Disclosure - Less is often more!

Brendan Sheridan, director Deloitte financial reporting technical team, writes about the disclosure challenge and recent developments. First published as part of December 2013 edition of Financial Reporting Brief.

Too much detail can make the material information more difficult to understand – so companies should proactively reduce the clutter!

The words of Hans Hoogervorst, Chairman of the International Accounting Standards Boards (IASB) 2013 aptly summarise one of the major challenges to financial reporting. Each new or amended standard brings an additional layer of disclosure to annual reports, already unwieldy, and diminishes the possibility of the stakeholder being able to see the wood from the trees.

The UK Financial Reporting Council (FRC) has recently issued a press statement calling out for actions for improving disclosures, expressing the belief that, in line with the Corporate Governance Code, the guiding principle for annual reports as a whole to be fair, balanced and understandable is crucial to high quality financial reporting.

The need to address the burgeoning amount of disclosure in annual reports has long been recognised as a major issue of financial reporting. A major risk is that annual reports become simply compliance documents, rather than instruments of communication.

Disclosure Initiative
The IASB is undertaking a broad-based initiative to explore how disclosures in IFRS Financial reporting can be improved. The initiative is made up of a number of projects, both short - term and medium - term. The different projects in the initiative are:


  • Materiality - the project will look at how materiality is applied in practice in IFRS financial statements and consider whether further guidance is needed
  • IAS 1 amendments - the IASB will consider narrow scope amendments to IAS1 ‘Presentation of Financial Statements’ to address some of the concerns.


  • Research project on presentation and disclosure – the IASB will explore whether IAS1, IAS7 ‘Statement of Cash Flows’ and IAS8 ‘Accounting Policies, Changes in Estimates and Errors’ could be replaced with a single standard on presentation and disclosure, in effect creating a disclosure framework for IFRS.
  • Standards-level review disclosure – the IASB will begin a research project to review disclosure in existing standards to identify and assess conflicts, duplication and overlaps.

The speech already referred to, by the IASB Chairman, calls for a behavioural change by reporters in their approach to disclosure. Understandable risk aversion on the part of preparers, auditors and regulators leads to a ticking the box mentality, with the communicative value of financial statements suffering as a result. The Chairman’s speech outlines a ten point plan which focuses on materiality, enhanced clarity and guidance in IAS 1, net debt reconciliation and less prescriptive wording for disclosure requirements.

The Chairman supports his comments by highlighting that the IASB had itself managed to reduce the size of its 2012 annual report by 25 per cent, while at the same time increasing the amount of useful information in the report and making it easier to read.

The recent press statement by the FRC supports the IASB proposals and the comments made in the Chairman’s speech. In addition, it recommends that the IASB should:

  • Develop a disclosure framework that considers disclosures in the financial report as a whole
  • Define the boundaries of financial reporting
  • Develop placement criteria
  • Reduce and define the magnitude terms used in IFRSs, such as significant, key and critical

There is a global momentum for improving disclosures with the US financial Accounting Standards Boards (FASB) also advancing its project on the Disclosure Framework.

Financial Institutions
The recently published Deloitte UK survey of reporting by UK listed companies in2012 indicates that while the average length of annual reports increased from 103 pages in 2012 to 107 pages in 2013, the annual reports of banks in the survey increased from 357 pages to 415 pages. This increase was at least in part due to their efforts to comply with the recommendations of the Enhanced Disclosure Task Force (EDTF) around risk reporting. It is noteworthy that despite the EDTF recommendations being published relatively late in 2012, it has been taken on board rapidly by those affected.

The European Securities and Markets Authority (ESMA) has recently published a report ‘Comparability of IFRS Financial Statements of Financial Institutions in Europe’. The report is based on an evaluation of the comparability and quality of the disclosure in the 2012 financial statements of a sample of 39 major European Financial Institutions. The focus of the report is on the disclosure objectives of IFRS 7 ‘Financial Instruments: Disclosure’ and IAS 1 looking at how issuers best portray economic transactions so that their presentation and disclosure is relevant and faithfully represented to users of financial statements while applying IFRS recognition and measurement principles.

Overall ESMA found that disclosures specifically covered by the disclosure requirements of IFRS 7 were generally provided and acknowledged the efforts made by financial institutions to improve the quality of their financial statements. However, ESMA observed a wide variability in the quality of information provided in that it was not sufficient or not sufficiently structured to allow comparability among financial institutions. Some common weaknesses were (1) disclosures not specific enough (2) lacking links between quantitative and narrative information, (3) disclosures could not be reconciled to the primary financial statements.

As a result of the review, ESMA believes quality and comparability of IFRS financial statements could be enhanced in relation to some aspects:

  • Structure and content of the income statement
  • Liquidity and funding
  • Asset encumbrance
  • Hedging and the use of derivatives
  • Credit risk
  • Forbearance
  • Impairment of equity securities classified as available for sale.

ESMA expects financial institutions and their auditors to consider the findings of this review when preparing and auditing the financial statements. ESMA will also be monitoring that national competent authorities will take or have already taken appropriate enforcement actions where material breaches of matters highlighted in the ESMA report are identified.

Transparent financial information plays a key role in maintaining market confidence, improving markets’ efficiency by allowing investors to identify risk in a timely manner and contributing to financial stability. It is a pre-requisite to creating a basis for sound economic growth.

A robust and communicative disclosure framework is a corner-stone of keeping markets and stakeholders adequately informed.

For now, it is without doubt that companies who focus on clear communication of key messages, both good and bad, and do not get caught in the clutter of immaterial disclosures will be seen in good light in the marketplace.This article will also appear this month in Finance Dublin.

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