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The Bruce Column — Quality, not quantity, should define materiality

19 Oct 2012

The use of materiality as a means of bringing coherence to disclosures has come to the fore in the latest thinking from the UK Financial Reporting Council, says our resident columnist, Robert Bruce.

There is probably only one aspect of current financial reporting on which everyone can unequivocally agree. There is too much of it. As a result there have been cascades of suggested solutions for trimming the mass of information. People have tried to cut clutter. They have tried to shorten the reports. They have tried to make them more readable. But we still face a forest of trees and little chance of seeing the wood within.

Another tack is required. And as the IASB rolls up its sleeves to start its work on a disclosure framework there is no shortage of advice. It would be best to start from the point of agreement. There is too much stuff being disclosed in a relatively disorganised way. What is required is a better way of defining what should and shouldn’t be there without making the process too rigid and prone to excess boilerplatery.

Back in 2011 ESMA, the European Securities and Markets Authority, pointed to one way forward with its consultation paper on the issue of materiality in financial reporting. And in August this year it produced a summary of the responses which it received. Perhaps the most significant was this: ‘Responses across most stakeholder groups raised concerns about the length of disclosures reaching the point where they could obscure readers’ understanding of the entity’s financial position and performance. Many respondents considered that proper application of the materiality concept could address this position.’

And so it comes as no surprise to find the UK’s Financial Reporting Council devoting a sizeable chunk of its new paper, ‘Thinking about Disclosures in a Broader Context’, to the topic. ‘In our view’, it says at the outset, ‘the “disclosure problem” is not just about quantity; the quality of disclosures, in terms of meeting the needs of users, is also an issue. Financial reports have become a disjointed collection of disclosures driven by different authoritative sources. The objective of financial reporting seems to have been forgotten as disclosures have become more about compliance than communication’.

And for the FRC too the answer is a disclosure framework as an attempt to ‘empower preparers to apply materiality more robustly to disclosures’. From there a principle is developed: ‘Materiality is entity-specific. Preparers apply materiality to disclosure requirements set by regulators so that financial reports only provide disclosures that are relevant to the entity’.

But the water simply becomes muddier when it comes to disclosure. ‘Materiality as a concept in relation to recognition and measurement is well-established’, the paper says. ‘However, what materiality means from a disclosure perspective is less clear. Therefore, it is not surprising that materiality is not being applied robustly to disclosures’. So there is a resulting confusion. ‘Some would say that we have a principle-based model for recognition and measurement, but a compliance-based model for disclosures’. And what does this lead to? ‘The overall result is disclosure of immaterial information that leads to clutter’, concludes the paper.

The problem is the lack of precision, something which both preparers and users of financial reporting like to depend upon. The IASB’s Conceptual Framework essentially defines whether information is material or not by whether its omission or misstatement would mislead users. The UK Accounting Standards Board adds the point that by shunting too much immaterial information into the financial statements ‘the resulting clutter can impair the understandability of the other information provided’ And amongst IFRSs IAS 1 makes it clear that ‘an entity need not provide a specific disclosure required by an IFRS if the information is not material’.

So the building blocks do exist. It is just that they are scattered about in disparate places and not made plain in some central repository. What the FRC is suggesting is that some classification criteria might make it simpler. They suggest three: ‘top-level’, the sort of disclosures ‘that would be of interest to the 10-minute reader’; middle level, based on the ‘concept of materiality as described in accounting standards; and bottom level where ‘items that are considered to be insignificant or trivial’ would languish.

As so often the problem will be definitions, boundaries and precision. Or, as the FRC puts it: ‘Determining the order of magnitude of these different terms can be difficult’.

It suggests the following: ‘significant, material, not material, immaterial’, and, finally, ‘insignificant’. That makes sense. But the task ahead would be to set boundaries between them. The FRC agrees that this is ‘not an easy task’ but is sure that the IASB will be up to it. ‘We recommend that the IASB considers this point and as a minimum uses the terms consistently’, it says. And then provides a helpful graphic showing how the application of a framework to materiality in disclosures within financial statements might work.

