Reducing disclosure – enough with the carrots, where are the sticks?

Here’s an extract from a recent IASB update on the progress of its ongoing disclosure initiative:

  • “At the March 2016 meeting of the Global Preparers Forum (GPF), IASB staff sought feedback on possible approaches to drafting disclosure requirements that will be included in the Principles of Disclosure Discussion Paper. The feedback will be used to help the Board develop internal guidance for use in its Standards-level review of disclosures.
  • GPF members supported the general direction of the approaches to drafting disclosure requirements. However, some members were sceptical that these proposals would lead to significant change in practice. In their view, a corresponding change in the behaviour of other parties with an important role in financial reporting (for example, regulators and auditors) would also be essential to improve the effectiveness of disclosures.
  • GPF members stated that for disclosure objectives in Standards to be effective, they should be specific enough to help preparers understand which information is relevant to investors….”

The discussion paper referred to is scheduled to be issued in the next few months, According to the agenda paper that accompanied the GPF meeting, these are the main features of what it’ll propose:

  • “Inclusion of an overall disclosure objective for each Standard and more specific objectives for groups of disclosures.
  • Greater emphasis on the need to exercise judgement to determining appropriate extent and mix of disclosures.
  • Two tiers of disclosure requirements:
  • –summary information: entities are required to disclose this information (subject to materiality)
  • –additional information: entities are required to consider if more information is necessary to meet the disclosure objectives.”

I imagine most people would say that sounds fine, as far as it goes, but it’s not hard to see where the GPF’s reservations about its effectiveness would come from. Regarding that first bullet point, the paper provides the following possible example of a “disclosure objective” for IAS 16:

  • “The objective of disclosing information about the entity’s investment in property, plant and equipment is to help users of its financial statements to assess the effect of the entity’s investment in property, plant and equipment on the financial position, financial performance and cash flows of the entity, including judgements made in accounting for that investment”

…and the following example of a “more specific objective” for an underlying group of disclosures:

  • “To achieve the disclosure objective, an entity shall consider whether to disclose additional information about the basis for measuring property, plant and equipment and any associated uncertainties of that measurement in order to help users understand how the amounts recognized have been determined and any significant measurement uncertainties that are associated with that determination.”

And so on in that vein. But frankly, you wonder if it’s just so many words. Concepts of users and who they are and what they need or don’t need are arguably just too subjective and variable for an entity to “consider” matters of disclosure based on much more than sheer instinct. The IASB’s recent proposed practice statement on materiality tried to help out on this a bit, noting for instance: “Management cannot reasonably be expected to meet all of the information needs of all of the entity’s primary users. For example, a single investor might be particularly interested in detailed information about an entity’s expenditure in a specific location because that investor may also have a business operating in that location, but such detailed information may be inconsequential for the other primary users.” The paper also tried to provide guidance on how management might identify whether information is or isn’t useful to primary users, for instance by “observing users’ or market responses to information or requests for information, for example on particular transactions or disclosures issued by the entity, or responses by external parties such as analysts,” or by “considering what decisions management themselves would seek to make and what information they would want as users of financial information in similar situations.” But as the GPF aptly notes, if auditors or regulators have different concepts of users and their needs (no matter how ill-conceived those concepts might be, as in the discussion I addressed here for instance) one suspects it’ll still often just be easier, and will seem like better risk management, for management merely to cave in.

If we’re collectively convinced that disclosure overload is a problem (and I sometimes wonder about that too, but never mind) then by far the best way to address that is for the IASB to ruthlessly and hard-headedly take a scythe to the standards, trashing large chunks of the existing disclosure requirements and more or less turning a deaf ear to any theoretical arguments why they should remain. As a halfway alternative, they might designate many of the disclosures as ones that would be required only in rare or unusual circumstances, or something like that. But one way or another, I don’t think this battle is going to be won unless it’s fought with sticks as well as carrots.

The opinions expressed are solely those of the author

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