extend to each item for which cash flows have been., or would be, classified as financing activities in the statement of cash flows, while excluding equity items.

Responding to Investors

The ED, published last December, also would extend IAS 7's disclosures provisions about an entity's liquidity and proposes requiring disclosures about restrictions that could affect an entity's decisions to use cash and cash equivalent balances.

The ED's proposals on cash flows respond to “requests from investors for improved disclosures about an entity's financing activities and its cash and cash equivalents balances,” IASB said in a Dec. 18, 2014 statement.

The comment period on the ED ended April 17.

Including Taxonomy Changes

The ED marks the first time that IASB has included proposed changes to the International Financial Reporting Standard Taxonomy in an exposure draft.

“The IASB plans to assess the form, content and timing of the proposed IFRS Taxonomy Update on the basis of feedback received on these proposals,” according to the ED.

‘Lacking a Clear Goal.'

Along with slamming IASB for introducing prescriptive guidance into IAS 7 without first establishing objectives for disclosures, EFRAG criticized the ED's proposed disclosure requirements regarding restrictions on cash and cash equivalent balances.

The IASB's proposals on cash and cash equivalent balances lack a clear goal and overlap with current guidance in other IFRS, the comment letter said.

EFRAG urged IASB to clarify its existing standards in lieu of introducing additional disclosure requirements.

Financial Institutions' Disclosures

On a larger scale, EFRAG called on the board to “reconsider the purposes and use of the statement of cash flows for financial institutions (such as banks and insurers) that seems to be of limited relevance for users.”

EFRAG said that its stakeholders put only slight weight on financial institutions' cash flow statements because these statements fail to take into account the complexity of liquidity and funding management.

The group noted that it currently is addressing this topic by conducting research on cash flow statements for financial Institutions.

Opposing Taxonomy Inclusion

EFRAG also opposed the inclusion of proposed taxonomy changes in the ED.

Modifications to taxonomy should remain a separate activity of the IFRS Foundation, IASB's parent group, and including it in an ED could undermine IASB's principles-based approach to standard setting, the comment letter said.

EFRAG Divisions on ED

EFRAG issued the comment letter despite divisions in its ranks on the ED, particularly among members of its Technical Expert Group (TEG), according to a notice on the group's web site.

The EFRAG TEG noted in an April 23 conference call that “views of constituents were split as EFRAG's preliminary views had been,” referring to EFRAG's initial discussions on the ED in January 2015, the notice said.

Seeking Consensus

In response, the TEG didn't attempt to characterize a majority view among its members on the ED.

Instead, the advisory panel worked to identify aspects that could serve as the basis for consensus.

To contact the reporter on this story: David R. Jones in London at correspondents@bna.com

To contact the editor responsible for this story: Steven Marcy at smarcy@bna.com

The EFRAG comment letter is available at http://www.efrag.org/files/EFRAG%20public%20letters/Amendments%20to%20IAS7%202014/EFRAG_Comment_Letter_on_ED_2014_6.pdf. The ED on IAS 7 can be downloaded at http://www.ifrs.org/Current-Projects/IASB-Projects/Debt-disclosures/Exposure-Draft-December-2014/Documents/ED-Disclosure-Initiative-Amdments-IAS-7-December-2014.pdf.

For a discussion on preparing cash flow statements, see 5121-3rd, The Cash Flow Statement, at 5121.