27 June 2013

IASB/Hoogervorst: 'Breaking the boilerplate'

Mr Hoogervorst spoke about progress towards the G20-endorsed goal of global accounting standards and about three important parts of IASB´s current work programme, namely loan loss provisioning, insurance and the Conceptual Framework. The main topic of his speech were disclosures.

For many companies, the size of their annual report 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.

The IASB recently published a feedback statement that set out the key messages everything that the IASB had heard during the disclosure event. On the basis of this document, Mr Hoogervorst set out a ten-point plan to deliver tangible improvements to disclosures in financial reporting.

1. The IASB should clarify in IAS 1 that the materiality principle does not only mean that material items should be included, but also that it can be better to exclude non-material disclosures. Too much detail can make the material information more difficult to understand— so companies should proactively reduce the clutter! In other words, less is often more.

2. The IASB should clarify that a materiality assessment applies to the whole of the financial statements, including the notes. Many think that items that do not make it onto the face of primary financial statements as a line item need to be disclosed in the notes, just to be sure. The IASB will have to make clear that this is not the case. If an item is not material, it does not need to be disclosed anywhere at all in the financial statements.

3. The 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.

4. The IASB will remove language from IAS 1 that has been interpreted as prescribing the order of the notes to the financial statements. This should make it easier for entities to communicate their information in a more logical and holistic fashion.

5. The IASB could make sure IAS 1 gives companies flexibility about where they disclose accounting policies in the financial statements. Important accounting policies should be given greater prominence in financial statements. Less important accounting policies could be relegated to the back of the financial statements.

6. At the request of many users around the world, the IASB will consider adding a net-debt reconciliation requirement. Not only would this provide users with clarity around what the company is calling ‘net debt’ but it also consolidates and links the clutter of scattered debt disclosures through the financial statements.

7. The IASB will look into the creation of either general application guidance or educational material on materiality. Doing so should provide auditors, preparers and regulators with a much clearer, more uniform view of what constitutes material information. The IASB wants to work with the IAASB and IOSCO on this important matter.

8. When developing new Standards, the IASB will also seek to use less prescriptive wordings for disclosure requirements. Instead, the IASB will focus on disclosure objectives and examples of disclosures that meet that objective. In recent Standards the IASB has already started doing this, creating more explicit room for judgement on materiality. Finally, the IASB will begin work on two pieces of work to deliver improvements in the medium term.

9. During the second half of 2013, the IASB will begin a research project to undertake a more fundamental review of IAS 1, IAS 7 and IAS 8. This project will revisit some of the work the IASB already did in the Financial Statement Presentation project. The goal will be to replace those Standards, in essence creating a new disclosure framework.

10. Finally, once the review of these Standards has been completed, the IASB will then undertake a general review of disclosure requirements in existing Standards.

Press release

Full speech

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