Accounting bodies and regulators across the globe are wrestling with the task of how to improve the usefulness and clarity of disclosures in financial statements.
Following a public forum on the topic, the International Accounting Standards Board (IASB) has decided to facilitate more relevant disclosures with three main courses of action:
- Possible changes to IAS 1. The board will consider narrow scope amendments to IAS 1, Presentation of Financial Statements, to address obstacles preparers face in exercising judgment.
- Materiality education. With input from an advisory group, the IASB will develop educational material on materiality.
- Disclosure project. As part of its research agenda, the IASB will consider a project on the broader challenges associated with disclosure effectiveness.
A 44-page Feedback Statement published Tuesday described the results of the IASB’s outreach to preparers, auditors, regulators, and financial statement users. They discussed the growth in the volume of disclosures, which has been accompanied by a perceived reduction in the quality and usefulness of disclosures.
In other words, financial reports are getting bigger, but not better.
It’s a problem that many other organizations, including FASB and the European Financial Reporting Advisory Group, also have been working to find ways to solve. HSBC group Chief Accounting Officer Russell Picot explained during the IASB forum that contributing factors to irrelevant disclosures include:
- Poor organization and structure of reports.
- Duplication of disclosures.
- Poorly targeted disclosure requirements that elicit boilerplate disclosures.
- Disclosures that are not focused on key issues, emerging issues, and what has changed.
The IASB’s actions are designed to combat some of these problems, but IASB Chairman Hans Hoogervorst cautioned that shedding a compliance-only mindset is important for improved disclosures.
“It is undoubtedly true that we and others can improve our requirements to alleviate some of the difficulties,” Hoogervorst said in a news release. “However, material improvements will require behavioral change to ensure that financial statements are regarded as tools of communication rather than compliance. That means addressing the root causes of why preparers may err on the side of caution and ‘kitchen-sink’ their disclosures.”
—Ken Tysiac (firstname.lastname@example.org) is a JofA senior editor.