Financial Reporting Brief - May 2014
This months article: The quest for improved disclosure
The quest for improved disclosure
Cutting the clutter – a major objective of all involved in the preparation and presentation of financial statements. There is a universally accepted belief that financial statements need to be more transparent and relevant to the needs of investors and other stakeholders.
A number of national standard-setters, including the UK Financial Reporting Council (FRC), have initiated reports and projects with the aim of simplifying and rationalising disclosure in financial reports.
The International Accounting Standards Board (IASB) has also undertaken various activities in this regard. The IASB has recently issued a feedback statement emanating from its disclosure initiative which outlines its intention to take action in a number of areas.
FRC calls to action
In October 2013 the FRC published a series of calls to action for preparers and auditors to consider improving the quality of disclosures in annual reports. The FRC’s recommendations include:-
• Disclosures should focus on communication of relevant information to investors
• Core information that is relevant for investors is separated from supplementary information that only meets the needs of a wider stakeholder group.
• Placement of information outside the annual report may be more appropriate for supplementary information, where the law permits this.
• Immaterial information should be excluded.
• Boilerplate language should be avoided with a focus on entity specific disclosures.
• Related information should be linked to tell the story of a company and its business model.
The FRC also noted the initiatives being taken by the IASB and has urged the IASB to develop a disclosure framework that considers disclosures in the financial report as a whole and defines the boundaries of financial reporting.
IASB disclosure initiative
The IASB has undertaken an initiative, arising from its disclosure framework project, to explore opportunities to see how those applying IFRS can improve and simplify disclosures within existing disclosure requirements. The IASB carried out a constituent survey on disclosure and held a forum to bring together regulators, auditors, investors and preparers.
Arising from this initiative the IASB published a feedback statement in May 2013 which outlined a number of IASB intentions to address perceived impediments to preparers exercising their judgement in presenting their annual reports.
Three key actions to be considered by the IASB include:
• Narrow scope amendments to IAS 1.
• A project to develop application guidance and educational material on materiality.
• A revised research project on financial statement presentation.
The role of financial statements in providing useful and relevant information to the market must continue to be firmly to the forefront of any initiatives taken.
Presentation of financial statements
In March 2014 the IASB published an exposure draft on amendments to IAS1. The amendments proposed are in four areas that may cause particular difficulties and may potentially impede the use of judgement, which are as follows:
• Materiality - clarifications proposed to emphasise:
o That information should not be obscured by aggregating or disaggregating
o That materiality considerations apply to all parts of the financial statements
o That even when a standard requires a specific disclosure, materiality considerations do still apply.
• Statement of financial position and statement of profit or loss and other comprehensive income – proposals to introduce
o A clarification that the list of line items to be presented in these statements can be disaggregated and aggregated as relevant
o Additional guidance on subtotals in these statements
• Notes - proposals to clarify that the understanding and comparability of the overall financial statements should be considered when determining the order of the notes
• Accounting policies – proposals to remove guidance and examples with regard to the identification of significant accounting policies that are perceived as being potentially unhelpful – with one of the aims being to avoid ‘boiler-plating’.
An additional proposal included in the ED which does not arise from the IASB’s Disclosure Initiative is with regard to the presentation of items in the statement of other comprehensive income arising from equity–accounted associates and joint ventures. It proposed that they should be presented as single line items based on whether or not they will subsequently be released to profit or loss.
The ED does not contain a proposed effective date. Comments on the proposals are due by 23 July 2014.
The IASB has identified a specific need to publish guidance and educational material on materiality. Feedback received by the IASB from its survey of constituents on the disclosure initiative highlight that:
• There is uncertainty about how the concept of materiality should be applied, resulting in a perhaps overly cautious approach to disclosure, preparers being reluctant to ‘filter out’ information which is not relevant and auditors and regulators being reluctant to accept omissions.
• The drafting of some standards can be read to suggest the specific requirements of those standards override the general statement in IAS 1 that an entity need not provide information that is not material.
The IASB has launched a project to help preparers, auditors and regulators use judgement when applying the concept of materiality in order to make financial reports more meaningful. While the scope encompasses all of the financial statements there is a focus on the notes. The project will focus on the following topics:
• The lack of understanding of the ‘materiality’ concept
• The lack of clarity in applying the concept of materiality, in particular to the notes
• How disclosure requirements are written, with the use of unclear language
• Consideration of whether additional guidance could be developed that assists entities to determine significant accounting policies.
The goal should be to make disclosures more effective, not necessarily to reduce the amount of disclosures.
Future of corporate reporting
The need to improve the transparency and relevance of disclosures within financial reporting is rightly a major objective of the IASB.
But what of the future of corporate reporting? Progress is being driven by the users and supported by advances in technology. The demand for a more holistic view of the business, making linkages between financial and other available information is growing and initiatives like Integrated Reporting (IR) are a response to such demands. There are some that want the IASB to modify its Practice Statement on Management Commentary to move it towards being an Integrated Report. The IASB has not commented on this and will continue to work with the International Integrated Reporting Council (IIRC) under its memorandum of understanding as IR develops.
Corporate reporting in a digital world is being explored by, amongst others, the FRC with a project just commenced by its Financial Reporting Lab to investigate how companies are using, and might in the future, use digital media in their corporate reporting to improve investors’ access to information. The project is the first part of a series of three projects on corporate reporting in a digital world, with the FRC planning over the next 18 months to investigate:
• Digital present – the current state of corporate reporting through digital media
• Digital challenges – barriers to the use of digital media in reporting, and
• Digital future – how companies might make the most of technological opportunities
Changes in the regulatory environment are also taking place with, for example, the European Parliament voting in favour of amendments to European accounting legislation in order to require certain large companies to provide additional information on social and environmental matters.
Transparency and clarity of financial reporting is a must in ensuring the relevance of the information being communicated to the market. The IASB has a key role to play in making improvements to the presentation of and disclosures in financial statements. Corporates need to take responsibility for implementing improvements that will benefit their investors and other stakeholders which should improve the potential for continuing loyalty and support.
What’s new - monthly reporting pack
Irish GAAP / GAAS and related developments
- FRC Lab explores corporate reporting in a digital world
- FRC simplifies accounting for micro-entities
- Consultation on the UK corporate governance code published
- FRC consults on revised operating procedures for reviewing corporate reporting
IFRS and related developments
- IASB Publishes discussion paper on macro hedging
- IASB staff paper on insurance contracts
- FEE issues Paper on European Public Sector Accounting Standards (EPSAS)
- FEE publishes unofficial advance text of 2014 audit directive
Regulatory and related developments
- European Parliament adopts directive on disclosure of non-financial and diversity information
- Fifteenth ESMA enforcement decisions report released
- Central Bank publishes annual report 2013
- Central Bank publishes review of the Credit Union sector
- Regulations to give effect to Capital Requirements Directive IV (CRD IV) signed into Irish law
- IAASA publishes 2013 profile of the profession
Financial Reporting Brief
- April 2014 - Sustainable investment – accounting a concern?
- Financial Reporting Brief special edition (March 2014): FRS 103 Insurance Contracts
- March 2014 - Annual reports – Achieving their goal?
- February 2014 - Pensions – more than an accounting challenge?
- January 2014 - Quarterly edition of financial reporting brief
- November 2013 – Accounting alert – hedge accounting