A recent report suggests that 30% of the information in financial reports should be eliminated. CIMA’s reporting specialist Nick Topazio ACMA assesses the findings.
An announcement that ‘30% of the disclosure requirements in your financial statements can be dropped’ would almost certainly be followed swiftly by ironic cheers and applause from beleaguered finance departments embarking on another reporting round. But why ironic? Can it be true?
The claim that disclosure reductions could total 30% was made in a report published this year by the Institute of Chartered Accountants of Scotland (ICAS) and the New Zealand Institute of Chartered Accountants (NZICA). These two bodies had been asked by the International Accounting Standards Board (IASB) to review the levels of disclosure requirements in existing IFRSs, with a view to proposing deletions and amendments.
The need for such a project is all too clear. Financial reports are becoming longer and longer with each passing IFRS. The result is that it is often very difficult to find what is most relevant in corporate reports because of the sheer amount of clutter. The term clutter is used extensively in the 'Cutting clutter' chapter of the Financial Reporting Council’s guidance on how to make financial reports more engaging and understandable.
What makes up the disposable 30%?
The ICAS / NZICA report refers to it as excess baggage and believes that much could be eliminated by a more robust application of the materiality principle.
They first distinguish between material items (those in the main financial statements) and material information which appears in the notes. The report argues that too often preparers and their auditors conclude that if an item is material, it needs disclosing on the face of the financial statements. Additional notes are also required to explain it. However, users of the financial statements may only need to have the amount disclosed, without the additional reporting burden of extensive notes explaining the minutiae of the transaction.
In addition to breaking the established link between material items and information, the report concludes that each standard published by the IASB should make explicit reference to materiality to emphasise its importance. Currently, IAS 1 – presentation of financial statements provides the guidance in IFRS on materiality issues.
It remains to be seen whether emphasising these provisions in every standard will help or not. What is clearly needed is the confidence to apply professional judgement and the ability to have a sensible discussion with auditors who are willing to deviate from their disclosure checklist in the face of reasoned argument.
The third step that ICAS and NZICA propose is specific deletions and changes to existing disclosure requirements, such as:
- deleting merely encouraged disclosures – if they are needed they should be mandated
- reducing the number of detailed reconciliations in IFRS; a summary of material changes should suffice
- allowing preparers not to repeat their summary of accounting policies in all financial statements. Instead they should refer to where the material policies can be accessed, for instance a website. Disclosure of any material changes to the policies adopted in the previous year would continue to be required in the financial statements.
This latter proposal mirrors a suggestion in the FRC’s 'Cutting clutter' publication. As well as containing similar proposals on the disclosure of accounting policies and promoting greater emphasis on materiality, the FRC document also illustrates how companies can produce more straightforward disclosures on governance and share based payments.
An improvement in the reporting of corporate governance is the subject of the next CIMA report leadership report, which is due to be published later this year. As usual, this report will contain straightforward practical illustrations of what can be achieved now, to make the reporting of corporate governance more relevant and understandable.
What will happen in the future?
There is no doubt that there is a growing momentum for change. In the UK the Department of Business, Innovation and Skills has just issued a consultation document. It proposes splitting the narrative reporting element of financial statements into two parts, with the second element moving to company websites.
Internationally, the IASB should respond to this input from ICAS and NZICA with a consultation on disclosure reduction and other initiatives such as integrated reporting. The task for those involved is to try to make sure that these inevitable changes are compatible with each other and do not result in conflicts that would negate much of the benefit.
Links
ICAS / NZICA – Losing the excess baggage
Cutting clutter
Report leadership
The future of narrative reporting
International Integrated Reporting Committee
CIMA professional development
CIMA on demand