Developing and drafting disclosure requirements: play it down the middle!

Here’s a portion of a recent IASB news release:

  • The International Accounting Standards Board (IASB) has today concluded its project on improving its approach to developing and drafting disclosure requirements. The improved approach is designed to help the IASB develop Accounting Standards that would enable companies to make better judgements about which information is material and should be disclosed, thereby providing more useful information to investors.
  • The improved approach is summarized in guidance that the IASB has published, alongside a Project Summary and Feedback Statement, as part of the IASB’s Targeted Standards-level Review of Disclosures project.
  • The improved approach involves:
  • engaging early with investors to understand their information needs;
  • developing disclosure requirements alongside recognition and measurement requirements;
  • considering the digital reporting implications of new disclosure requirements;
  • using general and specific objectives that describe and explain investors’ information needs; and
  • supporting specific objectives by requiring companies to disclose items of information that would satisfy the objectives in most cases.
  • The IASB intends to use this approach when developing disclosure requirements.

The document sets out that to enable entities to make effective materiality judgements, the IASB, when drafting disclosure requirements, will typically:

  1. include an overall disclosure objective that provides context of the overall user information needs to enable an entity to make materiality judgements and apply the requirements about specific disclosure objectives and items of information;
  2. require an entity to comply with specific disclosure objectives;
  3. support each specific disclosure objective with explanations of user assessments that rely on information an entity would disclose in satisfying the specific disclosure objective; and
  4. link a specific disclosure objective with items of information that an entity is required to disclose to satisfy that specific disclosure objective.

The IASB describes this as a “middle-ground” approach in that it’s more prescriptive than what it originally proposed, responding to the widespread skepticism described in the feedback statement:

  • A few respondents took the view that the proposed approach would help alleviate the disclosure problem. However, most respondents questioned whether it would help, and said entities would continue to apply a checklist approach to disclosing items of information specified in an Accounting Standard, even if those items are not drafted as requirements.
  • Some respondents said the proposed approach would, at best, help reduce the disclosure of irrelevant information. Many respondents agreed that a change in behaviours throughout the financial reporting ecosystem would be required to solve the disclosure problem. Some respondents said the root cause of the disclosure problem is that entities do not make effective materiality judgements when applying the disclosure requirements in an Accounting Standard. Instead of using the proposed approach to draft disclosure requirements, a few respondents suggested the IASB simply emphasise that materiality principles should be applied. For example, the beginning of the disclosure section in every Accounting Standard could include a cross-reference to paragraph 31 of IAS 1 Presentation of Financial Statements.
  • Many users were concerned the proposed approach would reduce the comparability of financial information between entities and make digital information difficult to use. Some users were unconcerned by immaterial information, and they were able to extract the information they needed, even from very lengthy financial statements.
  • Many respondents suggested the IASB develop a middle-ground approach to disclosures, whereby disclosure objectives would be accompanied by a prescriptive list of items of information that an entity would be required to disclose to meet the objectives. However, a few respondents said a middle-ground approach would only help alleviate the disclosure problem if entities were to make effective materiality judgements in applying the disclosure requirements.

 The document also focuses attention on specific drafting matters, clarifying for example that the IASB “avoids using the same words to signify different terms or concepts, and avoids using different words to signify the same term or concept.” If that’s unavoidable, “the IASB considers if additional interpretative guidance, such as an explanatory paragraph, should be provided to explain why the term or concept has been used in a particular context; and clearly links each use of the term or concept to the related explanation.” The document also focuses on the challenges of translation, the challenges of which are probably vastly underestimated by those of us working entirely in English.

It doesn’t seem to me that one hears as much about the “disclosure problem” or “disclosure overload” recently. Maybe it’s hard to keep chattering on about the negative effect of too much information in one place when, via the ISSB, everyone is happily anticipating getting even more information of another kind, the preparation and use of which will require entire new waves of time and resources. Even if the IASB’s new approach is incrementally helpful in the intended respects, the task of preparing the financial statements, and in particular of auditing them, will continue to be acute, accentuating the resource and other problems we’ve mentioned several times lately. It’s probably appropriate then that the IASB didn’t try to oversell the benefit of all this…

The opinions expressed are solely those of the author.

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