The United Kingdom regulator issues a series of calls to action on the topic of improving disclosures
The director of the UK’s Financial Reporting Council recently issued “a series of calls to action for preparers and auditors to consider improving the quality of disclosures in annual reports.” This chimes with the IASB’s current focus on this area, including several speeches by its Chair Hans Hoogervorst. These are the FRC’s recommendations:
- Disclosures should focus on communication of relevant information to investors.
- Core information that is relevant for investors is separated from supplementary information that only meets the needs of a wider stakeholder group.
- Placement of information outside the annual report may be more appropriate for supplementary information, where the law permits this.
- Immaterial information should be excluded.
- Boilerplate language should be avoided with a focus on entity specific disclosures.
- Related information is linked to tell the story of a company.
The FRC’s release also recommended that the IASB:
- Develops a disclosure framework that considers disclosures in the financial report as a whole.
- Defines the boundaries of financial reporting.
- Develops placement criteria.
- Reduces and defines the “magnitude” terms used in IFRSs, such as significant, key and critical.
This seems likely to add to the growing momentum in this area, and it seems certain that something will come out of the IASB in the foreseeable future. The problem, of course, is that this is an emblematic area where just about everyone might agree on the broad issues, while entirely disagreeing on the details. The FRC’s recommendations certainly don’t provide any help in this regard, in that for the most part they’re entirely generic. That is, for most of the points, no one would try to argue the converse, that – for example – disclosures should focus on communicating irrelevant information to investors, or should use boilerplate language whenever possible.
A broader context
The devilish nature of the details is underlined further by referring back to the FRC’s earlier discussion paper, Thinking about disclosures in a broader context. To take one example, this suggested that related party disclosures would more suitably be reported outside the financial statements, in a document dealing with corporate governance issues, because their primary purpose is to provide information about “the responsibilities of the board in setting the company’s strategic aims, supervising the management of the business and reporting to shareholders on their stewardship.” No doubt anyone can see what they mean.
But on the other hand of course, related party disclosures could, in the words of IAS 24, highlight areas where financial position and profit and loss may have been affected by the existence of related parties. For example, if a material corporate asset were sold to a director at something less than its fair value, this would seem too important not to be included in the notes, in close proximity to other information about that transaction. But the great majority of related party disclosure consists merely of eye-rolling recitations of amounts paid to law firms, consultants and so forth, none of it remotely relevant to decision making. This kind of information could certainly be reported elsewhere (as it already is in Canada, although regulatory and IFRS requirements in the area don’t entirely align) without any loss of important perspective on the numbers.
Using the website?
Perhaps we could all agree that only “important” related party transactions would be included in the notes to the statements, with the rest recorded somewhere else. But it’s far from clear we’d all agree on what goes where, prompting many preparers to play it safe (in their analysis) and put more in the notes rather than less, for fear of drawing unwanted regulatory attention. No doubt this fear, for the most part, is more imagined than real, but it’s hard to say it’s not valid, when regulatory reports regularly imply that certain omissions identified in their reviews are prima facie problems, regardless of their materiality.
Still, even with these difficulties, the basic notion of separating core information from supplementary information does seem to me to have some potential. The earlier discussion paper noted: “We believe that there is a case for suggesting that some explanatory information that remains unchanged from one year to the next could be included on a website. This is our vision, but currently there are legal barriers that prevent these disclosures being included outside the printed annual report.” The same suggestion has been made elsewhere, and seems to me incontrovertible: anyone interested enough to want to read through pages of accounting policy descriptions, for instance, wouldn’t likely be hindered by having to go to a designated place on the corporate website to find it (if it is a hinderance, then that individual plainly has larger problems in participating to his or her advantage in the capital markets). Shoving material onto a website (presumably incorporated by reference within the scope of the auditors’ report) isn’t of course as clean a solution as eliminating certain material altogether, but then it’s somewhat contrary to the spirit of the age to move toward making less information available about something – about anything. I think many of the commentators on excessive disclosure might feel less passionate about the issue if it were easier for them not to have to look at the disclosures they don’t like.
The opinions expressed are solely those of the author