As we discussed here, the IASB issued the exposure draft Disclosure Requirements in IFRS Standards—A Pilot Approach: Proposed Amendments to IFRS 13 and IAS 19, with comments requested by a revised date of January 12, 2022
The driving premise is that “the notes in financial statements sometimes include too little relevant information, too much irrelevant information and information disclosed ineffectively. Stakeholders say this typically occurs when the requirements in IFRS Standards are treated like a checklist without applying effective judgement.” The proposals were designed to “enable companies to enhance their judgement and reduce ‘boilerplate’ information, giving investors more useful information.”
In a nutshell, the draft guidance would require entities to comply “with overall disclosure objectives that describe the detailed information needs of users of financial statements.”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: “specifying that items of information are not mandatory should not result in material information being omitted. Instead, using this language to describe items of information would help entities to fully understand specific disclosure objectives and determine which information is material and therefore has to be disclosed.”
Based on my quick and incomplete review of the comments received, many respondents are skeptical that this would work as intended. This is from the Dutch Accounting Standards Board,:
- In our opinion, this approach gives much more discretion to and requires much more judgement by and is too burdensome for preparers of financial statements. It may also lead to audit and enforcement challenges by auditors and regulators and (comparability) challenges by users of financial statements as well. Although this approach creates more flexibility for preparers of financial statements to determine which disclosures are really relevant to meet the needs of users, we are of the opinion that this change is too radical.
- Furthermore, we disagree with the proposed expression for the consideration of the disclosure of items of information in assessing how to meet the objectives (‘while not mandatory the following information may enable…’). First of all, we have our concerns about the effectiveness of this expression. As certain disclosure objectives can most likely not be met by excluding certain non-mandatory items we would suggest to include a list of minimal required items or expected disclosure to meet the requirement…Secondly, we are not convinced this is an adequate expression to remove the checklist-mentality and therefore we are concerned that the objective of this project will not be achieved. After all, the list of not mandatory items of information can still be used as a checklist (from a view of prudence) or can simply be ignored (because it is not mandatory).
The Australian Accounting Standards Board had very similar reservations:
- The disclosure problem can be adequately addressed only through the proposed objective-based disclosure approach if preparers apply the materiality concept appropriately. Some entities, particularly the smaller ones with fewer resources, might be challenged by the level of complex judgement required, and instead use the proposed items of information in the ED as a new form of ‘checklist’, which would not result in the provision of less irrelevant information. In other cases, preparers may tend to disclose all available information because they would be unsure of users’ needs, resulting in lengthy financial statements.
New Zealand’s External Reporting Board also failed to see how the proposals would achieve a behavioural breakthrough:
- We therefore remain of the view that behavioural issues in applying judgement play a larger part in contributing to the disclosure problem than a lack of guidance or the actual requirements in IFRS Standards. Entities that currently take a considered and thoughtful approach to disclosures and document judgements about disclosure would most likely take the same approach to any new requirements. Those that treat disclosure as a compliance exercise (whether disclosing too much or too little) would most likely continue with that approach.
The New Zealand Board suggested that publications put out by professional bodies and supported by public discussions between preparers, auditors and regulators, ongoing education (such as webinars, webcasts and articles), about the requirements in standards and the practical application of those requirements, and informal interviews with entities about how they have applied disclosure requirements or reviewed disclosures might all go to addressing these behavioural issues.
And then there’s the Institute of Chartered Accountants in England and Wales:
- We are not convinced that the overall disclosure objectives as drafted for the two test standards are particularly helpful in this regard as they are so high-level and open-ended that they risk becoming meaningless. In particular, we believe that inconsistent judgements around materiality by preparers, auditors and regulators are one cause of the disclosure problem and that overall disclosure objectives are unlikely to be sufficiently specific as to assist with materiality judgements.
And there’s plenty more like that. In general though, the alternatives (if any) proposed by various commentators are less compelling than their reservations regarding the current proposals. Maybe the “disclosure problem,” and the “behavioural issues” underlying it, are an inevitable consequence of a discipline that, despite its increasing complexity, is still primarily in the hands of humans, with all their attendant limitations. If and when artificial intelligence takes over, this handwringing may seem mainly quaint…
The opinions expressed are solely those of the author