BIN THE CLUTTER (Part 2)

ACCA P2 考试：BIN THE CLUTTER (Part 2)

Explanatory information may not change from year to year but it nonetheless remains necessary to an understanding of aspects of the report. There is merit in a reader of an annual report being able to find all of this information in one place. If the reader of a hard copy report has to switch to look at a website to gain a full understanding of a point in the report, there is a risk that the report thereby becomes less accessible rather than more. Even if the standing information is kept in the same document but relegated to an appendix, that may not be the best place to facilitate a quick understanding of a point. A new reader may be disadvantaged by having to hunt in the small print for what remains key to a full understanding of the report.

Preparers wish to present balanced and sufficiently informative disclosures and may be unwilling to separate out relevant information in an arbitrary manner. The suggestion of relegating all information to a website assumes that all users of annual reports have access to the internet, which may not be the case. A single report may best serve the investor, by having one reference document rather than having the information scattered across a number of delivery points.

Shareholders are increasingly unhappy with the substantial increase in the length of reports that has occurred in recent years. This has not resulted in more or better information, but more confusion as to the reason for the disclosure. A review of companies’ published accounts will show that large sections such as ‘Statement of Directors Responsibilities’ and ‘Audit Committee report’ are almost identical.

Materiality should be seen as the driving force of disclosure, as its very definition is based on whether an omission or misstatement could influence the decisions made by users of the financial statements. The assessment of what is material can be highly judgmental and can vary from user to user. A problem that seems to exist is that disclosures are being made because a disclosure checklist suggests it may need to be made, without assessing whether the disclosure is necessary in a company’s particular circumstances. However, it is inherent in these checklists that they include all possible disclosures that could be material. Most users of these tools will be aware that the disclosure requirements apply only to material items, but often this is not stated explicitly for users.

One of the most important challenges is in the changing audiences. From its origins in reporting to shareholders, preparers now have to consider many other stakeholders including employees, unions, environmentalists, suppliers, customers, etc. The disclosures required to meet the needs of this wider audience have contributed to the increased volume of disclosure. The growth of previous initiatives on going concern, sustainability, risk, the business model and others that have been identified by regulators as ‘key’ has also expanded the annual report size.

The length of the annual report is not necessarily the problem but the way in which it is organised. The inclusion of ‘immaterial’ disclosures will usually make this problem worse but, in a well organised annual report, users will often be able to bypass much of the information they consider unimportant, especially if the report is on line. It is not the length of the accounting policies disclosure that is itself problematic, but the fact that new or amended policies can be obscured in a long note running over several pages. A further problem is that accounting policy disclosure is often ‘boilerplate’, providing little specific detail of how companies apply their general policies to particular transactions.

IFRS requires disclosure of ‘significant accounting policies’. In other words, IFRS does not require disclosure of insignificant or immaterial accounting policies. Omissions in financial statements are material only if they could, individually or collectively, influence the economic decisions that users make. In many cases, it would not. Of far greater importance is the disclosure of the judgments made in selecting the accounting policies, especially where a choice is available.

A reassessment of the whole model will take time and may necessitate changes to law and other requirements. For example, unnecessary clutter could be removed by not requiring the disclosure of IFRS in issue but not yet effective. The disclosure seems to involve listing each new standard in existence and each amendment to a standard, including separately all those included in the annual improvements project, regardless of whether there is any impact on the entity. The note becomes a list without any apparent relevance.

The IASB has recently issued a request for views regarding its forward agenda in which it acknowledges that stakeholders have said that disclosure requirements are too voluminous and not always focused in the right areas. The drive by the IASB has very much been to increase the use of disclosure to address comparability between companies and, in the short to medium term, a reduction in the volume of accounting disclosures does not look feasible although this is an area to be considered by the IASB for its post 2012 agenda.

Written by a member of the Paper P2 examining team

Last updated: 20 Apr 2015