It is a start. But it is only one of many proposals, ideas and initiatives which the IASB will be presented with as it starts its own thinking process. There is a long way to go and Hans Hoogervorst’s proposed timeline for completing the IASB’s conceptual framework programme by 2015 is very ambitious.

IFRS Foundation issues educational material to support IFRS 13

19 Oct 2012

As part of the IASB’s Education Initiative, the IFRS Foundation staff, with the assistance of the valuation expert group, is developing educational material to support IFRS 13. The draft of the first chapter of this educational material titled ‘Measuring the fair value of unquoted equity instruments within the scope of IFRS 9 Financial Instruments’ is now available.

The staff is not seeking any comments on the draft and will keep the draft available until the end of November 2012. The final version of the document is expected in December 2012.

Click to view (links to IASB website):

IPSASB releases consultation paper on government reporting

19 Oct 2012

The International Public Sector Accounting Standards Board (IPSASB) has published a Consultation Paper which aims to help reduce differences between Government Finance Statistics (GFS) reporting guidelines and International Public Sector Accounting Standards (IPSASs).

The Consultation Paper, IPSASs and Government Finance Statistics Reporting Guidelines, was developed by a task force that included representation from both the IPSASB and the statistical community, including the International Monetary Fund and Eurostat, and national representatives from Brazil, the United Kingdom, South Africa, and Switzerland.

The paper outlines the two key types of financial information produced by Governments:

  • government finance statistics (GFS) on the general government sector (GGS) for the purpose of macroeconomic analysis and decision making, applying Government Finance Statistics (GFS) reporting guidelines
  • general purpose financial reports (GPFRs) for accountability and decision making at an entity level, including the whole of government reporting entity, prepared using IPSASs applicable to accrual based financial statements.

The paper asserts there is considerable overlap between these two reporting frameworks, but also provides an overview of differences between GFS reporting guidelines and IPSASs, and goes on to identify opportunities to reduce these differences.  These opportunities include:

  • potential changes to the IPSAS setting process, ranging from range from a positive commitment to avoid all unnecessary differences to inclusion of GFS comparisons in all IPSASs
  • possible IPSASB projects to reduce differences, e.g. 'reporting entity' definition, currency on issue, inventory measurement, defence weapons, measurement and financial statement presentation
  • the use of accounting information for GFS, only considering alternative sources of data, and alternative measurement approaches if the financial reporting data has clearly failed to address GFS issues
  • possible changes to measurement requirements under GFS, particularly the valuation of assets for which there is no active and liquid market, heritage assets and long-lived, specialised assets, for which market prices are unavailable.

The paper notes that using a single integrated financial information system can result in significant benefits, including reduction of GFS report preparation time, costs, and effort. Improvements are also likely to the source data for GFS reports, with flow-on benefits in terms of report quality.

The Consultation Paper is an important step toward more global acceptance and adoption of IPSAS and is open for comment until 31 March 2013.  Click for IPSASB press release (link to IFAC website).

Additional notes from the October 2012 IASB meeting

18 Oct 2012

The IASB's October meeting is being held in London on 15-19 October 2012, some of it a joint meeting with the FASB. We have posted Deloitte observer notes from Monday's joint session on Insurance contracts and Thursday's Classification and measurements and Impairment sessions.

Click through for direct access to the notes:

Monday, 15 October 2012

Thursday, 18 October 2012

You can also access the preliminary and unofficial notes taken by Deloitte observers for the entire meeting.

IFAC and IIRC agree to co-operate

17 Oct 2012

The International Federation of Accountants (IFAC) and the International Integrated Reporting Council (IIRC) have signed a Memorandum of Understanding (MoU) to promote cooperation, coordination, and alignment between the two bodies. The MoU seeks to take advantages of the 'inherent synergies' between the work of IFAC and the IIRC in supporting of an internationally accepted framework for integrated reporting.

Under the MoU, IFAC and the IIRC acknowledge each other's mandates (speaking for the accountancy profession and developing an integrated reporting framework) and both parties acknowledge the complementary nature of those respective mandates.  This is on the basis that:

"the successful development and implementation of <IR> [Integrated Reporting] is materially relevant and beneficial to the accountancy profession and the public interest and the active involvement and support of the accountancy profession is materially relevant and beneficial to the development and implementation of <IR>."

