CUTTING THE CLUTTER 

CUTTING THE CLUTTER 

The issue of ‘disclosure overload’ is not new, neither is it an issue for preparers of IFRS financial statements only. In fact, a number of standard-setters and regulators around the world are attempting to find solutions to the issue of disclosure overload. 

The International Accounting Standards Board (IASB) has found that financial statements contain too much irrelevant and not enough relevant information owing to the poor application of the concept of materiality and the lack of appropriate judgement. 

Users of financial statements – including investors and analysts – view the financial disclosures as being too generic (boilerplate) and lacking relevance, making them less useful to their decision-making. Financial disclosures often include too much clutter and this can become confusing or overwhelming for the users. Prepares of financial statements often use International Financial Reporting Standards (IFRS) disclosure requirements as a checklist without considering their relevance, using the wording directly from IFRS, or copy not disclosures from illustrative financial statements but fail to make the information specific to the entity’s specific circumstances. 

Possible reasons for disclosure overload include the following: 

  • The growth and complexity of financial reporting disclosure, which results in more disclosures, all of which are not necessarily relevant to a specific entity.
  • Risk-aversion. Cautious preparers rather disclose everything required by IFRS, so that they can’t be blamed for omitting important information or misleading their users.
  • It’s relatively easy to simply use the wording from the IFRS disclosure requirement or illustrative financial disclosures, but it takes effort to consider the relevance and usefulness of the information in an entity’s specific circumstances.
  • Inappropriate application of the concept of materiality and judgement. 

The excessive disclosure of immaterial information becomes burdensome to preparers, it obscures the material, useful information (which loses its prominence), and the communicative value of financial statements suffers as the information becomes less relevant, less transparent and less useful. 

HOW TO REDUCE THE DISCLOSURE OVERLOAD 

It is indeed a challenging task to decide what and how much information to disclose in the financial statements. In order to improve the effectiveness of financial reporting, it is essential to focus on the quality, not quantity, of the disclosures provided. Preparers need the courage to change their mind sets and need to adopt a fresh approach to disclosure: it is essential to move away from a ticking-the-box mentality where IFRS minimum disclosures are treated as a checklist. One should rather take a step back, think about it, consider the relevance and usefulness of the information provided and more away from generic wording and disclosures to entity-specific, useful disclosures. Instead of erring on the side of caution and simply disclosing everything, it should be considered if the information provided is material. International Accounting Standard (IAS) 1, Presentation of Financial Standards, allows non-compliance with specific disclosures required by IFRS, if the information is not material. 

CONCLUSION 

Moving away from disclosure overload and removing the clutter in financial reporting disclosures takes courage and effort and requires a change in mind set and a fresh approach to communicating information to the users of financial statements. Judgement is required in order to determine what information is material and an entity’s specific circumstances should be considered. In addition, it is necessary to understand the users of the financial statements and what decisions they make based on the financial statements. 

Reference: 

Mareli Dippenaar CA(SA) – Lecturer of PostGraduate