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Accounting in Europe
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Response of the EAA FRSC to
the EFRAG/ANC/FRC Discussion
Paper: Towards a Disclosure
Framework for the Notes
Richard Barker a , Elisabetta Barone b , Jacqueline Birt
c , Ann Gaeremynck d , Anne Mcgeachin e , Jan Marton
f & Rucsandra Moldovan g
a Oxford University, UK, (Chairman of Working Group)
b Henley Business School, University of Reading, UK
c Monash University, Australia
d KU Leuven, Belgium
e Aberdeen University, UK
f University of Gothenburg, Sweden
g ESSEC Business School, France
Version of record first published: 28 Mar 2013.
To cite this article: Richard Barker , Elisabetta Barone , Jacqueline Birt , Ann
Gaeremynck , Anne Mcgeachin , Jan Marton & Rucsandra Moldovan (2013): Response of
the EAA FRSC to the EFRAG/ANC/FRC Discussion Paper: Towards a Disclosure Framework
for the Notes , Accounting in Europe, 10:1, 1-26
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Response of the EAA FRSC to the
EFRAG/ANC/FRC Discussion
Paper: Towards a Disclosure
Framework for the Notes
RICHARD BARKER∗, ELISABETTA BARONE∗∗, JACQUELINE
BIRT
†#
, ANN GAEREMYNCK
‡
, ANNE MCGEACHIN
§
,
JAN MARTON
}
& RUCSANDRA MOLDOVAN∗∗∗
∗Oxford University, UK (Chairman of Working Group), ∗∗
Henley Business School, University of
Reading, UK,
†
Monash University, Australia,
‡
KU Leuven, Belgium,
§
Aberdeen University, UK,
}
University of Gothenburg, Sweden and ∗∗∗
ESSEC Business School, France
ABSTRACT We summarise the response of the EAA’s FRSC to Towards a Disclosure
Framework for the Notes, a Discussion Paper (DP) issued jointly by EFRAG, ANC and
FRC. While supportive of much of the DP, and in particular of the underlying aim to
place disclosures on a sounder conceptual foundation, we identify two broad themes for
further development. The first concerns the DP’s diagnosis of the problem, which is that
the existing financial reporting is characterised by, on the one hand, disclosure overload
and, on the other hand, an absence of a conceptual framework for organising and
communicating disclosures. Our review of the literature suggests much greater support
for the second of these two factors than for the first. The second broad theme is the
purpose of the proposed DF, and the principles that are derived from this purpose. Here,
we stress the need for the framework to better accommodate the context within which
financial statement disclosures are used. In practice, this context is characterised by
variation in information, incentives and enforcement, each of which has a considerable
effect on the appropriate disclosure policy and practice in any given situation.
The objective of the European Accounting Association (EAA) Financial Reporting
Standards Committee (FRSC) is to identify and analyse research that is relevant to
Correspondence Address: Richard Barker, Chairman of Working Group, Oxford University, UK.
Email: richard.barker@sbs.ox.ac.uk
#
Current address: University of Queensland.
Accounting in Europe, 2013
Vol. 10, No. 1, 1–26, http://dx.doi.org/10.1080/17449480.2013.772715
#2013 European Accounting Association
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discussions surrounding current International Accounting Standards Board (IASB)
and European Financial Reporting Advisory Group (EFRAG) issues. In the specific
case of this paper, we summarise the research in relation to a disclosure framework
(DF) discussion paper (‘DP’) issued jointly by EFRAG, the French Autorite
´des
Normes Comptables (ANC) and the UK Financial Reporting Council (FRC).
The DP, issued in July 2012, forms part of EFRAG’s proactive research
agenda, through which it seeks to engage with European constituents, influence
the development of global financial reporting standards, provide thought leader-
ship and promote solutions that improve the quality of information, are practical
and enhance transparency and accountability. Within this overall agenda,
EFRAG’s focus on disclosure arises because it perceives there to be a ‘strong
consensus in the financial community that disclosure in the notes to the financial
statements have become unwieldy’ and ‘far too complex to be easily understood’
(DP, p. 6). Moreover, the DP notes (p. 7) that while
there have been several attemptsto rationalise the disclosure requirements ...
they have typically been met by debate about why such disclosures should be
removed or changed ... the debate needs to move beyond simply a discus-
sion about more or less disclosure to how to improve the quality of what is
disclosed to better serve the objective of financial reporting.
To this end, the DP proposes several principles designed to guide an effective DF.
First, the general objective of a DF is stated as being ‘to ensure that all and only
relevant information is disclosed in an appropriate manner so that the detailed
information does not obscure relevant information in the notes to the financial
statements’. Next, the purpose of the notes is described as being ‘to provide a rel-
evant description of the items presented in the primary financial statements and of
unrecognised arrangements, claims against and rights of the entity that exist at
reporting date’. The notes are therefore, defined as amplifying and explaining
the financial statements, with the implication that they should include entity-
specific information, concerning past transactions and events existing at the
reporting date, including assumptions, judgements, risks, alternative measure-
ments and other such information relevant to a user’s understanding of the
accounts. The main body of the DP sets out an application of this framework,
including a series of questions on which constituents’ comments are invited.