The MoU contains a number of commitments between the parties regarding such things as respecting each other's mandate and working together.  In particular, the MoU seeks to "identify ways and means by which <IR> principles can be aligned with accounting practices to strengthen corporate reporting".

The MoU, which was signed in September and publicly announced on 17 October 2012, covers a number of related matters and is in force until 30 September 2014 - by which time the IIRC is expecting to have completed the first edition of its integrated reporting framework.

Click for:

Notes from the October 2012 IASB meeting

17 Oct 2012

The IASB's October meeting is being held in London on 15-19 October 2012, some of it a joint meeting with the FASB. We have posted Deloitte observer notes from Monday's education session on insurance contracts and Wednesday's macro hedge accounting session.

Click through for direct access to the notes:

Monday, 15 October 2012

Wednesday, 17 October 2012

You can also access the preliminary and unofficial notes taken by Deloitte observers for the entire meeting.

Agenda for World Standard Setters meeting

17 Oct 2012

The tentative agenda is now available for the annual World Standard Setters (WSS) meeting, which is being hosted by the IASB in London on 25-26 October 2012.

The agenda is summarised below.


Agenda for the meeting

Thursday, 25 October 2012 (08:30-16:30)

  • Registration and welcome
  • IASB future agenda
    • Background to the review
    • Education sessions
  • Working together - IASB and standard-setters
    • IFRS indicators database
    • Accounting standards forum
  • IFRS Interpretations Committee update
  • IFRS Advisory Council update

Friday, 26 October 2012 (08:00-16:00)

  • XBRL IFRS taxonomy (optional session)
  • Post implementation reviews
  • Concurrent sessions:
    • Updates on new standards and staff drafts - IFRS 9, IFRS 10, IFRS 11, IFRS 12, IFRS 13, investment entities
    • Smaller group sessions - insurance contracts, leases, revenue recognition, disclosure framework, conceptual framework


Agenda papers from this meeting are available on the IASB's website.

IFRS Model Financial Statements 2012

16 Oct 2012

Deloitte's Global IFRS Office has released International Financial Reporting Standards — Model financial statements for the year ended 31 December 2012.

These financial statements illustrate the presentation and disclosure requirements of IFRSs for the year ended 31 December 2012 by an entity that is not a first-time adopter of IFRSs. They illustrate the impact of the application of IFRSs that are mandatorily effective for the annual period beginning on 1 January 2012.

The publication includes:

  • Section 1 — Overview of new and revised International Financial Reporting Standards (IFRSs)
    • An overview of new and revised International Financial Reporting Standards (IFRSs) that are mandatorily effective for the year ended 31 December 2012
    • An overview of new and revised IFRSs that are not yet mandatorily effective but allow early application for the year ended 31 December 2012
  • Section 2 — Model financial statements of International GAAP Holdings Limited for the year ended 31 December 2012

Click to view IFRS Model Financial Statements 2012.

EU perspective on global accounting standards

16 Oct 2012

At a recent joint conference held by the EFRAG and the Trustees of the IFRS Foundation, prominent European speakers held a roundtable discussion on the European Union’s perspective on the move towards global accounting standards.

The speakers discussed the current state of adoption of IFRS in Europe. Currently, more than two thirds of the G20 countries have adopted IFRS. The goal of the European Union is to adopt all IFRS issued by the IASB, provided that they are acceptable to and met the needs of European constituents. To meet this goal, views from the EU should be consolidated into ‘one message’ and expressed early in the standard setting process.

Also discussed at the conference were the financial reporting developments in the US. Specifically, representatives from the European Commission expressed their disappointment and frustration regarding the outcome from the SEC staff paper regarding US adoption of IFRS. The lack of a decision in the SEC staff paper was perceived as a negative outcome and has caused a slow down on global convergence efforts. The European Commission has label 2013 as the ‘year of truth’ regarding globalisation of IFRS and convergence.

