Thursday, July 04, 2013

IASB Chair Sets Out Ten-Point Plan to Break Boilerplate of Financial Statement Disclosure

In significant remarks at a recent IFRS Foundation seminar, IASB Chair Hans Hoogervorst set forth a ten-point plan to break the boilerplate of uncommunicative and box-ticking financial statement disclosure. The Chair fears that, without a game-changing initiative, company annual reports are destined to become simply compliance documents rather than instruments of communication to investors and other users of financial statements.

Broadly, the Board will undertake a general review of disclosure requirements in existing Standards (Pt. 10) after it has already conducted a fundamental review of IAS 1, IAS 7 on financial instruments and IAS 8 on operating segments (Pt. 9). More specifically, the Board will clarify in IAS 1 that the materiality principle does not only mean that material items should be included, but that it can mean that it can be better to exclude nonmaterial disclosures. (Pt. 1). Too much detail can make the material information more difficult to understand, said the IASB Chair, as he urged companies to proactively reduce the clutter.

Many preparers of financial statements will err on the side of caution and throw everything into the disclosures, he noted, since they do not want to risk being asked by the regulator to restate their financials. No CFO has ever been fired for producing voluminous disclosures, he observed. Moreover, excessive disclosures can be handy for burying unpleasant, yet very relevant, information.

The IASB will also clarify that a materiality assessment applies to the whole of the financial statements, including the notes (Pt. 2). Many persons think that items that do not make it onto the face of primary financial statements as a line item need to be disclosed in the notes, he said. The Board will clarify this is not the case. If an item is not material, he reasoned, it need not be disclosed anywhere at all in the financial statements.

Relatedly, the Board will remove language from IAS 1 that has been interpreted as prescribing the order of the notes to the financial statements. This should make it easier for companies to communicate their information in a more logical and holistic fashion (Pt. 4). The Board will clarify that if a Standard is relevant to the company’s financial statements, it does not automatically follow that every disclosure requirement in that Standard will provide material information. Instead, each disclosure will have to be judged individually for materiality (Pt. 3).

The Board will ensure that IAS1 gives companies flexibility about where they disclose accounting policies in the financial statements. (Pt. 5). According to Chairman Hoogervorst, important accounting policies should be given greater prominence in financial statements and less important accounting policies relegated to the back of the financial statements.

At the request of global users of financial statements, the Board will consider adding a net-debt reconciliation requirement in order to provide users with clarity around what the company is calling net debt and also to consolidate and link the clutter of scattered debt disclosures through the financial statements. (Pt. 6). Working with IOSCO and the IAASB, the Board will look into the creation of either general application guidance or educational material on materiality in order to provide auditors, preparers and regulators with a clear and uniform view of what constitutes material information. (Pt. 7). Finally, the Board will use less prescriptive wordings when developing new disclosure Standards, focusing on disclosure objectives and examples of disclosures that meet that objective.

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