Disclosing accounting policies – let’s take a hard line

Here’s one of the less inspiring items from the annals of CPA Canada’s IFRS Discussion Group, which I’ll present here almost in its entirety:

  • “The challenge of disclosure overload is recognized by the IASB and many others in the financial reporting world. There are publications that highlight how a growing volume of disclosures can be perceived to inhibit a user’s ability to identify and understand the most important information. The IASB is undertaking a multi-part Disclosure Initiative to address this challenge. In considering what an entity should disclose as part of its significant accounting policies, IAS 1 Presentation of Financial Statements provides the relevant guidance.
  • Issue: Is an entity required to disclose all significant accounting policies?
  • View A – Yes, an entity is required to disclose all significant accounting policies. Proponents of this view interpret paragraph 10 of IAS 1 to require all significant accounting policies to be disclosed on the basis that it cannot be assumed that all users are familiar with the requirements of IFRSs.
  • View B – Yes, an entity is required to disclose all significant accounting policies. The disclosure should focus on accounting policies in which the entity has explicit or implicit discretion to select or develop its policy.
  • Proponents of this view also interpret paragraph 10 of IAS 1 to require the disclosure of all significant accounting policies, but the guidance in paragraphs 119 and 121 of IAS 1 are also taken into consideration. These two paragraphs suggest that an entity should focus on disclosing particular accounting policies over which it has discretion.
  • An example of such a particular accounting policy would be when an entity selects from alternatives (i.e., a policy choice) allowed in IFRSs. Another example would an accounting policy that is not specifically required by IFRSs, but an entity selects and applies it in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.
  • View C – No, an entity is not required to disclose all significant accounting policies. Only the most significant accounting policies should be disclosed.
  • Under this view, materiality should be taken into consideration in determining which significant accounting policies should be disclosed.
  • Paragraph 119 of IAS 1 states, in part: “In deciding whether a particular accounting policy should be disclosed, management considers whether disclosure would assist users in understanding how transactions, other events and conditions are reflected in reported financial performance and financial position.” Proponents of this view interpret this paragraph as requiring disclosure of only the most significant accounting policies.
  • View D – No, an entity is not required to disclose all significant accounting policies. Disclosure should be limited to only those policies in which the entity has explicit or implicit discretion to select or develop.
  • Under this view, if the requirements of a particular IFRS are direct, clear and without choice, summarizing such requirements would detract from the usefulness of financial statements and be considered redundant (assuming the entity has made an explicit and unreserved statement of compliance with IFRSs).
  • The Group’s Discussion The presenter clarified that the issue submitted was in the context of existing requirements as at January 1, 2015. However, the views presented take into consideration amendments to IAS 1 that become effective for annual periods beginning on or after January 1, 2016.
  • Group members supported the view that an entity is required to disclose all significant accounting policies (View A). Financial statements are prepared for a wide range of investors that can have varying knowledge of IFRSs. Only disclosing accounting policies when a choice is made by an entity places heavy reliance on users to be well-versed with the requirements in IFRSs. It is essential that a user has sufficient information in a set of financial statements to understand all of the significant accounting policies adopted by an entity. Providing a description of the accounting policies directly in the financial statements also communicates to a user what components of the standards are significant to the entity…”

It’s an uninspiring and unprogressive conclusion, built on a wholly fanciful view of a financial statement user. Looked at rationally, if a user demands (say) a summary of income tax accounting within a particular set of financial statements, on the basis that he or she either doesn’t already know it or else doesn’t have the wherewithal to conduct a five-second Google search for the information, then he or she won’t have what it takes to engage with the complexities and nuances of the accounting anyway. Such labored, pointless repetition from one set of statements to the next only communicates to the world that the exercise is much more about technocratic compliance than about providing accessible, decision-relevant information.

I would have put much more weight on the following passage in IAS 1.119: “Disclosure of particular accounting policies is especially useful to users when those policies are selected from alternatives allowed in IFRSs. An example is disclosure of whether an entity applies the fair value or cost model to its investment property.” By choosing such an extremely consequential example of a disclosure that’s “especially useful”, the IASB seems to signal quite strongly that disclosure of many policies that aren’t selected from alternatives allowed in IFRSs would be, as one might put it, “not especially useful at all.” Or put another way, even if you start with a general presumption that IFRS requires drearily describing those other unchanging significant policies, it wouldn’t usually be a material omission if you don’t do it.

The funniest thing is that the group then had the audacity to observe: “it is important that entities not only describe accounting policies that are significant to its operations, but also tailor the description to explain how the policies are applied to the entity’s operations so that it provides useful, concise information to users.” Whatever you might think of the consensus reached by the group, it’s hard to see how it represents an applied commitment to usefulness and concision. Well, I suppose any discussion forum is liable from time to time to generate its fair share of hot air…

The opinions expressed are solely those of the author

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