Investors to IASB: Presentation of Financial Statements Must Address Our Concerns
CFA Institute supports the overall efforts of the International Accounting Standards Board (IASB) to improve the clarity and presentation of financial statements and enhance the effectiveness of financial reporting. However, we are concerned that its exposure draft, published in March 2014 and part of IASB’s “Disclosure Initiative,” has been developed primarily in response to issues raised by preparers of financial statements.
The stated intent of the exposure draft, which contains proposed amendments to IAS 1 Presentation of Financial Statements and is mainly the result of IASB’s “Disclosure Initiative,” is to address:
- Materiality concerns (concerns regarding the clarity of the definition of materiality in IAS 1 and its application in practice)
- Presentation issues (confusion regarding the requirements governing the presentation of specific captions in the financial statements and the ability to present subtotals)
- Structure of the notes
Our longstanding view is that the primary objective of financial statements should be to provide investors with the information necessary for them to evaluate their investments. Information should be relevant, complete, understandable, comparable, consistent, and presented in a manner that is useful to investors. Thus, we believe that the IASB should actively seek input and feedback from the investor community when it undertakes initiatives to improve financial reporting.
Investors Do Not Believe Financial Statements Have Too Much Immaterial Information
While we are aware that a perception exists among preparers and auditors that financial statements are filled with immaterial information, we believe this is based on anecdotal evidence. We are not aware of any empirical studies to validate this assertion. In fact, our survey of investors demonstrates the opposite — 76% of investors surveyed do not find an obvious overabundance of immaterial information within the financial statements (see page 7 of our related financial disclosure report).
As such we do not believe that the IASB should attempt to change the current definition of materiality. We are of the view that materiality has been applied to disclosures for decades. Our concern is that the exposure draft contains language that provides relief from disclosures at a moment in time when the disclosure might not be material, but when the disclosure might be material over time. For example the lack of balance in, say, an allowance account may seemingly appear as immaterial and therefore suggest a disclosure is not warranted; however, that can provide very material and decision-useful information to investors on management’s judgments during and through a business cycle.
Subtotals: Caution Must Be Exercised
With respect to the guidance on the use of subtotals, the IASB has stated that it does not want to propose amendments that could be seen as encouraging the proliferation of non-GAAP (generally accepted accounting principles) measures. Notwithstanding this, we are concerned that the adoption of the proposed amendments would lead to the increased use of such measures.
As a rule we don’t object to subtotals per se. Our concern is that the exposure draft contains language that might appear to encourage the presentation of non-GAAP measures by suggesting that anything is acceptable as long as it is reconciled to another nonspecified subtotal/total. It is not clear which subtotals would be reconciled to which subtotals or totals. Without greater disaggregation and several key subtotals/totals to which entities must reconcile (i.e., a defined anchor for investors) the lack of comparability between entities is likely to be significant.
Organize Notes in a Manner Most Useful to Investors
Entities should have the flexibility to highlight matters of importance, and integrate, organize, and layer information accordingly. Thus, we support the amendment in the exposure draft that enables entities to organize information in a way that they believe best makes sense for users of financial statements.
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