Financial Statement Presentation and Disclosure: How will IASB Proposal Affect Change?
The International Accounting Standards Board (IASB) recently issued a discussion paper, A Review of the Conceptual Framework for Financial Reporting. In the discussion paper, the IASB proposes introducing a new section on presentation and disclosure into the conceptual framework, which CFA Institute supports.
Focus on Presentation: It is the Foundation
Broadly we note that presentation and disclosure have been addressed quite differently in the discussion paper, with the discussion on presentation being very basic. Presentation, being the foundation of financial reporting, needs to be addressed before disclosures, and we believe that the IASB should address presentation more comprehensively in the discussion paper. The IASB also needs to go beyond the discussion paper and reinstate the Financial Statement Presentation project as there is need for more substantive work on presentational issues. The focus of the project should be on the following four elements:
- disaggregation
- cohesiveness
- account balance roll-forwards
- direct cash flows
Views on Specific Elements
Our view of the specific elements of this section can be stratified into those we support, those we believe require greater clarification, and those with which we disagree. Promoting communication principles is an example of one element that we support, and we believe it will serve the purpose of increasing transparency.
However, there are a number of areas in which we believe the discussion paper isn’t sufficiently comprehensive. These include the need for a certain level of specificity to affect change or have a substantive impact on financial statement presentation and disclosures. For example,, we agree that the conceptual framework should highlight the importance of delivering financial statements in an electronic format. But further clarification is needed on how this concept would be applied. Discussion is needed on how technology can be leveraged to more effectively deliver information and reduce the cost of producing information. Investors need to know what the linkage is between the proposed changes and the nature of financial reporting information they will actually receive.
Need for Caution Against Misuse of Concepts
We observe that certain concepts in the discussion paper, while reasonable on their face, could be misused to justify not providing necessary information for investment analysis purposes. A few examples are highlighted below:
- Emphasis on Aggregation vs. Disaggregation: We agree that the purpose of the primary statements is to provide information that is aggregated in a useful manner. However, the emphasis on aggregation over disaggregation may be taken by some to justify not providing investors with the necessary disaggregated information.
- Use of Public Information Sources: While we recognize the financial statements cannot include all information about an entity, we are concerned with the wording in the discussion paper that suggests the use of public information sources. This wording may be used later to justify excluding essential information from financial statements.
- Notion of Recalculation: We are concerned by language in the discussion paper that indicates disclosures are not required to enable users to recalculate amounts in the primary statements and could be referenced as a reason not to include disclosures. Many investors prefer to make their own adjustments using footnote or other supplementary data. Such adjustments have been part of financial analysis for many decades.
Costs vs. Benefits: Need to Invoke Investor Paradigm
Finally, we believe that the IASB needs to evaluate its proposed changes from the perspective of the investor as the primary user of the financial statements. There is, in our view, a bias toward corporate managers in the presentation and disclosure section. For example, the discussion of cost-benefit analysis appears tilted toward consideration of the costs to corporate managers of preparing financial information over the informational needs of users. We fear that such bias may not work toward ensuring investors receive the information they need.
For further views on this topic, please read at our related comment letter to the IASB.
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