A pilot approach to disclosure – what if it don’t fly?

As we discussed here, the IASB has issued the exposure draft Disclosure Requirements in IFRS Standards—A Pilot Approach: Proposed Amendments to IFRS 13 and IAS 19, with comments requested by October 21, 2021.

In a nutshell, the draft guidance would require entities to comply “with overall disclosure objectives that describe the overall information needs of users of financial statements” and “with specific disclosure objectives that describe the detailed information needs of users of financial statements.” These would be prescriptive requirements, indicated by the term “shall.” The specific disclosure objectives would be linked “with items of information an entity may, or in some cases is required to, disclose to satisfy the objective” – typically indicated by the language “while not mandatory, the following information may enable an entity to meet the disclosure objective.” The thinking is that this approach will make it implausible to achieve compliance through the dreaded “checklist” approach.

I mentioned last time that three members of the IASB voted against publication – let’s look today at some of the reasons for that. The dissenters overall “believe that the primary source of the disclosure problem is the poor application of materiality rather than the perceived prescriptive nature of current disclosure requirements,” and that the proposed approach will raise challenges in several areas.

First of all, enforcement:

  • The proposed Guidance would move the focus of disclosure requirements, and thus enforcement of those requirements, to meeting a disclosure objective and satisfying the associated information needs of users of financial statements. These Board members are concerned that such a change in emphasis would expose preparers to second guessing and make review and enforcement more difficult for auditors and regulators. Preparers will need to explain how they satisfied the stated information needs of users. Auditors and regulators can currently monitor whether a preparer has disclosed specific items required by a Standard that are material for the preparer’s financial statements. However, under the proposed Guidance, auditors and regulators would have to assess whether a preparer has met the disclosure objectives and base their enforcement on that assessment. The examples of information that could be provided to meet the objective will typically be non-mandatory. Difficulty of enforcement may inadvertently lead to the reduction of relevant information in financial statements.

Second, they perceive an increased burden on preparers: “by increasing the reliance on materiality judgements and requiring preparers to judge whether they have met the information needs of users of financial statements, the Board may worsen, rather than help solve, the disclosure problem.” Thirdly, they suggest the proposed approach “could impair comparability for users of financial statements compared with an approach in which the Board determines the specific items of information that would meet user needs and requires all preparers to provide those items of information when they are material. Ensuring that consistent information is provided can help achieve comparability between preparers, which enhances the usefulness of information for users. If less consistent information is provided, this may also increase costs for users by necessitating additional efforts to customize screening and analysis.”

To me, this all carries a (probably inadvertent) subtext – that the so-called “disclosure problem” speaks more to human weakness than anything else. If financial reporting were entirely prepared and consumed by distraction-free artificial intelligence, then it might not matter how much cluttered and immaterial information an entity threw out there – the AI recipient would always find its way to what was or wasn’t relevant. Since, at least for now, most users are just flesh and blood, with limited time and capacities, it’s necessary to think about accessibility, structuring, filtering and so forth. But this inherently means that some items will be structured and filtered out (or at least shoved to the sidelines), and that those items are ones that could have been of interest to some specialist readers.

It’s hard to shake the suspicion that a large portion of those who might rail against the “disclosure problem” are essentially just grandstanding, and that whether they’re presented with financial statements perfectly reflecting the substance and spirit of the proposed guidance, or an inadequately differentiated mass of numbers and notes, they’ll proceed in much the same way, identifying the key measures that they rely on and quickly turning the pages on the rest to scan for “red flags.” In opining on financial reporting, as with politics or social issues or most other things, it’s hard to see why people wouldn’t fall prey to a “social desirability bias,” expressing opinions consistent with the kind of person they might aspire to be, rather than the person they actually are. In Wikipedia’s example of that: “Those in a community where drug use is seen as acceptable or popular may exaggerate their own drug use, whereas those from a community where drug use is looked down upon may choose to under-report their own use.” Within the esoteric community of those who claim to get high on financial reporting, I wonder how many are, basically, exaggerating their own drug use…

The opinions expressed are solely those of the author

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