IASB Plans to Bolster Financial-Statements Reporting

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By David R. Jones

June 30 — The International Accounting Standards Board will launch an initiative to strengthen reporting in financial statements, board chairman Hans Hoogervorst said in a speech on international financial reporting standards.

IASB's goal is to provide greater structure for organizing statements of financial performance—profit or loss (P&L) and other comprehensive income (OCI)—Hoogervorst told the more than 300 participants at an IFRS Foundation conference in Zurich June 30. The foundation oversees IASB activities.

Improving Balance Sheets

The Primary Financial Statements project also will consider how to improve the statement of cash flows and the statement of financial position, also known as the balance sheet. “Currently we define Revenue and Profit or Loss, but not so much in between,” Hoogervorst said. Work might include developing a principle-based definition of operating income.

Broader Program

The project is part of the board's larger set of initiatives, grouped under the umbrella concept of “Better Communication,” to ensure that financial statements express information as clearly as possible. Since its founding in 2001, IASB has succeeded in upgrading old international accounting standards, he said, as well as convincing 143 jurisdictions across the globe to switch from national to international standards for all or most publicly accountable companies.

Beyond Compliance

IASB now faces the challenge of moving entities beyond simple compliance with IFRS, Hoogervorst said. "Valuable information gets drowned out by ‘tick the box’ disclosures and voluminous, but poorly organized and presented financial data," he said.

Use of APMs

Some preparers also are opting to use so-called alternative performance measures (APMs), which aren't grounded in IFRS or generally accepted accounting principles. APMs include such terms as earnings before interest and tax (EBIT). “This information is easier to consume by users, but it almost always paints a rosier picture than reality and can be highly misleading,” he said.

Incorporating Non-GAAP Terms?

Hoogervorst last year warned that APMs shouldn't be used to obscure an entity's financial performance (11 APPR 08, 4/10/15).

Still, he said at the Zurich conference, IASB might consider incorporating such commonly used non-GAAP terms as EBIT into IFRS.

Bolstering Financial Reporting

IASB intends to use the Better Communication program to bolster financial reporting by:

  •  enhancing disclosures;
  •  providing additional guidance on materiality; and
  •  distinguishing between liabilities and equity.

In addition, IASB will consider whether to become involved in non-financial reporting.

Disclosure Initiative

The board's amendments to IAS 1: Presentation of Financial Statements strengthened disclosures, Hoogervorst said, by making it clear that companies should use judgment when deciding what information to include in their financial statements. “This should make it easier for preparers to improve the quality and hopefully reduce the volume of their disclosures,” he said.

Materiality Guidance

IASB intends to publish a discussion paper this year outlining its proposed strategy for drafting disclosure requirements, along with examples of revised disclosure guidance, as part of its larger disclosure initiative (12 APPR 05, 3/11/16).

The board also is putting the finishing touches on its guidance for materiality, Hoogervorst said, which is part of the disclosure initiative. “Not making appropriate materiality judgements can result in both the disclosure of too much irrelevant (i.e. immaterial) information and not enough relevant (i.e. material) information,” a notice on the IASB website said.

Liabilities and Equity

By helping entities drawn the line between liabilities and equity, IASB's project on financial instruments with the characteristics of equity "should help improve communication by looking at the recognition and presentation requirements for complex financial instruments," he said. This, in turn, should make both an entity's statement of financial position and P&L statement more relevant to users, Hoogervorst told attendees.

Non-Financial Reporting

Further, Hoogervorst left the door open for IASB involvement in other areas. He highlighted the hundreds of non-financial reporting programs underway that address such topics as sustainability reporting and integrated reporting. Though “the world of non-financial reporting is still very far removed from the crystallization of a single set of global standards,” he said, IASB will examine whether it might play a role in areas outside of financial reporting.

To contact the reporter on this story: David R. Jones in London at correspondents@bna.com T

To contact the editor responsible for this story: Laura Tieger Salisbury at lsalisbury@bna.com

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