Clarifying (and reducing?) disclosures – a first step

The IASB has issued amendments to IAS 1 resulting from its Disclosure Initiative, effective for annual periods beginning on or after January 1, 2016, with earlier application permitted.

The narrow-focus amendments “are designed to further encourage companies to apply professional judgment in determining what information to disclose in their financial statements,” for the most part by reducing the capacity for interpreting the standard too rigidly or legalistically. This is one of the main additions:

  • “Some IFRSs specify information that is required to be included in the financial statements, which include the notes. An entity need not provide a specific disclosure required by an IFRS if the information resulting from that disclosure is not material. This is the case even if the IFRS contains a list of specific requirements or describes them as minimum requirements. An entity shall also consider whether to provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users of financial statements to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance…”

This confirms, for instance, that even if an entity has a share-based payment expense that’s material to its profit or loss, it doesn’t therefore follow that every piece of information set out in IFRS 2 has to be disclosed for that expense. In theory, to take an example, one might decide it’s sufficient to summarize the terms of the plan and to describe the options outstanding at the end of the year, without providing a full reconciliation of movements during the year, specifying the inputs into the option pricing model and so forth. Or maybe the analysis would go another way. The problem is that as long as IFRS 2 sets out its two pages of minutiae as being relevant to enabling users to understand the nature and extent of share-based payments arrangements that existed during the period, it’s going to be hard for users to conclude which of the items do or don’t, in themselves, provide material information. The same point goes for many other areas, indicating that what the IASB really needs to do – if disclosure overload is indeed a problem – is to start chopping at the standards. But it’s not there yet…

Line items and subtotals

Similarly, the amendments try to steer preparers away from a checklist-like approach to disclosing items in the statements and the notes: “When applying this and other IFRSs an entity shall decide, taking into consideration all relevant facts and circumstances, how it aggregates information in the financial statements, which include the notes. An entity shall not reduce the understandability of its financial statements by obscuring material information with immaterial information or by aggregating material items that have different natures or functions. When applying this and other IFRSs an entity shall decide, taking into consideration all relevant facts and circumstances, how it aggregates information in the financial statements, which include the notes. An entity shall not reduce the understandability of its financial statements by obscuring material information with immaterial information or by aggregating material items that have different natures or functions.” Of course, that latter part (like the last bit of the bullet above) might in some circumstances suggest a need to disclosure more rather than less about a particular item.

The IASB has also taken a new look at the requirement to present additional line items, headings and subtotals in the balance sheet and income statement when such presentation is relevant to a user’s understanding, adding language on the appropriate presentation for such subtotals. These direct that the subtotals should be made up of items recognized and measured in accordance with IFRS; should be presented and labelled in a manner that makes the line items that constitute the subtotal clear and understandable; should be consistent from period to period; and should not be displayed with more prominence than the subtotals and totals specified in IFRS. In Canada, this all falls in line with the guidance already issued by regulators for presenting “additional GAAP measures.”

Ordering the notes

The proposed amendments also try to counter any notion that the notes have to be presented in a certain order: “Examples of systematic ordering or grouping of the notes include (a) giving prominence to the areas of its activities that the entity considers to be most relevant to an understanding of its financial performance and financial position, such as grouping together information about particular operating activities; (b) grouping together information about items measured similarly such as assets measured at fair value; or (c) following the order of the line items in the statement(s) of profit or loss and other comprehensive income and the statement of financial position. It’s appealing to think entities might at least try option (a), so that (speaking very generally) the relative importance of the notes increases in relation to how close to the front they are.

Also, following the amendments, IAS 1 no longer refers to “the summary of significant accounting policies,” opening the door to presenting each significant accounting policy in conjunction with other disclosures about that item, or in some other way, rather than as a single list. The statement that “users would expect an entity subject to income taxes to disclose its accounting policies for income taxes, including those applicable to deferred tax liabilities and assets” is now deleted, potentially allowing preparers not to disclose an accounting policy for (among other things) income taxes if the amounts are currently immaterial or, perhaps (and this is the kind of point where we’ll have to see how practice develops), if the policy would merely repeat the same standard wording that’s available in a thousand places.

In other respects too, of course, the impact of the changes will depend on a common sense of purpose between management, audit committees, auditors and regulators, which might take a while to evolve. This will certainly be one of the more interesting aspects of financial reporting over the next few years. And there’s really no need for any entity to wait until 2016 to get started on it – the usual requirements of IAS 8 don’t apply to these changes, so it’s fine to make incremental improvements right away (if only, for instance, by eliminating obviously pointless policy descriptions) without having to spell out what’s going on…

The opinions expressed are solely those of the author

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