The woods for the trees – better communication through IFRS

Notes on a recent speech by IASB Chair Hans Hoogervorst

Here’s how the accompanying news release summed it up:

  • “Mr Hoogervorst stated that the completion of several big IFRS Standards now allows the Board to focus its efforts on increasing the communication effectiveness of financial statements. He intends to prioritise the theme of ‘Better Communication’ during his second term as Chair, which commences tomorrow, 1 July 2016.
  • Mr Hoogervorst said:
  • ‘Valuable information gets drowned out by ‘tick the box’ disclosures and voluminous, but poorly organized and presented, financial statements. For the investor, it is often difficult to see the woods through the multitude of information trees. We will take a fresh look at how financial information is presented, how it is grouped together, and in what form it is made available.’
  • ‘Better Communication’ will bring together a number of work streams, including:
  • Primary Financial Statements—improving the organization and structure of the ‘face of financial statements’ (statements of financial position, financial performance and cash flows);
  • Disclosure Initiative—improving the quality and usefulness of financial disclosures through amendments;
  • Financial Instruments with the Characteristics of Equity (FICE)—clarifying the definition, presentation and disclosure requirements for such instruments;
  • Digital reporting—further developing the IFRS Taxonomy to ensure it meets electronic reporting needs and remains fit for purpose; and
  • Non-financial reporting—assessing strategic challenges and exploring any potential future role that the Board may play in this area.
  • ‘Better Communication’ as a theme for the Board’s work responds to much of the feedback received through the 2015 Agenda Consultation, and should deliver material improvements to users’ ability to make economic decisions from financial information.
  • Mr Hoogervorst also announced that the Board will be playing a more active role in supporting jurisdictions in the implementation of new and existing IFRS Standards.”

That probably all sounds fairly progressive and uncontroversial. Considered as a whole though, the speech arguably demonstrates a limitation in the IASB’s theory of information and its dissemination. The driving technological concept of our age is abundance – virtually unlimited access to our collective intellectual and cultural resources. Of course, that can rapidly become overwhelming – many researchers have commented for instance on how enhanced choice often hinders effective decision making by consumers, and limits their ultimate pleasure, for all its supposed advantages. A response to that might entail identifying guides or curators to facilitate a way through it all, or providing education in focused decision-making. But it would obviously be regressive to suggest dealing with the “paradox of choice” by simply jettisoning much of the choice and winding back to a more restricted era.

This dynamic plays out around financial reporting much as it does for buying cereal. The volume of financial and corporate information proliferates, and it’s reported that users feel consequently overwhelmed (I don’t know that it’s ever been conclusively demonstrated though that such complaints are actually directly linked to measurably less risk-appropriate decision-making). Some of what the IASB proposes would seemingly amount to finding ways to lead users through that, for instance:

  • “Many investors already consume IFRS Standards information through electronic media. We expect this tendency to be increasingly pervasive in the future. Currently, investors often use data aggregators, who add their own industry tags and other related information. The big question here is to what extent our Standards can and should meet a broader range of electronic reporting needs.”

Based on Hoogervorst’s description though, the IASB is as interested, if not more so, in limiting or paring down the volume of material that’s currently available, or in reducing the flexibility currently available to preparers:

  • “Valuable information gets drowned out by ‘tick the box’ disclosures and voluminous, but poorly organized and presented financial data. Increasingly, preparers present their investors alternative performance measures, which are not based on IFRS Standards. This information is easier to consume by users, but it almost always paints a rosier picture than reality and can be highly misleading. In addition, many companies present non-financial information on, for example, sustainability issues. For the investor, it is often difficult to see the woods through the multitude of information trees.”

I’ve written before about the IASB’s somewhat problematic view of non-GAAP measures. The speech suggests a possible effort to provide a standard definition for some such measures, but of course this in itself won’t do anything to limit the creation and dissemination of others. A new focus on organization and presentation might be helpful, but on the other hand might reflect an ultimately futile attempt to impose a rigid structure on something which by its multi-faceted complexity inherently resists that. Strangest of all, perhaps, is the implication that disclosure on matters like sustainability is more to be lamented than welcomed, for its contribution to the stifling volume of “information trees” (advocates of integrated reporting might think it unfortunate that <IR> doesn’t even get vaguely cited as a possible contribution to a way forward here).

Although the line about not seeing the woods for the trees is a tired old cliché, Hoogervorst’s use of it here is somewhat telling, for the very suggestion that there actually are always some woods in there, waiting to be revealed. But by definition, pushing events into the form of a story involves choice and shaping and exclusion. Sure, it’s important to describe the woods as management sees them, but even the most competent leaders can only see so far and so clearly. We deserve access to all the information trees as we can get, and we should be celebrating that we’re in an age that allows us that possibility, not wringing our hands about it. Rather than devising methods to chop down the forest and limit its possibilities, we should be filling it with lights and walkways and 360 degree cameras and viewing platforms, and then let visitors (despite the risk of getting lost) wander to their hearts’ content…

The opinions expressed are solely those of the author

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