Financial Statements: Disclosure overload - What can be done to reduce the clutter? By Vik Bhandari Managing Partner Financial Reporting Specialists www.frsgroup.com.au Agenda • Problem with financial reporting • Cutter in financial statements • Practical example: review financial statements • Recap and reflection.
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Financial Statements: Disclosure overload -
What can be done to reduce the clutter?
By Vik Bhandari
Managing Partner
Financial Reporting Specialists
www.frsgroup.com.au
Agenda
• Problem with financial reporting
• Cutter in financial statements
• Practical example: review financial
statements
• Recap and reflection.
Agenda
• Problem with financial reporting
• Cutter in financial statements
• Practical example: review financial
statements
• Recap and reflection.
Problem with financial reporting
Lack of useability
– Complex and unintuitive
– Excessive disclosures
– Unable to be understood.
Only will get worse
– with myriad of new standards/interpretations (eg AASB 9)
Problem with financial reporting
• Likely response from users:
“The financial statements are too
complicated to read. I only look at
profit figure, dividend figure, what
the directors and auditors earn
and, post GFC, whether the company
is solvent.”
• Press reports – questioned the benefit of Australia adopting IFRS and the so called disclosure overload
• Some auditors are promoting streamlining.
Problem with financial reporting
Reduced Disclosure Regime (stage 1 of ED192 Revised Differential
Reporting Framework) has added another layer of complexity:
– Full General Purpose Financial Statements (GPFS)
– General Purpose Financial Statements Reduced Disclosure
Requirements (RDR)
– Special Purpose Financial Statements (SPFS)
• Is the right framework being used?
• Do users know which is which?
AASB concerned about
abuse of SPFS:
(i) Application
(ii) Recognition and
remeasurement
(iii) Disclosures
All recognition &
measurement.
Disclosures of
AASB 101, 107,
108, 1048, 1054
As
appropriate
for users.
Disclose
policies
GPFS
Tier 1 or
not early
adopt
RDR
Full
compliance
with
standards
All recognition
and
measurement,
reduced but
mandatory
disclosure
Tier 2
and early
adopt
RDR
SPFS
Ch 2M.3 Other
Agenda
• Problem with financial reporting
• Clutter in financial statements
• Practical example: review financial
statements
• Recap and reflection.
Clutter in financial statements
• Too much detail in accounts
– Unnecessary/immaterial information
• Important information lost/obscured
• Investors/users being “Blinded”
• Information rolled forward with little/no thought
– Prior period accounts
– Explanatory information
– Disordered/non-logical layout.
Clutter in financial statements
• How true is this statement:
“generally, if regulations require a disclosure, it goes in the report –
regardless of the materiality or importance to the business”
UK FRC, April 2011
• Auditors, company directors, preparers and regulators would
rather ‘over disclose’
i.e. when in doubt, disclose approach.
Clutter in financial statements
“… there is concern that the volume and complexity of disclosure
has a potentially negative impact by distracting users from the
information that is relevant to their decision making. In essence,
there is a risk that quantity is outweighing quality.”
The Group of 100, Oct 2009
Clutter in financial statements
“… since the introduction of IFRS, the accumulation of accounting
rules and accompanying disclosures, the pace of change and the
growing complexity of business, have led to calls for reductions in,
and simplification of, various requirements.”
Managing Complexity Report
Australian FRC, May 12
Clutter in financial statements
• Using model accounts/templates without thought
• Adding disclosures to comply with checklists
– for checklist sake!
• Not using materiality from disclosure perspective
• Financial reporting process
– an after thought (not enough time spent on them).
Significant focus in the area of clutter
‘Less is more’ report
• Group of 100, Oct 2009
• Concern about volume, complexity and usefulness of certain
disclosures
• Contradiction:
‘Principles-based’ approach => used in standards settings
‘Rules-based’ approach => used for disclosures.
Common pitfalls/clarity
Clutter – “Losing the excess baggage”
Reducing disclosures in financial statements to what’s important (July 2011) ICAS and NZICA joint project, on behalf of IASB • “Whilst requirement of each standard seemed
reasonable at time of standard development, the combined impact of existing requirements has lead to lengthy financial statements cluttered by excessive detail”
Recommendation:
• Deleting specific requirements (A ‘top down’ lens should be applied – balanced and relevant to users); and
• Enhancing use of materiality in financial reporting disclosures
• 30-40% reduction in disclosure.
Current materiality approach
Source: Losing the excess baggage discussion paper, July 2011, NZICA/ICAS
Proposed materiality approach
Source: Losing the excess baggage discussion paper, July 2011, NZICA/ICAS
Significant focus in the area of clutter
FRC Australia
• Managing Complexity Report, Oct 12
• FRC Survey on Financial Literacy of Australian Directors, Sept 12
• Corporate Governance Principals to reflect steps entities undertake
to ensure directors have adequate financial literacy when signing
financial statements (post-Centro)
• Examine current financial reporting regime – better
explained/understood, and (if necessary) rationalisation.
Significant focus in the area of clutter
ASIC bi-annual surveillance project
• Surveillance will focus on material disclosures of information useful
to investors and other users of financial reports; and
• ASIC will not pursue immaterial disclosures that may add
unnecessary clutter to financial reports.
Significant focus in the area of clutter
Financial Reporting Specialists ‘EFLICKS’
• Reduce disclosure by thinking EFLICKS
Essential
Fundamental
Legacy
Important
Critical
Key
Significant.
Give the disclosures the EFLICKS
Significant focus in the area of clutter
‘To disclose or not to disclose: Materiality is the question’
• AASB staff paper, Feb 2014
• Identified following reasons for disclosure overload:
– Time pressure – no time to reduce clutter
– Work (effort) required - time taken to justify something
immaterial, easier to just disclose
– Lengthy debates with auditors - default position to include
disclosure; discussion required on using AASB 101.31 to
reduce immaterial disclose.
Significant focus in the area of clutter
‘To disclose or not to disclose: Materiality is the question’
• Identified following reasons for disclosure overload (continued) :
– Judgement – required for not disclosing; easier not to make
decision and just disclose
– Following the leader – follow others especially in same
industry. “Two wrongs don’t make a right” (auditors also guilty
= point to other examples to justify disclosures being
required)
– Fear of regulators – ASIC!
Significant focus in the area of clutter
Use of materiality
• Although AASB 1031 has been withdrawn, AASB 101.31 states:
“An entity need not provide a specific disclosure required by an
Australian Accounting Standard, if the information is not
material.”
• AASB 101.7 states:
“Items are considered material if their omission or
misstatement, individually or collectively, could influence the
economic decisions that users make on the basis of the
financial statements”.
Significant focus in the area of clutter
Use of materiality
• Materiality
– Consider size and nature of the item
– Professional judgement required (consider both quantitative and
qualitative aspects of information)
– Entity specific.
• Disclosure must be useful:
– For resource allocation decision making
– Possess the qualitative characteristics
– Not include immaterial information.
Significant focus in the area of clutter
Amendments to AASB 101 / IAS 1
• ED issued Q1, 2014 with Final standard expected Q4, 2014
• Limited clarifying amendments
• Removes language that prevents (perceived) rigid
presentation/format
• Proposals: • Materiality – apply to primary statements and notes