Reducing Disclosure Burden - Dealing with the Domestic Dimensions of a Global Problem 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 1 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 project. 1 IASB, Feedback Statement: Discussion Forum – Financial Reporting Disclosure, May 2013 2 ASIC media release 14-294MR, Focus for 31 December 2014 financial reports, 7 November 2014 3 http://www.aasb.gov.au/admin/file/content102/c3/RCSP_214_Disclosure_and_Materiality.pdf 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. Conclusion 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.
© Copyright 2022 Paperzz