The Bruce Column — The struggles to make disclosure principled

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30 Mar 2017

The IASB has published its long-awaited discussion paper on Principles of Disclosure and now everyone has six months to grapple with the important questions it raises. Robert Bruce, our regular, resident commentator looks at where the answers may lie.

It is the traditional Catch-22 of financial disclosure. Create a mass of requirements and all you will see is checklist and boilerplate information. Remove some of the requirements in an attempt to encourage judgement and what you get is complaints from investors that they are being denied information. Furthermore if you want a degree of consistency preparers need disclosure objectives to exercise their judgement.

There is also the question of whether you need to write out principles about good communication, or whether it should be down to common sense.

Although the debate has been with us for many years this is the IASB’s first attempt to step back, rethink and try to steer an effective way through these issues. The IASB has produced a discussion paper on Principles of Disclosure.

It all comes down to a deceptively simple question: deciding what to disclose and how to disclose it. But as soon as anyone gets into the detail they realise that the IASB’s current Standards are full of uncertainties. For example it is not clear whether IFRS information should be allowed to be disclosed outside the financial statements and whether non-IFRS information is allowed to be disclosed within the financial statements.

The complexities are rife. During the discussions the IASB realised that it would not be operational to prohibit the disclosure of non-IFRS information within the financial statements because there are differing views of what constitutes non-IFRS information. One example: the IASB requires entities to report (unspecified) subtotals where relevant and to report management determined segment information. Are these numbers IFRS measures or non-IFRS information?

Another issue that the IASB has struggled with in the past is that it knows that users need information that helps them analyse performance and it also knows that it would be helpful to separate out items which mask underlying performance. We are back to the old arguments over a decade ago about ‘extraordinary’ items. The IASB is thinking about developing requirements for the presentation of unusual or infrequently occurring items in the statement of financial performance. And it is thinking of clarifying the presentation of EBITDA and EBIT and creating a bit more structure around these frequently used KPIs. For example it suggests that EBITDA could be presented only if expenses are classified by nature, while EBIT could be presented regardless of whether expenses are classified by nature or by function.

Another area that the discussion paper is trying to tackle is the disclosure of accounting policies, and the problems of laborious and lengthy generic wording copied verbatim from IFRS in an unspecific way cluttering up and obscuring disclosures. The idea is to create several categories of accounting policies. The first category would be for policies that are essential to understanding information in the financial statements because the amounts involved are material and they involve choice or significant judgments or assumptions. The second category would be of items which do not fall into the first but relate to items that are material to the financial statements. The rest falls into the third category. For this tier disclosure is deemed not be necessary, but it would not be prohibited as long as they don’t clutter up or obscure material information or the financial statements generally. In other words accounting policies relating to items in categories one and two have to be explained.

One of the more radical suggestions is to have a two-tiered approach to disclosure requirements that would be less prescriptive and put greater emphasis on judgement in deciding how and what to disclose. You first decide how important a particular issue is to the company. The more important it is the more information a reader should expect to see about that activity. 

The discussion paper leaves everyone with a lot to think about. There are complexities and uncertainties. Will it be possible to create more structure? What role should management judgement be allowed to play? The next six months gives everyone an opportunity to put their views across.

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