08 February 2013

There’s a remarkable consensus in the IFRS world that we have a problem with disclosure. There’s a problem with the problem, though, as was very evident from the IASB Disclosure Forum at the end of January: there is no consensus on what the problem is.

Preparers complain about disclosure overload pushing up the cost of financial reporting. Some regulators and users argue that there is too much irrelevant disclosure – “clutter” – such that important disclosure gets lost amongst the trivial. Others say there isn’t actually enough disclosure on critical issues. Some feel that the amount of disclosure isn’t the problem, it’s the way it’s organised and explained.

Without agreement on what the problem is, it’s no surprise that there is no obvious solution on the table. A cottage industry has developed in the last couple of years around producing discussion papers on the subject. The only common theme emerging from these is that we should all be braver in applying the materiality concept to disclosures. Even here, there are differences of view as to whether existing materiality guidance is sufficiently clear. Materiality alone doesn’t solve all the perceived problems – preparers still have to collect the data to decide whether something is material, and just reducing clutter doesn’t necessarily make what’s left any more readable or useful.

I believe the debate needs to be expanded to consider more radical ideas. There has been much talk about establishing a single principle for disclosure but, so far, there has been little research into what that principle might be. Two ideas that come to mind are:

  • to disclose information that has direct predictive value for cash flows; or
  • to disclose information that allows users to have an in-depth understanding of the quality of assets and claims and the expected timing of payments and the ultimate amount of liabilities.

Applying either would probably eliminate some disclosures, but equally it could highlight the need to expand other disclosures or introduce new ones. There’s no guarantee that the amount of disclosure would reduce, but at least following a principle should help to present a more coherent set of information rather than a compliance checklist of data.

Interestingly, the first option above did come up at the IASB Discussion Forum but, apart from a disagreement among participants about how much disclosure it might eliminate, it wasn’t really explored. I think it should be, although I don’t underestimate the difficulty in both agreeing a single principle and then agreeing how to apply it. But a more radical debate might well help in bringing closer together the different views on what the real problem is.

The IASB Forum concluded there are no quick fixes. This might be true, but I believe we can make short-term progress. I suggested that we establish a principle that every piece of disclosure be accompanied by an explanation of its significance to the business. This could have two benefits: first, where that significance is difficult to find, it could embolden us to leave the disclosure out as not material, thus getting rid of clutter; and, secondly, additional explanation would help the reader to navigate the financial statements – the “story” behind the financial statements would be clearer. A couple of preparers found this idea interesting – what do you think?



TrackBack URL for this entry:

Listed below are links to weblogs that reference Disclosures:


There are two main drivers for disclosures: an explanation of the likelihood and extent of future cash flows, and an explanation of how items are measured.

An explanation of the likelihood an extent of future cash flows will always be required when an item is material.

The challenge for standard setters is to minimise unnecessary disclosure related to the second driver, the valuation method.

You cannot separate the disclosure debate from the measurement debate.

Where measurement is certain, there is very little need for additional disclosure around how the value is arrived at. Where measurement is uncertain, disclosure is needed to describe the extent of this uncertainty in valuation. But this begs the question of when is a certain measurement more useful than an uncertain measurement? e.g. When an outcome is uncertain, is it better to measure something at historic cost, or mark to model?

If you optimise the "relevance" of a measure, even at the cost of "faithful representation" you are likely to minimise disclosure.

Your idea of explaining why disclosures are significant is attractive because it forces attention on the "relevance" of the disclosure. However, I fear that it will only increase clutter, and this explanation should instead become an essential part of working papers rather than of financial reports.

Verify your Comment

Previewing your Comment

This is only a preview. Your comment has not yet been posted.

Your comment could not be posted. Error type:
Your comment has been saved. Comments are moderated and will not appear until approved by the author. Post another comment

The letters and numbers you entered did not match the image. Please try again.

As a final step before posting your comment, enter the letters and numbers you see in the image below. This prevents automated programs from posting comments.

Having trouble reading this image? View an alternate.


Post a comment

Comments are moderated, and will not appear until the author has approved them.