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Improving Communication in Annual Reports

Hugh Shields, CA

In a June 2013 speech, Hans Hoogervorst, chairman of the International Accounting Standards Board (IASB), stated, “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.” This article summarizes the steps the board is taking to address this situation.


In January 2013, the board held a discussion forum, “Disclosures in Financial Reporting,” and conducted a related survey. A feedback statement was published in May 2013, and the disclosure initiative, a portfolio of projects including both implementation and research, was formally established.

Implementation projects include the following:

  • ▪ Narrowly focused amendments to International Accounting Standard (IAS) 1 (amendments to IAS 1 were published in December 2014) and

  • ▪ Narrowly focused amendments to IAS 7 (proposed amendments to IAS 7 were also published in December 2014).

Research projects include the following:

  • ▪ Principles of disclosure, including a review of IAS 1, IAS 7, and IAS 8;

  • ▪ Materiality; and

  • ▪ A more general review of disclosure requirements in existing standards.

Actionable Steps

Together, these projects provide the mechanism through which the actions below are being implemented.

Action 1.

The IASB clarified in IAS 1 that the materiality principle not only means that material items should be included; it is also preferable to exclude immaterial disclosures. Too much detail can make material information more difficult to understand.

Action 2.

The IASB has also clarified that a materiality assessment applies to the whole of the financial statements, including the notes. There is a widely held view that items specified in IFRS that are not included as a line item on the face of the primary financial statements need to be disclosed in the notes. If an item is not material, however, it does not need to be disclosed anywhere at all.

Action 3.

The board has further clarified that if a standard is relevant to the entity's financial statements, it does not necessarily follow that every disclosure requirement will provide material information. A particular requirement might not be relevant enough to justify a separate disclosure.

Action 4.

The IASB has removed 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 information in a logical and coherent fashion.

Action 5.

The IASB has ensured that IAS 1 gives companies flexibility about where they disclose accounting policies in the financial statements; specifically, important accounting policies should be given greater prominence. Less significant accounting policies can be relegated to the back.

Action 6.

The proposed amendments to IAS 7 are designed to improve 1) information provided about an entity's financing activities, excluding equity items, and 2) disclosures to understand an entity's liquidity.

Action 7.

The IASB will soon publish draft guidance on the application of materiality. This should provide auditors, preparers, and regulators with a clearer view of what constitutes material information. The board has conducted outreach with both national and regional standards setters regarding local guidance and practice on the application of materiality. It has consulted numerous other stakeholders, including the International Organization of Securities Commissions (IOSCO) and the International Auditing and Assurance Standards Board (IAASB), about how materiality is applied in practice. The board is aware of some sensitivity on this topic because some consider materiality to be the responsibility of the securities regulator and the courts. The IASB remains confident that it can develop helpful, voluntary guidance that works globally.

Action 8.

When developing new standards, the board will seek to use less prescriptive wording for disclosure requirements. Instead, it will focus on disclosure objectives and related examples. In recent standards, the board has explicitly stated the need to exercise judgment when determining what is material.

Action 9.

The principles-of-disclosure project is the cornerstone of the IASB's disclosure initiative. The project's ultimate aim is to replace the disclosure requirements in IAS 1, IAS 7, and IAS 8, but it may also affect other standards. This project is revisiting some of the work that was previously completed as part of the financial statement presentation project, and the board aims to publish a discussion paper early in 2016.

Action 10.

The board is undertaking a general review of disclosure requirements in existing standards. This project will identify and assess conflicts, duplication, and overlaps. The project will also identify problem areas, such as overly prescriptive wording or the absence of clear objectives.

Further Support

The IASB continues to receive strong support for the disclosure initiative, including support for nearly all of the changes to the IAS 1 amendments package. IASB's outreach indicates considerable support for the other projects outlined above.

The above measures have great potential and, taken together, should evoke real behavioral change among preparers and help “break the boilerplate” of disclosures. It is also hoped that these measures will change the mindset among auditors and regulators. In the meantime, the board will continue to engage with all constituents, as well as users, in making disclosures more meaningful and more effective.

Hugh Shields, CA is the executive technical director of the IASB. Previously, he was a managing director of Credit Suisse, based in London.

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