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AASB essay on presentation and disclosure

  • AASB (Australian Accounting Standards Board) (lt blue) Image

14 Aug 2013

The Australian Accounting Standards Board (AASB) has published an essay discussing disclosure and presentation in the context of conceptual frameworks. The essay argues there is a "gap" in frameworks between the objective level and the lower levels, due to an insufficient exploration of the connection between users' needs and the characteristics of the entity. The essay suggests a possible broader focus on 'stocks' and 'flows' and a resultant new approach to presentation and disclosure which would move away from topic based disclosure.

The essay, AASB Essay 2013-1 Rethinking the Path from an Objective of Economic Decision Making to a Disclosure and Presentation Framework, was principally authored by Kevin Stevenson (AASB Chair) and represents the first in series intended to be produced by the recently formed AASB Research Centre. The essay series is "designed to provide an avenue for a wide range of financial reporting issues to be discussed and for ideas to be raised to stimulate debate and provide thought leadership in accounting standard-setting" but does not necessarily represent the views of the AASB.

The essay contends that much of the debate in the history of accounting standards has predominantly focused on recognition and measurement issues, and more recently also seen as a rise in the importance of business models in the development of accounting standards. These foci have resulted in disclosures "expounding on recognised items" and providing more information about an entity's business model. As a result, the paper argues, the current disclosure regime "might be characterised as largely... topically driven" and focused on drawing out information about cash flow implications of each topic, whilst presentation is in Mr Stevenson's view characterised by "minimum required line items, somewhat stilted formatting and limited ordering principles".

Although the essay was originally intended to contribute towards discerning the principles for disclosure and presentation, it instead concludes that the focal point of conceptual frameworks "should be the identification of the characteristics of entities with which users would need to be concerned in order to make decisions about allocating scarce resources". It goes on to say:

In essence, ... we have been glib about economic decision making and too ready to accept somewhat unexplored phrases such as “the amount, timing and uncertainty of cash flows”. The essay does not decry information about the amount, timing and uncertainty of such flows. Rather, it calls for identification of the generic characteristics of entities that will enable users to understand the significance of that information at understandable levels of aggregation and classification.

Consistent with this analysis, the essay argues that disclosure and presentation should be considered at a much 'higher' level in the Framework as "we need to know what we are trying to convey before deciding on when and how". It notes what Mr Stevenson considers "unstated or undeveloped principles" in presentation and disclosure and "unproductive arguments between competing and incompatible ideas" results in "excessive and inconsistent disclosure requirements".

In developing its thesis further, the essay picks up on the broader economic concepts of 'stocks' and 'flows' and explores "the possible stocks and flows that could, generically, be used to characterise the 'economics of an entity'" before contending "there is an identifiable list of such stocks and flows and that we are actually quite familiar with the items on that list."

The essay puts forward six tentatively identified stocks:

  1. The current capacity of the entity to provide goods or services
  2. The capacity of the entity, with its current financial structure, to efficiently and effectively fund its current operations and meet its commitments as and when they fall due
  3. The capacity of the entity to sustain current operations
  4. The capacity to sustain the entity’s current funding model
  5. The capacity of the entity to change operationally
  6. The capacity to finance material changes in operations

It then relates these concepts to flows, being material changes in attributes of these stocks, with a focus on "volume, direction, pace of change, variability and predictability of change". The paper notes:

In accounting terms, we have seen the various attempts to define profit, operating profit, comprehensive income and many variants thereof. In broad terms, and ignoring opportunistic behaviour, those attempts, and the attempt of businesses to reveal “underlying profitability”, are symptoms of the implicit need to find a better way to explain flows.

The paper further explores these concepts, by relating them to the notion of 'performance', considering the inter-relationship of stocks, and addressing their relationship to cash flows. It also notes that the 'stocks' and 'flows' approach would provide guidance to standard-setters and regulators when considering whether topics such as integrated reporting are within their scope.

The paper concludes with a discussion on 'operationalising' the concepts of 'financial position' and 'performance' within the context of 'stocks' and 'flows'. On disclosure and presentation, it argues for moving away from a 'topical basis' of disclosures and concludes:

The essay contends that, among other consequences, purpose-driven disclosure and presentational approaches could flow from attempts to faithfully represent... stocks and flows. This would result in a substantial rationalisation of existing disclosures and provide a way of cutting through the unending debates about presentation that stem from multiple implicit conflicting goals.

The author is of the view that the implications... could be illustrated by taking existing disclosures and presentation requirements and trying to classify them by reference to stocks and flows set out... This will prove not to be a simple task as the principles underlying those requirements are often unclearly stated or not stated at all.

Click for:

  • AASB press release (link to AASB website).
  • AASB Essay 2013-1 Rethinking the Path from an Objective of Economic Decision Making to a Disclosure and Presentation Framework (link to AASB website).

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