Reducing disclosures to enable more meaningful reporting
Anyone who has picked up a set of financial statements will know how complex they are, and this is not helped by the sheer volume of disclosures they contain. Some of the mandatory disclosures in financial statements cloud the really useful information. Long and complex financial statements are not isolated to any particular entities, sectors, or even countries.
In October 2010, the International Accounting Standards Board (IASB) invited the New Zealand Institute of Chartered Accountants (NZICA) and the Institute of Chartered Accountants in Scotland (ICAS) to establish a joint working group to consider the proposition that mandatory disclosure should be reduced to allow more meaningful financial reporting. I was a member of that Working Group, which recently reported to the IASB.
The report is entitled Losing the Excess Baggage - reducing disclosures in financial statements to what's important and is available at http://www.nzica.com/reducingdisclosures.
There are two parts to the report: the principles and approach, and a detailed consideration of the disclosure requirements of financial reporting standards. The first part should be of significant interest to anyone involved with financial statements, from preparing them to reading them. The second part, which has the recommended disclosure changes, will be of greater interest to those involved in the technical detail.
Broadly, the recommendations are to have disclosures for only the most important information and to give greater emphasis to materiality. Consequently, the report recommends removing a large number of currently mandatory disclosures. And the emphasis on materiality will require greater judgement to be exercised by all involved in the financial reporting process.
The Working Group thinks that annual financial statements could be reduced by about a third as a result of what it proposes.
The Working Group expects that the IASB will send out the recommendations for consultation later this year. That will provide an opportunity for people to tell the IASB how important it is to ensure financial statements contain only the most important information.
I strongly support this report and commend it to you. And I know that NZICA would welcome any comments.