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What is the IASB Disclosure Initiative?
Posted By Ceci On 11 February, 2015 @ 5:09 pm In Accounting,Edición 51 | No Comments
By: Sandra Minaburo
Head of the Accounting Department
Instituto Tecnológico Autónomo de México
The main objective of financial reporting is “accountability,” so that one of the major features of the reports or annual declarations is that they be clear, that is, the user must understand the facts and events that happened in an organization during an accounting period to be able to properly make decisions.
For information to be clear, it must be concise and written in simple language. It must also show a link between the activities of the business and financial performance. To ensure information is concise, entities must apply their professional judgment to make decisions about what to report, how to report and how much to report.
Recently, since the adoption of international standards in Mexico and in other countries, to which their local rules had to be standardized, one of the main complaints of the accounting community has been the amount of disclosures that must be made to comply with what is required in each of the concepts of the financial statements.
Comptrollers and financial directors of Mexican organizations subject to these disclosures have commented in various media and interviews that in the year of adoption “the information presented in the financial statements grew exponentially, and this meant that now the annual reports were books rather than reports.”
Similarly, Russell Picot, finance director of HSBC, commented in the discussion forum organized by IASB on January 28, 2013:
There is a big risk that the financial statements and annual reports become only an exercise in compliance rather than a communication tool, as there is pressure from regulators to add more and more information. Many companies have chosen to communicate information through other means that are not financial statements, since users feel that the reports lack structure, have duplicate disclosures and these do not focus on the important or new concepts; in short, the disclosures do not respond to the needs of the market and the rapidly changing environment in which companies exist.
However, from the point of view of the user, having more information should not be a concern; on the contrary, it should be seen as a battle won against such common comments like: “I can’t give you that information because it is confidential.” “I don’t understand what the entity is reporting because I don’t have more information in the notes, since the entity is simplifying the disclosures it makes of some elements of the financial statements.”
From these comments, it can be concluded that those preparing the information and those who use it have a different opinion on the need for such information. Preparers complain that there is an excess of disclosures, and users say that there is no proper communication about what actually happens in the companies and that important information to make decisions is lacking.
However, it is not difficult to postulate what features financial information should have. It must be organized, be linked, business clearly linked to financial performance, be timely, clear, concise and written in plain language, be entity-specific (that is, reflecting the situation of the entity that is reporting) and explain the substance of the transactions carried out by the entity during the reporting period.
On June 27, 2013 in Amsterdam, Hans Hoogervorst, president of the International Accounting Standards Board (IASB), said in a conference entitled “Breaking the Boilerplate,” that “in many companies, the size of their reports for the year 2012 was stratospheric.” But the volume of information did not necessarily imply that the amount of useful information for the user had increased. The risk is, therefore, that annual reports become documents to comply rather than documents to communicate” (Hoogervorst, 2013).
At the same conference, 10 actions that the IASB would perform to seek a solution to the problem of the disclosures were announced. However, to begin with, the IASB called them simple and not particularly revolutionary:
As a result of the actions announced, the IASB began working with the project called: “Disclosure Initiative”, which includes three areas of research: Materiality, Principles of Disclosure and Standards-level review of Disclosure.
The Materiality1 project includes research of how the materiality principle has been implemented in accounting practice, in order to develop a guide on its implementation. Since March 2014, the IASB has published several research articles that it has added to its work agenda.
The Standards-level review of Disclosures is a longer-term project that the IASB has not yet begun and aims to review the disclosure requirements of all the rules to check for conflicts, duplication or overlap in all the disclosures.
In March 2014, the IASB issued for review and comment a draft standard entitled “Disclosure Initiative. Proposed Amendments to IAS 1.” This project focuses on two main changes:
1 See http://www.ifrs.org/Current-Projects/IASB-Projects/Disclosure-Initiative/Materiality/Pages/Home.aspx [1].
The IASB received more than 100 letters in response. Most users agreed with the proposed changes and emphasized that the concepts of materiality and professional judgment are essential to improving the quality of accounting information and the notes in the financial statements.
Therefore, in addition to the actions undertaken by the IASB, some recommendations that can be made to try and solve this problem of disclosure are:
Finally, the accounting profession has a great responsibility in the problem that users and entities perceive with regard to our accounting maxim – that information must be useful in order to make decisions. We are all involved – preparers, auditors, regulators and users. We must all take urgent steps to ensure that the product of our profession (reporting useful financial information for decision-making) does not deteriorate and lose the importance it has had historically.
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URLs in this post:
[1] http://www.ifrs.org/Current-Projects/IASB-Projects/Disclosure-Initiative/Materiality/Pages/Home.aspx: http://www.ifrs.org/Current-Projects/IASB-Projects/Disclosure-Initiative/Materiality/Pages/Home.aspx
[2] http://www.ifrs.org/Current-Projects/IASB-Projects/Disclosure-Initiative/Principles-of-Disclosure/Pages/Home.aspx: http://www.ifrs.org/Current-Projects/IASB-Projects/Disclosure-Initiative/Principles-of-Disclosure/Pages/Home.aspx
[3] www.ifrs.org/Alerts/Conference/Documents/2013/HH-Amsterdam-June-2013.pdf: http://www.ifrs.org/Alerts/Conference/Documents/2013/HH-Amsterdam-June-2013.pdf
[4] ifrs.org/Current-Projects/IASB-Projects/Disclosure-Initiative/Pages/Disclosure-Initiative.aspx: http://www.ifrs.org/Current-Projects/IASB-Projects/Disclosure-Initiative/Pages/Disclosure-Initiative.aspx
[5] www.ifrs.org/Current-Projects/IASB-Projects/Amendments-to-IAS-1/Project-news/Pages/Update-January-2013.aspx: http://www.ifrs.org/Current-Projects/IASB-Projects/Amendments-to-IAS-1/Project-news/Pages/Update-January-2013.aspx
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