The Bruce Column — Effective disclosure: More or less

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06 Mar, 2013

Everyone agrees that something should be done about the levels of disclosure in financial reporting. It is just, as our resident columnist Robert Bruce reports, that no one agrees on what that something might be.

The issue of disclosure unites everyone. And it divides everyone. Everyone agrees that useful and effective disclosure is at the heart of financial reporting. Everyone agrees that we need less boilerplate and more clarity and a story better and more clearly told. But at the same time everyone has different ideas of what precisely constitutes useful and effective.

So it was helpful, a few weeks ago, to have a forum where all strands of opinion could be heard; ideas mooted and objections raised. And it helped to have it pulled together by the International Accounting Standards Board, (IASB), which itself is no stranger to piling up the complexity of what is disclosed.

Perhaps not surprisingly the main conclusion that the IASB drew after the event was that there ‘was no clear agreement on what the disclosure problem is’. In the IASB’s view, ‘the objectives of the IASB, the auditors and regulators, are appropriate and beneficial’. But the perceptions remained that the standards were seen to compel more than to guide and auditors and regulators were seen as emphasising compliance more than communication. Perceptions are that the problem is behavioural. And that takes a long time to change, and, as was noted at the forum, the incentives for such change were not right.

So it was felt that there are two ways forward. A long-term strategy needs to be put into place. And some quick fixes need to be sorted out which can act as a catalyst to bring people into a mode of thinking which encourages the focus on disclosures that matter, that are key to telling a clear story.

A short-term route to help disclosure become clearer would be for the IASB to make some changes to IAS 1. That says specifically that you don’t have to disclose something if it is not material. But people still do. The IASB needs to highlight that as much as it can. It should try to nudge the mindset into change. Stick a line in saying specifically that you should not disclose something if not material. Another paragraph says that the notes ‘should be produced in the following order’. This stands in the way of thoughtful preparers trying to put the less important stuff in the back of the book and allow the really important stuff to stand out. The wording needs to change. The IASB has to lighten it all up and emphasise that not only it is perfectly all right to use judgement but it is something that they encourage.

The IASB also needs to pull back on taking the easy way out when there have been huge arguments over two differing treatments in the creation of a standard. Too often they suggest that the results under the losing treatment can be disclosed in the notes. It may cheer up the protagonists but it simply creates more disclosure.

But the IASB cannot force a preparer to be brave and less compliance driven. It can only nudge and encourage.  And that goes for everyone else in this dance of the data. Recognising that it is everyone’s problem and getting everyone to act accordingly would be a start.

The really long-term changes are going to be those in the work the IASB is doing on the conceptual framework and the work on a disclosure framework. That would create more clarity.

Another process which is on the horizon is integrated reporting, the reorganising of all information, non-financial as well as financial, which impacts on corporate strategy. The IASB has just signed a memorandum of understanding with the International Integrated Reporting Council, (IIRC), which: ‘demonstrates the common interest of both organisations in improving the quality and consistency of global corporate reporting to deliver value to investors and the wider economy’. An ebullient Paul Druckman, CEO of the IIRC, said: ‘creating a new corporate reporting language that better serves business and investors, and contributes to a more sustainable global economy will be the ultimate prize’.

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