As we discussed here, the IASB has issued for comment an exposure draft of a proposed practice statement Application of Materiality to Financial Statements, with comments to be received by February 26, 2016.
Although the document’s primary purpose is to reduce unnecessary disclosures, it also sets out various instances where focusing on materiality might lead to disclosing more information than issuers might provide at present. Here’s one such example:
- “In some cases it might be helpful to disclose the fact that a particular issue is immaterial to the entity. For example, management may wish to inform the primary users that the entity is not exposed to a particular risk normally associated with an item that is of particular interest to market participants. This can often be done by making a simple statement rather than including detailed information or analysis about the amount or nature of the item. For example, an international bank may explain that it does not hold a material amount of debt in a particular jurisdiction or industry that is suffering severe financial difficulties, without providing further information. In this case, the statement that the entity is holding an immaterial amount of debt may provide material information about how effective management has been in protecting the entity’s resources from unfavourable effects of economic conditions.”
You can see the value of what it’s getting at, but I can imagine some practitioners (those who are fond of identifying “slippery slopes”) being a bit concerned. The opening sentence just says such disclosures might be “helpful,” which basically seems to indicate they’re entirely discretionary, because fair presentation doesn’t depend on identifying and implementing all the ways in which financial statements could have been helpful. But the last sentence says the disclosure might constitute “material information,” which seems quite different, because if the statements omit material information, it’s presumably a problem. This seems to suggest though an obligation for preparers to identify all the risks and conditions that market participants might conceivably think are applicable to the company, and then to explicitly assure them that these risks and conditions aren’t actually applicable, which might seem like an onerous task by any measure.
To me this raises the issue I mentioned before, of the division between financial statements and other disclosure documents, MD&A in particular. I previously mentioned another example that seems to tread into the same territory:
- “…a fall in sales of a major product from a material amount in the prior year to an immaterial amount in the current year may be a material change that should be separately disclosed or identified in the current year.”
Obviously, that’s something investors would want to know about from somewhere. But if it’s the function of the financial statements to tell them, then shouldn’t the statements also be talking about the impact of pricing, and competition, and technological change, and all the other things that are relevant to digging into the numbers? Where’s the line being drawn here? I’ve written here more than once that if we were starting from scratch to design a reporting regime for the modern age, it’s not very likely we’d come up with the one we have. The IASB’s examples seem to evidence a nagging dissatisfaction with the artificial parameters of the financial statements, but one that leads only to random and fragmented attempts to do anything about it. It’s like converting two arbitrarily chosen minutes of an epic movie into 3-D and then hoping the illusion will somehow carry over into the rest of it.
Other aspects of the document might seem problematic in a somewhat different way, for instance:
- “IFRS 2 Share-based Payments prescribes detailed disclosure requirements for an entity that has share-based payment transactions. If share-based payments are material to the financial statements, the entity considers which information required by paragraphs 44–52 of IFRS 2 is useful to the primary users and also whether any additional information should be disclosed. In some cases, instead of disclosing all the information in paragraphs 44–52 of IFRS 2, it might be appropriate to summarize some information, such as providing a range of vesting periods, if that does not lead to the loss of material information.”
As I’ve also written before, 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 only sane way of making consistent progress here is simply to chop away at the requirements in the standards. The IASB intends to get to that as part of its disclosure initiative, but will it have the courage to bring an axe rather than a table knife?
The opinions expressed are solely those of the author