Prominent speakers at the conference included Nadia Calviño, Deputy Director General, European Commission Directorate General Internal Market and Services; Françoise Flores, EFRAG Chairman; Hans Hoogervorst, Chairman of the IASB; Sven Hayn, Ernst & Young; Wolf Klinz, MEP; Elisabetta Magistretti, non-executive independent Director in listed Italian companies and Peter Malmqvist, Board member of the European Federation of Financial Analysts Societies.

The press release on this conference is available on the EFRAG website.

UK FRC publishes paper on disclosure

16 Oct 2012

The United Kingdom Financial Reporting Council (FRC) has published a discussion paper on enhancing disclosure in financial reporting. The paper states that one of its aims is to influence the IASB before it commences its disclosure framework project, and it identifies a number of action points for the IASB.

The paper, entitled Thinking about disclosures in a broader context: A road map for a disclosure framework, follows on from an earlier FRC paper published in 2009.

The FRC notes that the paper complements the discussion paper Towards a Disclosure Framework for the Notes which it joint published in July 2012 with the European Financial Reporting Advisory Group (EFRAG) and the Autorité des Normes Comptables (ANC) in France.

In contrast to the narrower focus of the EFRAG/ANC/FRC paper, the FRC paper sets out the FRC’s thinking on how a disclosure framework might apply in a broader context - particularly considering placement criteria, which in the FRC’s view, are an integral part of a disclosure framework.  In doing so, the paper focuses on 'financial reporting' as a subset of overall corporate reporting and sees placement criteria as providing a structure for the financial report so that disclosures are organised in a way that is more informative to the reader and can be consistently applied.

The paper reiterates the 'disclosure problem', which it describes in terms of both quantity and quality issues, which result in disclosures that are "more about compliance than communication".  The paper sees a disclosure framework as a coherent framework that draws together all the various strands of financial reporting that relate to disclosures, within which standard setters and other regulators can set disclosure requirements and preparers and auditors can apply them.

The paper sets out the following benefits of such a disclosure framework:

  • Ensuring that regulators only add disclosures to financial reports where those disclosures meet the objective of financial reporting
  • More consistent setting of disclosure requirements across standards
  • A reduction in the burden of disclosures arising from setting proportionate disclosure requirements
  • The elimination of duplicate information within financial reports
  • Better organisation of disclosures, which will make financial reports easier to navigate, as information fulfilling set objectives will be positioned within the same section of a financial report
  • Empowering preparers to apply materiality more robustly to disclosures
  • Elimination of boilerplate disclosures.

The paper also provides insights into how to reduce the disclosure burden through the application of the concepts of proportionality and materiality, and develops some principles for the communication of disclosures.

Recommendations for the IASB

The paper outlines what the FRC believes the IASB should do to contribute to the development of a disclosure framework, including setting the principles as part of its conceptual framework project.  For this purpose, the paper recommends the IASB should:

  • Define the boundaries of financial reporting for their purposes
  • Develop placement criteria for establishing where information should be disclosed
  • Develop a clear objective for disclosure, as well as a distinct objective for presentation.

In addition, there are other steps that the FRC believes the IASB can take to enable preparers and others to critically assess the disclosures they should provide within financial reports. The paper suggests the IASB should:

  1. Engage with users at an early stage in the development of a disclosure framework
  2. Provide guidance on what materiality means from a disclosure perspective
  3. Reduce and define the terms used within IFRSs, e.g. significant, key, critical, and then use the defined terms consistently
  4. Provide overarching principles for disclosures and present these within one standard
  5. Update IAS 1 so that presentational and disclosure aspects are clearly separated
  6. Make it clear that measures not defined within IFRSs (e.g. net debt) and adjusted measures (e.g. EBITDA) can be disclosed within the notes to the financial statements (as a type of disaggregation) as long as these measures are defined, reconciled back to IFRS figures, include comparative information and are consistently calculated and presented
  7. Where disclosure requirements within individual standards are not mandatory, these should be moved into implementation guidance that is not part of the standard.


The FRC is requesting comments on the Discussion Paper by 31 January 2013.  Click for press release (link to FRC website).

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