From Australia comes another contribution to the seemingly endless debate about disclosure overload
This is an Australian Accounting Standards Board staff paper titled “To Disclose or Not to Disclose: Materiality is the Question” (a Google search confirms my feeling that this Hamlet-derived formulation has been used far too often to be effective now, including in most of the more vulgar applications I thought of). The paper, written by Joanna Spencer, a project manager at the AASB, sets out some of the familiar reasons why companies disclose what strikes many observers as too much information – risk aversion, lack of confidence, pressure from auditors and so forth – and argues how focusing more effectively on materiality should help in countering all of these.
Time well spent?
The paper argues that “time is well spent when it is used to produce succinct and useful financial statements” and that the work involved in reducing the distraction of immaterial information (including standing up to the auditors if necessary) shouldn’t really be significantly greater than in capitulating to it. But even if the work is greater, the paper concludes: “taking the time and making the effort should result in reducing the clutter in financial statements, improve quality and help the financial statements meet their objective – to be useful to users.” On its own terms, this all seems reasonable enough, if hardly innovative.
The problem, it seems to me, is that most preparers (at least in the environment I’m familiar with, which I imagine isn’t so different from Australia) don’t actually believe more succinct financial statements would be more useful in any way that matters. I don’t mean to sound cynical or defeatist, but most preparers know from direct, repeated experience that there’s very little detectable audience for much of the information in the statements, and that the most influential readers, such as those in the analyst community, typically focus on certain limited measures and indicators (often not the ones on which IFRS itself places the most weight) and on detecting deviations from expectations. The Canadian transition to IFRS made this very clear, in that company after company experienced how their key users were mostly worried only about the continuity of cash flow and similar measures, placing little or no weight on the impact of IFRS in other areas, even when the impact was highly material. If asked, many of these users would probably say they’d prefer shorter financial statements, but people say lots of things if asked, and that doesn’t mean they’d do anything much different from now if that wish were granted.
Do not laugh!
The AASB paper doesn’t question the basic format of financial statements, implicitly assuming there’s nothing fundamental to be fixed there, but that seems like an increasingly debatable premise (for more thoughts on that see here). Even leaving that issue aside though and engaging with the paper on its own terms, it’s limited by expressing itself entirely in generalities, seldom venturing any specific examples of what this easily eliminated immaterial information might be. Of course, such an assessment has to depend on an entity’s facts and circumstances, but the only specific example in the paper, made in the context of disclosures about accounting policies, is the following: “In short – if it is not relevant, do not disclose it – if you do not use hedging or have share-based payments, do not disclose a policy (do not laugh, it happens).” Fine, but if Spencer feels obliged to acknowledge some readers might laugh at the obviousness of the example, it can’t be a very adventurous one.
The more difficult question, to extend the example, would be to consider when the myriad disclosures required by IFRS 2 for share-based payments might be omitted as immaterial, even when (say) the related expense in the statements is material (by some measure anyway). I’ve truly never been able to see how most of those disclosures would ever be significant to anyone – I’m not trying to be flippant here; I honestly don’t understand how they’d ever affect any investor’s reasoning on anything, and I don’t think many people would try to argue otherwise. But since they’re all laid out in IFRS 2 as being relevant to “understanding the nature and extent of share-based payment arrangements that existed during the period,” it’s hard for management of an entity to conclude with confidence that this particular disclosure isn’t required in this particular case. Despite all Spencer’s arguments, it’s often not worth the trouble of trying to figure out an acceptable middle ground.
Obviously the IASB could do more to help than anyone else, by simply throwing out the excess disclosure baggage: I’ll write next time about its newly-proposed IAS 1 amendments, and we’ll see what comes of its medium-term project on reviewing disclosure more broadly. But in the meantime, if regulators see a problem here, they can’t fix it solely by talking in generalities…
The opinions expressed are solely those of the author