The discussion paper carved out some space to describe an approach developed by the staff of the New Zealand Accounting Standards Board, with the following main features:
- (a) the inclusion of disclosure objectives, comprising an overall disclosure objective for each Standard and more specific disclosure sub-objectives for each type of information required to meet that overall disclosure objective;
- (b) the division of disclosure requirements into two tiers, with the amount of information to be disclosed depending on the relative importance of an item or transaction to the reporting entity and the extent of judgement required in accounting for the item or transaction. The two tiers are:
- (i) summary information, intended to provide users with an overall picture of the effect of the item or transaction. All entities would be required to disclose this information, subject only to materiality considerations (tier 1 disclosures); and
- (ii) additional information, which an entity would consider disclosing if that information is necessary to meet the overall disclosure objective in the Standard (tier 2 disclosures).
- (c) greater emphasis on the need to exercise judgement when deciding how and what to disclose to meet the disclosure objectives; and
- (d) less prescriptive wording in disclosure requirements.
So, to illustrate…
- For some entities, the tier 1 disclosures about an item might be sufficient to meet the overall disclosure objective in the Standard for that item. However, if the tier 1 disclosures are not sufficient to satisfy the overall disclosure objective in the Standard, the entity would need to provide some tier 2 disclosures. For example:
- (a) a financial institution with a small investment in property, plant and equipment might need to disclose only summary information (tier 1 disclosures), or not disclose any information at all about that investment; and
- (b) a manufacturer with a large investment in plant and equipment might need to provide both summary information (tier 1 disclosures) and some additional information (tier 2 disclosures).
The discussion paper provided a full example of how this might work in drafting disclosure requirements for property, plant and equipment, and for business combinations as well.
The IASB staff’s basic summary of the comments on this was: “Many respondents supported individual aspects of NZASB staff’s approach to drafting requirements in IFRS Standards. However, respondents expressed mixed views on the approach as a whole and had concerns about the Board developing it further.”
I suppose the most compelling reservation to me might be the behavioural one: if preparers, auditors and others don’t currently have the confidence or flexibility or whatever it takes to omit a bunch of clearly unimportant disclosures, then they might equally conclude under the New Zealand approach that it’s generally safer to put in some or most of the “tier 2” disclosures. Even if it could be demonstrated otherwise, the New Zealand approach – which would involve running a bulldozer through the current disclosure portions of the standards and then reconstructing them in a different configuration – might seem like taking the scenic route toward the targeted destination, compared to focusing on incrementally cleaning up the standards as they stand to remove overly prescriptive language, unnecessary requirements and so on. And then of course, commenters came up with no end of specific reservations about how to define and characterize the separate tiers, among other things. For many, the two examples provided to illustrate the approach seemed to contain a fair degree of boilerplate and mushiness, somewhat undermining the arguments in its favour.
But perhaps the best way to develop the two-tier idea would be by not talking so much about financial statements at all. As Deloitte put it:
- One way to think about the two-tier approach is that the tier-one disclosures are designed to give an overall (more complete) view of the different aspects of the business, including helping identify which aspects are the more important ones.
- … It is arguable that the material information is not the summary numbers, but the relative importance of the components of the business. In other words, the fact that, say, pensions or share-based payments are not an important part of the business could be the material information.
Put another way, it’s perpetually easy to get tangled up in concepts and nuances and to forget the underlying reason for all of this – that there’s no point understanding the numbers except as a portal to understanding the business and its prospects and risks. This seems to link back to the issue we considered previously, of how the discussion paper fails to consider the impact of digital technology on financial reporting: for example, direct linkages between the statements, the MD&A and other information might make it easier to convey what a particular number actually means, and the value of the disclosure attaching to it. Anyway, the IASB decided in March to perform a “targeted standards-level review of disclosure requirements,” starting by developing guidance for the Board itself to use in developing and drafting disclosure requirements – we’ll have to wait and see to what extent the New Zealand concepts find their way into that.
The opinions expressed are solely those of the author