Principles of disclosure – stop me before I over-explain!

We looked briefly last April at the IASB’s Principles of Disclosure discussion paper, for which the comment period closed in October….

Although accounting policy disclosures aren’t usually among the most decision-critical aspects of any particular set of financial statements, they often contribute very disproportionately to their overall volume. My anecdotal impression is that many larger companies are making good progress on cutting back this volume – by paring away language that essentially only describes how IFRS works rather than saying anything entity-specific, by expressing themselves more plainly and concisely, and by integrating the description of a particular item’s accounting policy with the other information provided about it in the notes. I doubt these companies need much more than encouragement to keep going – something their auditors may be sadly bad at providing though.

In contrast, smaller companies (and again, this is just based on what happens to have come to my attention) still tend to provide far too much boring description of things that don’t apply (for example – comprehensively summarizing all the potential classes of financial instrument and all three tranches of the fair value hierarchy, even though their financial instruments are limited to straightforward receivables and payables). It’s not hard to identify this as reflecting among other things a somewhat off-the-shelf approach to disclosure, and a feeling – no matter what anyone tells them – that it’s safer to provide more words than less.

Against that backdrop, here’s how I previously summarized one of the issues raised in the paper:

  • The discussion paper proposes that every accounting policy that an entity might theoretically disclose will fall into one of three categories, based on their degree of importance to understanding its financial statements; it attempts to distinguish between the three categories in some detail, and suggests that an entity should disclose policies falling within categories 1 and 2, but not those falling within category 3. Although for my money this might still be too much mandatory disclosure, the paper provides a better basis for discussing the matter than we currently have.

It’s no surprise that many of the commentators shared my reservations, and took them further. This is how IASB staff summed it up in a staff paper:

  • Many respondents supported the Board developing guidance about which accounting policies to disclose. However, respondents expressed concerns about the approach to developing that guidance that was described in the Discussion Paper—in particular the use of categories. Respondents also expressed concerns about the risk of any requirements developed being overly prescriptive.

To choose just one of the thoughtful commentators on this area, Grant Thornton put it this way:

  • We question… whether the categorization of accounting policies into three categories will really lead entities to take a fresh look at their disclosures and reorganize the sequence and location of information in the notes. Many entities already include too much information in their accounting policies in order to satisfy what they perceive to be the expectations of regulators and auditors, and we are not convinced that this will go far towards solving this problem. We believe it will be more important to emphasize that only those policies needed for an understanding of the financial statements need be given.

Grant Thornton suggests that entities should only disclose policies for which any of the following apply:

  • individual standards offer a choice between alternative accounting policies
  • an entity makes significant judgments and/or assumptions in applying the accounting policy
  • not specifically required by IFRS but which the entity has developed in accordance with IAS 8
  • have changed since the last reporting period.

They suggest that otherwise: “an entity should not need to produce an accounting policy which merely replicates measurement, recognition, or presentation requirements that are already set out clearly by individual standards, even where a material transaction, item or event of the entity is affected by them.” The IASB was worried that in this scenario: “users of the financial statements who are unfamiliar with IFRS requirements would need to consult IFRS Standards in order to understand the financial statements.”  But of course, that only opens up a multitude of other issues. For example, if a reader knows nothing of IFRS 9, will any amount of accounting policy disclosure really allow them to get the reasons behind the different classifications and measurement bases? Wouldn’t it be better to be honest about it, and to collectively say to users that if they really want to understand this stuff and use it in a risk-appropriate way, they have to take on responsibility for developing some minimal grounding in IFRS first? And even if you think it’s every company’s responsibility to educate its readers in the same things, year after year, why can’t it do that (say) on its website, with hyperlinks to and from the relevant part of the statements…?

That last point opens up a much more pervasive reservation about the discussion paper, that it’s a document for a linear, paper-based world, barely acknowledging the impact of technology. I’ve commented on that issue many times already in this space, but even so, we’ll return to it next time. As for accounting policy disclosure, the IASB decided at its March 2018 meeting that “the staff should perform further analysis about whether and how to further pursue” this aspect of the discussion paper, so we’ll have to wait and see…

The opinions expressed are solely those of the author

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