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European discussion paper 'Towards a Disclosure Framework for the Notes'

  • EFRAG (European Financial Reporting Advisory Group) (dk green) Image

12 Jul 2012

The European Financial Reporting Advisory Group (EFRAG), the Autorité des Normes Comptables (ANC) in France, and the Financial Reporting Council (FRC) in the United Kingdom have published a discussion paper 'Towards a Disclosure Framework for the Notes' that sets out key principles that are required for an effective disclosure framework.

The desire to reduce the volume of disclosure requirements in International Financial Reporting Standards (IFRSs) is widespread and numerous reports and suggestions have been published on the matter: In April 2011 the Accounting Standards Board (ASB) of the United Kingdom Financial Reporting Council (FRC) published a much noted report Cutting Clutter: Combating clutter in annual reports and in July 2011 the Institute of Chartered Accountants of Scotland (ICAS) and the New Zealand Institute of Chartered Accountants (NZICA) released a report entitled Losing the excess baggage — reducing disclosures in financial statements to what's important that was prepared in response to a request from the IASB and outlines recommendations on which existing IFRS disclosures can be amended, reduced or eliminated.

EFRAG/ANC/FRC have now joined the ranks by publishing Towards a Disclosure Framework for the Notes, however, the European approach is far more comprehensive. The discussion paper does not suggest removing or changing disclosures, it suggests principles for a new framework for disclosures. This step moves the debate about disclosures from a discussion about more or less disclosure to "how to improve the quality of what is disclosed to better serve the objective of financial reporting". As with all of EFRAG's Proactive Work the discussion paper is intended to stimulate debate and to influence future standard-setting developments by providing timely and effective input to early phases of the IASB’s work.

In introducing the problem of the disclosure overload and general deterioration in the quality of notes EFRAG/ANC/FRC make out five reasons for the development:

  • the attempt to increase transparency and compensating for shortcomings of recognition and measurement principles by adding disclosure requirements,
  • increasing complexity of transactions and financial reporting requirements,
  • difficulty of applying materiality judgements to disclosures,
  • a safety thinking of preparers, auditors and regulators that leads to providing as many disclosures as can be thought of, and
  • time pressure in relation to publishing financial statements that prevents careful consideration of disclosures.

According to EFRAG/ANC/FRC, these reasons form a complex set of behaviours that needs to be changed. They need to be tackled comprehensively to ensure the problem is not just relocated between the parties involved. Therefore, they suggests developing a disclosure framework that ensures that disclosure requirements under International Financial Reporting Standards (IFRS) are based on sound principles and yield relevant information for users of financial statements.

In the discussion paper EFRAG/ANC/FRC list five points that need to be considered when developing the framework:

  • the purpose of the notes since this drives what information should be included in the notes in the first place,
  • principles for identifying what information should be included in the notes,
  • the form of disclosure requirements, i.e. detailed disclosure requirements that require specific items to be disclosed or more principle based requirements that require greater judgement and consideration of an entity’s circumstances,
  • materiality considerations so that the only information disclosed is the what is necessary to understanding an entity’s financial performance and position, and
  • key features of effective communication that deal with the way disclosures are organised and presented.

All of these aspects are discussed comprehensively in separate chapters which also offer links to examples provided on the EFRAG website. The discussion paper also includes detailed questions on all matters presented. It can be accessed through the press release on the EFRAG website or directly through this link. Comments are requested by 31 December 2012.

The discussion paper is the result of a project that was carried out in cooperation with the US Financial Accounting Standards Board (FASB). In August 2011, EFRAG and FASB had formally agreed to work together on their respective projects to develop a disclosure framework, with a view to creating a consistent framework for both United States and international GAAP. The FASB has also issued an Invitation to Comment on a suggested disclosure framework.

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