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May 2013

Financial Statement Disclo sures — How Much is Too Much

By Kalpesh Shingala, Chartered Accountant
Reading Time 4 mins
Now that the IASB and the FASB’s joint projects are making steady progress in addressing key accounting areas, the two Boards are spending more time at the conceptual issues such as the presentation and disclosure in the financial statements. Earlier this year, the IASB hosted a public forum to brainstorm the topic while the FASB discussed a summary of the responses to its discussion paper on the disclosure framework.

Over the last five years, the size of annual reports of companies has increased substantially. One of the reasons attributed to the global financial crisis was the off-balance sheet exposures and the lack of adequate disclosures in the financial statements relating to these exposures by the companies. This pushed regulators, standard-setters, auditors, preparers and users of the financial statements alike in working overtime to bulge the size of companies’ annual reports without much deliberation around the usefulness of enhanced disclosures or their potential implications on loss of more relevant information among the resultant disclosure ‘noise’ in the financial statements.

Soon after, the solution began to emerge itself as a problem as preparers and auditors started feeling the burden of complying with these additional reporting requirements. Many organisations were forced to expand their financial reporting teams manifold to cope with the exhaustive data collection and analyses and to upgrade their financial reporting systems. This strain pushed forward the momentum around the Boards’ respective projects addressing the presentation and disclosure and is now creating a lot of traction among those affected.

As the participants from Africa, Asia, Europe and North America continue to debate possible solutions to the issue through the IASB and FASB forums, a message that has come out loud and clear is that while the preparers think there is too much required to disclose, users, on the other side, are suffering from information indigestion. There is a lot served, but of that there is very little that’s palatable. Much of the relevant information intended to address the needs of the key stakeholders is lost in this disclosure overload. However, if the constitution of the participants is to go by, the message is crystal clear that it’s the preparers who see this as a larger issue than users of the financial statements.

There are several ideas being mulled to achieve disclosure effectiveness, as there is also a scepticism around the practicability of these ideas. Some of these are:

• Materiality – How can this be applied to qualitative disclosures

• Principles-based guidance – Is it possible to have a single source of principles-based guidance providing conceptual framework for all disclosures

• Purpose and relevance – Is it possible to provide a ‘one-size-fits-all’ definition of purpose and/or relevance of the disclosure requirements

• Offer flexibility – Move away from the words such as ‘shall’ or ‘at a minimum’ from the disclosure requirements in the existing standards; let the preparers use discretion in deciding what’s relevant for their business

• Avoid overlap – There are areas requiring disclosures in the Management Discussion & Analysis (the front half) and also within the financial statements (the back half) of an annual report. A cross-reference mechanism may be developed to avoid repetition.

There is a high degree of engagement on this issue indicating wider approval to the disclosure framework project but a near unanimous view is that there isn’t going to be an easy fix to the disclosure problem.

The key challenges expected at this stage are:

• Finding the right balance to cater to all users with different needs

• Alignment with the overall financial statement conceptual framework

• Legal, institutional barriers

• Disclose more, not less – the cost of a disclosure failure is high

The debate continues but things seem to be moving in the right direction. The problem has been diagnosed; a solution will follow in due course. Standard-setters will need to work with regulators and other bodies who have a say in imposing the disclosure requirements and expand their outreach efforts to be able to cut the clutter effectively from financial statements without losing relevance and effectiveness from the disclosures. Let’s do our bit by getting involved in these discussions and work towards achieving a better world of financial reporting.

Thought to munch – There are so many of us who cannot find enough time to read an interesting book that’s more than 200 pages long. For an annual report with more than 200 pages!! Any takers?

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