A pilot approach to disclosure – embrace the checklist?

We’ve looked several times at some of the comments received on the IASB’s exposure draft Disclosure Requirements in IFRS Standards—A Pilot Approach: Proposed Amendments to IFRS 13 and IAS 19, for which comments were requested by a revised date of January 12, 2022

In a nutshell, the draft guidance would require entities to comply “with overall disclosure objectives that describe the detailed information needs of users of financial statements.”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.”

Among the widely negative reaction to the proposals, some respondents took issue with the basic premise that a “checklist approach” is undesirable. This is from the Institute of Chartered Accountants of Nigeria:

  • We agree with the principle of using prescriptive language for the disclosure objectives. We believe that while less prescriptive language is welcome when referring to the items of information to meet the specific disclosure objectives, there should however be a minimum requirement to disclose certain items of information as a minimum level of disclosure will still be required once an IFRS standard is applicable to the specific circumstances of a client. This approach is similar to what is currently adopted in IAS 16.79 where additional information is encouraged to be disclosed. The implication is that the checklist approach is still relevant as it drives objectivity and ensures certain information required to address comparability across entities with similar transactions are maintained.

This is the Canadian firm MNP:

  • We expect that requiring disclosures based on satisfying disclosure objectives wouldn’t be a welcome change for preparers that prefer the unambiguity of an approach based on specific disclosure requirements over having to interpret what disclosures are needed to satisfy disclosure objectives. The application of judgement necessary for making such determinations may also require more skill and experience than some preparers’ existing processes can provide.
  • Disclosure checklists are commonly considered to be an effective control to ensure the completeness of financial statement disclosure reporting. Although the application of a disclosure checklist may and sometimes does result in the inclusion of irrelevant disclosures in the financial statements, preparers using a checklist have confidence that all relevant information disclosures have been provided. There is a higher inherent risk that the disclosures that are important for users’ decision-making are incomplete or omitted entirely if disclosure checklists are not used as a detective control tool.
  • Auditors would also have to implement certain changes to their processes in order to ensure disclosures satisfy disclosure objectives. Differences of opinion about whether disclosure judgements made by the auditors’ clients sufficiently satisfy disclosure objectives are likely to be an outcome of a shift to an objectives-based approach, and we also expect that there will be greater disclosure diversity in practice as a result of different interpretations about the type and extent of disclosures necessary to satisfy disclosure objectives.

Here’s an interesting reference point. In 2007, a New Yorker article by Atul Gawande noted: “intensive-care medicine has grown so far beyond ordinary complexity that avoiding daily mistakes is proving impossible even for our super-specialists. The I.C.U., with its spectacular successes and frequent failures, therefore poses a distinctive challenge: what do you do when expertise is not enough?” The article recounted how even for steps that “are no-brainers…which have been known and taught for years,” for which “it seemed silly to make a checklist,” such an approach nevertheless achieved remarkable results. In one early instance: “The proportion of patients who didn’t receive the recommended care dropped from seventy per cent to four per cent; the occurrence of pneumonias fell by a quarter; and twenty-one fewer patients died than in the previous year. The researchers found that simply having the doctors and nurses in the I.C.U. make their own checklists for what they thought should be done each day improved the consistency of care to the point that, within a few weeks, the average length of patient stay in intensive care dropped by half.” The article set out many more such instances. And yet, at least at the time of its writing, Gawande described widespread resistance and failure to apply the lessons learned, in part perhaps because the checklist approach “pushes against the traditional culture of medicine, with its central belief that in situations of high risk and complexity what you want is a kind of expert audacity.”

Maybe something similar holds for financial reporting – that the idea of a checklist somehow seems unequal to the money and the expertise involved. But preparers, like medical professionals, are only human. Sure, checklists and their deployment can always be made smarter, but maybe it makes more sense to embrace the core concept than to try running from it…

The opinions expressed are solely those of the author

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