Hans Hoogervorst, chairman of the International Accounting Standards Board (IASB), has indicated the standards body plans to develop a new disclosure framework to cut down on the use of boilerplate text in financial reporting.
In a speech at the IFRS Foundation conference in Amsterdam entitled Breaking the boilerplate, Hoogervorst set out a 10-point plan to make financial reporting disclosure more effective. He said that while the size of many annual reports is ballooning, the amount of useful information contained within those disclosures has not necessarily been increasing at the same rate.
'The risk is that annual reports become simply compliance documents, rather than instruments of communication,' Hoogervorst said.
Hoogervorst listed eight short-term options to encourage the behavioural change he says is necessary to create tangible improvements to disclosures in financial reporting by encouraging companies to be proactive in reducing clutter.
These include making it clear in IAS 1, Presentation of Financial Statements, that the materiality principal means not only that material items should be included, but also that it can be better to exclude non-material disclosures, and that this includes leaving such items out of the notes as well as the statements.
Hoogervorst also suggested IASB should clarify that if a standard is relevant to the financial statements of an entity, it does not automatically follow that every disclosure requirement in that standard will provide material information. Instead, each disclosure will have to be judged individually for materiality. IASB has plans to work with the International Auditing and Assurance Standards Board (IAASB) and International Organisation of Securities Commissions (IOSCO) on developing additional guidance on materiality.
He said IASB would remove language from IAS 1 that has been interpreted as prescribing the order of the notes to the financial statements, so as to make it easier for entities to communicate their information in a more logical and holistic fashion. There is also the option of giving companies flexibility about where they disclose accounting policies in the financial statements, according to their relative importance.
Adding a net-debt reconciliation requirement is another option which Hoogervorst said would give users clarity around what the company is calling 'net debt' by consolidating and linking together debt disclosures which are otherwise scattered through the financial statements.
'When developing new standards, we will also seek to use less prescriptive wordings for disclosure requirements. Instead, we will focus on disclosure objectives and examples of disclosures that meet that objective. In recent standards we have already started doing this, creating more explicit room for judgement on materiality,' Hoogervorst said.
Longer term, IASB is to begin a research project in the second half of the year which will provide a more fundamental review of IAS 1, IAS 7, Statement of Cashflows, and IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, with the aim of creating a new disclosure framework. Once the standards review is complete, there will then be a general review of disclosure requirements in existing standards.
Hoogervorst said: 'I am convinced these measures have great potential. Even the eight quick wins can have a big impact. Taken together, they remove most excuses for boilerplate disclosures. They will certainly help to ignite the much needed change in mind set of preparers, auditors and regulators that is so sorely needed.'
