The International Accounting Standards Board (IASB) has always had a problem with disclosure. Take, for example, its past practice of disclosing, in its financial statements, a “budget” for former chairman David Tweedie’s salary rather than the real amount.
It is precisely this lack of focus in financial statements on what is truly important that chairman Hans Hoogervorst aims to tackle with a 10-point action plan. Alongside litigation-based liabilities, nowhere is there need for greater focus than DB pension obligations.
If the plan succeeds, disclosures made in compliance with IFRS financial statements will become less voluminous yet more relevant.
Hoogervorst revealed the plan in June at the IFRS Foundation Conference: “We should clarify in IAS 1 that the materiality principle does not only mean that material items should be included, but also that it can be better to exclude non-material disclosures. Too much detail can make the material information more difficult to understand, so companies should proactively reduce the clutter,” he said.
On point two: “We should clarify that a materiality assessment applies to the whole of the financial statements, including the notes. Many think items that do not make it onto the face of primary financial statements as a line item need to be disclosed in the notes, just to be sure. This is not the case. If an item is not material, it does not need to be disclosed.”
Meanwhile, point three calls for yet more clarification: “If a standard is relevant to the financial statements of an entity, it does not automatically follow that every disclosure requirement in that standard will provide material information. Instead, each disclosure will have to be judged individually for materiality.”
Points four and five signal action on IAS 1, presentation of financial statements. Hoogervorst said: “We will remove language from IAS 1 that has been interpreted as prescribing the order of the notes to the financial statements. This should make it easier for entities to communicate their information in a more logical and holistic fashion. We could make sure IAS 1 gives companies flexibility about where they disclose accounting policies in the financial statements. Important accounting policies should be given greater prominence. Less important accounting policies could be relegated to the back of the financial statements.”
A sixth action zone is the scattered debt disclosures that litter financial statements. IASB will consider adding a net-debt reconciliation requirement. This would clarify what a company is calling ‘net debt’ and consolidate clutter.
Seventh, Hoogervorst said, IASB wants to work with the International Auditing and Assurance Standards Board and IOSCO to “look into the creation of either general application guidance or educational material on materiality”. The aim is to provide a clearer, more uniform view of what constitutes material information.
What might IASB do to head off the problem at source? Point eight: “When developing new standards, we will also seek to use less prescriptive wordings for disclosure requirements. Instead, we will focus on disclosure objectives and examples of disclosures that meet that objective. In recent standards we have already started doing this, creating more explicit room for judgement on materiality.”
Longer term, points nine and 10, are a review of existing literature. IASB will launch a research project as a prelude to a more fundamental review of IAS 1, (presentation of financial statements), IAS 7 (statement of cashflows) and IAS 8 (accounting policies, changes in accounting estimates and errors).
Hoogervorst acknowledged the project will revisit some of the work done in the Financial Statement Presentation project. “The goal will be to replace those standards, in essence creating a new disclosure framework,” he said.
Finally, once the board has completed the review of this trio of standards, the plan calls for a “general review” of disclosure across existing standards. Hoogervorst has high hopes for the effort. “Taken together, they remove most excuses for boilerplate disclosures. They will help to ignite the much-needed change in mind-set of preparers, auditors and regulators. The IASB will continue to engage with these constituents and also with users for the joint effort needed to make disclosures less indiscriminate and more meaningful.” Only time will tell.