Tuning up the communication of financial reporting is the main project of the International Accounting Standards Board (IASB) at the moment. Though in fact the IASB started discussing this project back in 2013, when it identified the three concerns about information in the financial statements:
- There is not enough relevant information.
- There is too much irrelevant information.
- Information is not communicated effectively.
Five years later, why is this issue still forefront on the IASB's agenda? It seems to be that—on the one hand—the judgement required to determine what information is relevant for the users of the financial statements is not always fully exercised, with many entities using checklists for such decisions instead. On the other hand, entities are lacking guidance on the content and structure of the financial reports: the objective of some standards seems unclear to preparers, and the requirements often suggest that the reports are largely compliance documents, meant to satisfy regulators and auditor expectations (rather than the final investors). This results in including boilerplate rather than entity-specific disclosures.
In response to the three weaknesses identified, the board has decided to start a long-term initiative to improve the disclosure effectiveness. It comprises the following projects:
- amendments to IAS 1 Presentation of Financial Statements to encourage entities to apply professional judgement—effective since 1 January 2016 (read the press release)
- amendments to IAS 7 Statement of Cash Flows—effective since 1 January 2017 (read more in this blog article)
- (voluntary) guidance on Making Materiality Judgements (part of the Materiality Practice Statement project)—issued in September 2017; aims to help preparers make materiality judgements
- exposure draft revising the definition of material (part of the Definition of Material project)—published in September 2017; was open for comments until January 2018 (read more in this blog article)
- (first) discussion paper of the Standards-level Review of Disclosures project—published in March 2017; comments already collected; next steps discussed in recent board meetings.
So, while developments have certainly been made under the initiative, the main part—the disclosure problem—has yet to be fully addressed.
Until now, the IASB has been working with real companies on some case studies, aiming to inspire entities to improve their communication within their existing IFRS financial reports. In its October 2017 report, the IASB demonstrated which structural changes and language simplifications could improve readability and clarity without losing information, based on feedback preparers collected from their stakeholders. Improving communication in the disclosures does not generally mean dramatically changing communication terms from one year to the other—it could simply be a matter of the management making small and continuous changes over a few years in order to redesign the statements.
From my point of view, most important is collaborating with users and involving them in discussions. As a result of the changes, most companies have reported that documenting their decision-making process better has led to more efficiency and less time spent on preparation.
Watch this page for more details and developments in this area!
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