Reducing Disclosure Burden

Reducing Disclosure Burden
- Dealing with the Domestic Dimensions of a Global
Kris Peach, FCA, Chair, Australian Accounting Standards Board
Ahmad Hamidi-Ravari, Senior Project Manager, Australian Accounting
Standards Board
March 2015
What is the problem?
Globally, feedback to the International Accounting Standards Board (IASB) points to an
acute disclosure overload problem in financial reports, with many commentators viewing the
requirements of International Financial Reporting Standards (IFRS) as being responsible. A
common complaint from companies applying IFRS is that they are required to disclose
irrelevant information, which unnecessarily adds to the preparation cost and the page count
of the financial report. Users, on the other hand, who traditionally prefer more information to
less, have commented that they struggle to navigate through the clutter of perceived
irrelevant disclosures to find the information that is relevant to their understanding of the
financial performance and position of the company. As a result, a consensus has emerged
that financial statements need to be streamlined and structured in a way that that makes it
easier for users to extract information relevant to their economic decision making.
In Australia the disclosure problem has been further complicated due to uncertainties about
who should report publicly and what should be reported.
Who can fix the problem?
Although many commentators may blame IFRS as creating the problem, the requirements of
IFRS are only one of many factors that lead to disclosure overload. In early 2013, the IASB
held a Discussion Forum to seek constituents’ views on the IFRS disclosure burden and the
IASB found that:
... users, preparers, standard-setters, auditors and regulators are all important
parties in the financial reporting supply chain. The messages we heard in the
Discussion Forum made it clear that each of these parties contributes to one or
more of the perceived problems about disclosure. This also means that each party
can contribute to improvements in disclosure.
Thus, everyone has a role to play to resolve the disclosure problem. Some of the solutions
require standard setters and policy makers to act. Other solutions are already available to
entities and they can improve their financial reporting from today.
What can Directors and preparers do now to address disclosure overload?
On their own initiative, a number of Australian entities in the private and public sectors have
already embarked on streamlining projects and they have achieved substantial reductions in
the length and complexity of their financial statements. Recent changes to AASB 101
Presentation of Financial Statements clarify that entities should not be disclosing immaterial
information and that the presentation of information in notes can—and should be—tailored
to provide investors and other users with the clearest story of an entity’s financial
performance and financial position. Just because a standard contains a list of disclosures
does not mean that an entity must always make each of those disclosures in its financial
statements. Judgement is required to determine whether a particular line item in the financial
statements is material and also whether the specified disclosure is material.
With the recent amendments to AASB 101 and given supportive statements from the
corporate regulator, the Australian Securities & Investments Commission (ASIC),2 this is an
opportune time for directors and CFOs to take action to address disclosure overload in their
financial statements.
In the near future, the AASB website will assist preparers by providing a ‘one stop shop’ of
useful technical papers and other resources aimed at streamlining disclosures. One of those
resources is the AASB’s Research Centre staff paper on the application of ‘materiality’,
which was published in February 2014.3
What is the IASB doing?
The IASB established the Disclosure Initiative Project in early 2013 with short-term and longterm objectives. In the short-term, the project is introducing disclosure improvements, mainly
targeting the clutter problem. In the longer-term, disclosure principles are being devised to
improve the requirements in IFRS and, therefore, in Australian accounting standards for
presenting and disclosing information in the financial report in a manner that focuses on
reporting relevant information without requiring voluminous disclosure. The IASB has
already begun work on these disclosure principles.
What is the AASB doing?
In addition to the IASB’s work, the AASB has a multi-pronged strategy to reduce the
disclosure burden. The key components include:
Shaping the Australian financial reporting framework by collaborating with other
policy makers to ensure that the criteria for publicly lodging financial statements
capture only those entities that have users that rely on general purpose financial
statements to make economic decisions.
Improving the principles used to determine Reduced Disclosure Requirements
(RDR) for entities that are not publicly accountable (i.e. Tier 2 entities)
Obtaining feedback from users and preparers for the IASB’s Disclosure Initiative
IASB, Feedback Statement: Discussion Forum – Financial Reporting Disclosure,
May 2013
ASIC media release 14-294MR, Focus for 31 December 2014 financial reports, 7
November 2014
Encouraging and facilitating coordinated action by users, preparers, auditors and
regulators to immediately start addressing the disclosure burden.
Shaping the Australian financial reporting framework
An AASB sponsored Research Report published in June 2014 confirmed the prevalence of
special purpose financial statements that are lodged on the ASIC and state-based registers
for the public to access. Furthermore, it seems that preparers often spend more time
working out what to report than actually reporting and that the use of special purpose
financial statements is seen as a means for reducing disclosures.
In order to resolve the uncertainty about whether an entity should be preparing general
purpose or special purpose financial statements, the requirements for lodging financial
statements on public registers should be clearly defined and use objective criteria so that
Australian accounting standards are only required to be applied by those entities that need
to prepare general purpose financial statements. The AASB will work with Treasury and
other regulators to help achieve this. As part of the process, the financial reporting
thresholds in Australia will be benchmarked to the reporting requirements in other
comparable countries. It is too early to know what changes will be made to the reporting
framework, but it is possible that some entities currently preparing special purpose financial
statements may no longer need to publicly lodge financial statements and other entities may
be required to prepare general purpose financial statements for the first time. However,
overall, the review should lead to greater consistency, and therefore improve comparability,
in the financial reporting of entities that publicly lodge their financial statements.
Review of RDR principles
There is some evidence of high levels of Tier 2 take up by not-for-profit private sector
entities. However, anecdotal reports suggest that the for-profit private sector is lagging
behind in making use of the Reduced Disclosure Requirements (RDR).
It is expected that future improvements in IFRS arising from the IASB’s Disclosure Initiative
project will also have a flow on effect of improving RDR disclosures. However, in the short
term, the AASB will review the Tier 2 disclosure principles. Further rationalisation of Tier 2
disclosures may help its adoption by eligible entities.
Feedback to the IASB
To obtain feedback for the IASB’s Disclosure Initiative project the AASB will be expanding its
network of users and preparers. Those interested in providing comments should contact the
AASB at [email protected] or via LinkedIn. Feedback from those preparers and users
of financial statements that have already been, or are about to be, streamlined would be
particularly beneficial.
As mentioned, everyone has a role to play in addressing concerns about disclosure
overload. Consequently, the AASB invites all interested parties to provide feedback on how
to improve the Australian financial reporting framework, and to provide practical input to the
AASB and IASB on the development of appropriate disclosure principles.
Now is the time for all parties, users, preparers, regulators and standard setters to take
charge and deal with the domestic aspects of disclosure overload and to also influence the
IASB to resolve the global problem.