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INFLUENCE: Annual reports more than compliance documents

The size of the annual report of all companies is ballooning, and not necessarily with more useful information. The communicative value of financial statements prepared using International Financial Reporting Standards (IFRS) is diminishing and they are becoming no more than compliance documents.

Many national standard-setters, institutes and regulators around the world have undertaken work on disclosures in the annual report over the past few years: cutting the clutter, losing the excess baggage, a disclosure framework, materiality in financial reporting, financial reporting from an investor perspective, among others.

The International Accounting Standards Board (IASB) has been listening, consulting and deliberating, and has responded.


The IASB has determined that many factors contribute to the disclosure problem.

This is best depicted in the diagram below. 



Consequently, in 2013 the IASB started the Disclosure Initiative, a package of several projects aimed at improving the disclosure of financial information.

The objective of the Disclosure Initiative is to improve the effectiveness of communication of financial information to users outside the reporting entity. Financial statements – including the amounts and descriptions presented in the primary financial statements and the information included in the notes to the financial statements – are as a whole a form of disclosure.

The diagram illustrates the IASB’s steps in this project.


Digital reporting

The way IFRS disclosure requirements are worded contributes to the disclosure problem as noted above, hence the increase in the importance of electronic delivery of financial information. Going forward, the IASB will look at the way future exposure drafts’ disclosure requirements are worded and integrate the IFRS taxonomy development into the IASB’s work programme.

Amendments to IAS 1

In March 2014 the IASB published an Exposure Draft outlining proposed amendments to IAS 1 Presentation of Financial Statements.

The Exposure Draft proposes narrow-focus amendments to IAS 1 to address some of the concerns expressed about existing presentation and disclosure requirements and to ensure companies are able to use judgement when preparing their financial statements.

The proposed amendments are as follows:

Clarify the materiality requirements in IAS 1, including an emphasis on the potentially detrimental effect of overwhelming useful information with immaterial information.

Clarify that specific line items in the statement(s) of profit or loss and other comprehensive income and the statement of financial position can be disaggregated.

Add requirements for how an entity should present subtotals in the statement(s) of profit or loss and other comprehensive income and the statement of financial position.

Clarify that entities have flexibility as to the order in which they present the notes, but also emphasise that understandability and comparability should be considered by an entity when deciding that order.

Remove potentially unhelpful guidance in IAS 1 for identifying a significant accounting policy.


The IASB has acknowledged that the way  the concept of materiality is applied in practice is seen by many as a major cause of the disclosure problem noted above. This problem is often identified as a failure to use professional judgement when considering materiality. This has resulted in too much irrelevant (immaterial) information and not enough relevant (material) information.

Hoogervorst, chairman of the IASB, commented in June 2013:

In January this year we got regulators, preparers, auditors, users and standard-setters in the same room and refused to let them out until we had all understood the various perspectives of this problem. A common conclusion was that many aspects of the disclosure problem have to do with behavioural factors.

For example, many preparers will err on the side of caution and throw everything into the disclosures. They do not want to risk being asked by the regulator to restate their financials. After all, no CFO has ever been sacked for producing voluminous disclosures, while restatements may be career-limiting. Moreover, excessive disclosures can even be very handy for burying unpleasant, yet very relevant information! And sometimes it’s just easier to follow a checklist, rather than put in the effort to make the information more helpful and understandable.

In summary, understandable risk-aversion on the part of preparers, auditors and regulators leads to a ticking-the-box mentality. The communicative value of financial statements suffers as a result. So what can we do to change this culture? What can we do to break the boilerplate?

The IASB’s response is that they are working with auditors, regulators, preparers and others to assess the adequacy of existing guidance and propose whether additional guidance is required or not.

In addition the IASB is proposing to change the materiality requirements in IAS 1 to emphasise the following:

Information in the financial statements must not be aggregated or disaggregated in a manner that obscures useful information.

The materiality requirements apply to the statement(s) of profit or loss and other comprehensive income, statement of financial position, statement of cash flows and statements of changes in equity and to the notes.

When an IFRS requires a specific disclosure, the resulting information must be assessed to determine whether it is material and consequently whether presentation or disclosure of that information is warranted.

Debt disclosures

Over the last few years investors have asked the IASB to introduce a requirement that entities must disclose and explain their net debt reconciliation. The IASB is discussing this issue with investors on what is required and why before determining the scope of this project.

Research project – principles of disclosures in IFRS

Exploratory work will commence on whether the work previously done on the financial statement presentation project could form the basis of this research project. The research will be undertaken in parallel with the work on the Conceptual Framework for Financial Reporting. The topics IASB staff have identified for the IASB to consider for this project include the following:

Information in a complete set of IFRS financial statements: Placement of non-IFRS financial information and comparative information

Presentation principles for the primary financial statements: The relationship between primary financial statements and the distinction between operating and financing, and the level of (dis)aggregation

Principles of disclosure for the notes: Objective and boundaries, and principles regarding the organisation, placement, format and linkage of information.

Cash flow reporting

Disclosure of interim financial information

Research project – review of existing standards

The research project will review the disclosure requirements in each IFRS more holistically to identify and assess conflicts, duplication and overlaps. This is dependent on the outcome of the research project and the conceptual framework project and will happen over the next two years.



Work on the disclosure initiative project will be done in parallel with the conceptual framework project, as the projects inform each other and there is some overlap (see diagram below).


Provide your comments directly to IASB members at the joint IFRS Foundation and SAICA IFRS Conference which will be held at the Sandton Convention Centre on 13 and 14 August 2014. The vice-chairman of the IASB, Ian Mackintosh, will lead a panel discussion on IFRS Disclosures – Innovations in South Africa on 13 August 2014 as part of the conference. Panellists include:

IASB member: Patrick Finnegan

Preparer: David Cleasby, CFO of Bidvest Ltd

User/analyst: David Shapiro, Deputy Chairman of Sasfin Securities

Capital market regulator and member of the SAICA APC: Tania Wimberley, Head of Financial Reporting: Issuer Regulation at the JSE

IFRS advisor, member of the IASB’s ASAF, member of the FRSC and SAICA APC: Kim Bromfield, Partner, KPMG

Academic: Mark Graham, Associate Professor and Head of the College of Accounting, UCT

Visit the SAICA website’s seminars and events section to book for the conference and to hear what local business experts have to say to the IASB on this vital initiative. Air your views, too!

Author: Sue Ludolph CA(SA) is Project Director: Fi