Financial Reporting Brief September 2017


Financial Reporting Brief         

September 2017

Our featured article for September is 'Evolution - The Principles of Disclosure' with Brendan Sheridan commenting on the IASB Discussion Paper and its commitment to ‘Better Communication in Financial Reporting’.

Evolution – The Principles of Disclosure

A broad-based initiative to respond to the call out from investors and other stakeholders to refocus activities on projects designed to make financial information more relevant to them and improve the communication of that information.  

The Disclosure Initiative of the International Accounting Standards Board (IASB) is a key element in the consideration of how disclosure can be made more meaningful leading to improvement in the effectiveness of corporate communications with investors and other stakeholders.

The calling out by investors has added a strong focus to the IASB pursuing one of the key pillars of financial reporting which is to provide information that is useful to investors in making decisions. 

The IASB agenda for the period 2017 – 2021 has made ‘Better Communication in Financial Reporting’ a central theme. It is intended that the IASB’s overall project will consist of: -

  • Projects in the Disclosure Initiative, which primarily look at improving disclosures in the notes to the financial statements;
  • The Primary Financial Statements project, which is considering targeted improvements to the structure and content of the financial statements, focusing on the statement(s) of financial performance; and 
  • The IFRS Taxonomy, which enables structured electronic reporting of IFRS financial information.

This article shall focus on the first of these, the Disclosure Initiative. The most recent development in this regard has been the publication earlier this year of a Discussion Paper (DP) setting out the Board’s preliminary views on a disclosure standard or non-mandatory guidance on the topic. The DP is open for comment until 2 October 2017.

Disclosure Initiative - Project Objectives

The objective of the Disclosure Initiative project is to help preparers to communicate information more effectively, to improve disclosures for the users of financial statements and to help the IASB develop disclosure requirements in standards.

The IASB currently has four projects in the Disclosure Initiative including the Principles of Disclosure project, on which the DP has been published. The others are:

  • The Materiality Practice Statement project to contain non-mandatory guidance to help entities make materiality judgements when preparing IFRS general purpose financial statements. The guidance aims to respond to concerns that financial statements do not contain enough relevant information and may include irrelevant information;
  • The Definition of Material project, an Exposure Draft will issue to refine the definition of materiality and clarify its application;
  • The Standards-level Review of Disclosures project, to improve disclosure requirements in Standards and it will be partially informed by the feedback on the DP recently issued.

The IASB has also completed two projects under the Disclosure Initiative, as follows:-

  • Amendments to IAS 1:  Presentation of Financial Statements - to remove barriers to how entities exercise judgement in the preparation of financial statements which was implemented for years beginning on or after 1 January 2016 (refer to IFRS in Focus) ; and
  • Amendments to IAS 7: Cash Flow Statements - to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities. This is due to be implemented for years beginning on or after 1 January 2017 and is expected to be adopted by the EU in the fourth quarter this year (refer to IFRS in Focus). 

Challenges of Disclosure

So, what are the challenges? The IASB has identified the following examples of ineffective communication in financial statements:-

  • Using ‘boilerplate’ descriptions that merely repeat the Standards’ disclosure requirements;
  • Omitting material information or including immaterial information that obscures material information;
  • Using unclear descriptions and providing no or poor cross-referencing between related information;
  • Using an inappropriate format when disclosing information (e.g. using tables, graphs, bullet points or narrative descriptions inappropriately);
  • Preparers find it difficult to judge what information should be included in the primary financial statements versus the notes;
  • The question of whether entities are to be allowed to disclose IFRS information outside the financial statements and non – IFRS information to be disclosed within the financial statements. This raises the topic of the reporting of alternative performance measures which has been the subject firstly of much debate and then guidance including that issued by the European Securities and Markets Authority which has been effectively enforced in Ireland by the Irish Auditing and Accounting Supervisory Authority(IAASA);
  • Users find it difficult to identify which accounting policies are important to the financial statements. Symptoms of this problem quite often are the protracted length of the statement of accounting policies and the absence of distinction between accounting policies that require significant judgement or that allow entities a choice and those that offer little/no choice on application; and
  • The lack of clear disclosure objectives in the standards make it difficult for preparers to understand the purpose of the disclosure requirements.

The IASB would favour a situation where, in relation to determining what are appropriate disclosures, there is ‘thinking-out-of-the-box’, the putting of computer technologies to good use, and putting oneself in the users shoes when preparing the disclosures – this would contribute to achieving more effective communication.

Discussion Paper

The DP is comprised of eight sections as follows:-

  • Overview of the ‘disclosure problem’ and the objective of the project
  • Principles of effective communication
  • Roles of the primary financial statements and the notes 
  • Location of information
  • Use of performance measures in the financial statements
  • Disclosure of accounting policies
  • Centralised disclosure objectives
  • New Zealand Accounting Standards Board staff’s approach to drafting disclosure requirements in IFRS standards

IAS 1 contains general requirements for disclosures in the financial statements, and the project uses the IAS 1 requirements as a starting point to see whether parts of IAS 1 can be amended to reach the project’s objective or whether a new disclosure standard should be developed to replace parts of IAS 1.

The DP contains two examples of how existing standards could be redrafted using the principles described in the DP. 


While still at DP stage, there is no doubt that the Principles of Disclosure DP brings together and highlights a range of areas where improvements can be made to enhance the effectiveness of communication in the financial statements.

With still some time to go before year end, for calendar year end reporters and others, preparers have an opportunity to review the principles outlined in the DP and consider areas where enhancements could be made to the financial statements to improve communication. It would be appropriate for those charged with governance to champion this mission.

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