In the FRSC’s response letter, our comments are based on a comprehensive
review of the relevant literature, which includes research from European
countries and also from the USA, Asia and Australia. Before discussing this
research in relation to the specific questions in the DP, we first wish to note
some pervasive concerns about key assumptions that the DP makes.
The first assumption is that information overload is a problem. The DP refers to
a number of studies by regulatory or professional bodies, which indicate that the
volume of existing disclosures may confuse rather than inform users of financial
statements. In contrast, the academic literature indicates that the market, as a
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whole, reacts positively to increased disclosure, notwithstanding that individuals
may feel overloaded.
The second assumption is that there is a common desire across users, preparers,
auditors and regulators to resolve the perceived problem, and to do so in a con-
sistent manner. The academic literature, on the other hand, stresses that those
parties are likely to have different information, incentives and perspectives,
that information in the notes is supplied in conjunction with other information,
both within and outside the financial statements, and that these issues of
context do matter.
The final assumption is that a principles-based approach will always be the
best. Academic research suggests that while principles-based standards work
well in certain situations, in other cases they can perform poorly, especially in
the absence of strong enforcement.
None of this implies that there is no need for a DF. On the contrary, it high-
lights how important disclosure is. A coherent framework for making decisions
about disclosure requirements is hence desirable. But the academic literature pro-
vides a counterbalance to set against at least some of the criticisms of the
increased disclosures required by standard setters.
In developing a DF, we share EFRAG’s wish for coherence with the IASB’s
Conceptual Framework for Financial Reporting, which states that the fundamen-
tal qualitative characteristics that make financial information useful are relevance
and faithful representation. It is important that both of these characteristics are
applied in identifying information to be disclosed in the notes. One example is
the use of fair value in International Financial Reporting Standards (IFRS). For
recognised fair value estimates to be a faithful representation, they must be sup-
plemented by disclosures about the estimation process, to allow users to assess
their reliability (Ryan, 2002; Bies, 2005; Barth, 2006; Landsman, 2007; Blacco-
niere et al., 2011). Disclosures about reliability can be very diverse, including
(for example) disavowals of fair value disclosures in the notes (Blacconiere
et al., 2011), as well as disclosures on the data and methods used to address pro-
blems with the estimation accuracy of fair value measurements (Vergauwe et al.,
2012). Overall, disclosure has become more and more important in an IFRS (and
US GAAP) context as measurement methods, such as fair value, demand more
and more judgement from preparers. Users should be informed about judgements
made to assess the reliability of the measurement choices made, which is a key
characteristic in the decision process of different users.
The text below is structured according to the categorisation of questions asked
by EFRAG in the DP. Within each section of the paper, both analytical and
empirical research may be included.
1
In analytical research, models of human be-
haviour are developed, based on certain assumptions. In empirical research,
testing is done in order to discover what is actually happening in practice. Some-
times this testing involves the models developed in analytical research. In
general, we note that research is mixed on what is the optimal quantity of disclos-
ures. Often the nature of research is such that it is difficult to deduce concrete
Accounting in Europe 3
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recommendations based on it, but there are nevertheless many insights and
related evidence that can contribute to the standard-setting process.
Key Principles
The DP sets out a number of key principles, designed to underpin a DF. These are
listed in appendix.
In our response to the DP, we noted that while the key principles are presented
as a basis for the rest of the document, the principles themselves are not strongly
supported or motivated. Not the least, there is no principle setting out the purpose
of disclosures, other than that they should be ‘relevant’ (which itself is not defined
in the key principles; see below). The purpose, and the consequential definition of
relevance, is likely to be context dependent. We acknowledge that the objective
of financial reporting and the notion of relevance in that context are discussed in
the Conceptual Framework and that this project is not intended to reopen that dis-
cussion. Nonetheless, we note below aspects of these issues that should inform
any discussion of principles for disclosure.
Beyer et al. (2010) point out that accounting information has both an ex-ante
(valuation) role, and an ex-post (stewardship) role. In the first case, the literature
is concerned with the role of information in capital markets, including the effects
of information asymmetry and the role of information in asset-pricing models. In
the second case, the literature concerns the stewardship and contractual functions
of financial reporting, with a focus on incentives of preparers and users, and how
such incentives affect their behaviour. This includes research on agency issues
(for example between management and owners of firms), as well as literature
on accounting choices made by preparers. In both cases, the value of the firm
can be viewed in simple terms as being determined by management effort and
‘luck’ (random events outside the control of management). For valuation, infor-
mation is needed about both, while for stewardship separate information about
management effort is needed. Thus, for the latter function, disclosures should
enable users to distinguish performance afforded by management effort.
Disclosure reduces the information asymmetry between the preparers of a
company’s accounts and the users. This can be important. For example,
markets can break down when buyers and sellers have different access to infor-
mation (Akerlof, 1970). Focusing more specifically on financial information in
capital markets, Diamond and Verrecchia (1991) show analytically that
reduced information asymmetry is beneficial, in that it decreases the cost of
capital. This conclusion is supported empirically by a number of papers, for
example Botosan (1997).
Implicit in the notion that the notes reduce information asymmetry is the idea
that management has private information that can be conveyed to financial state-
ment users. This would suggest that notes are important, where private infor-
mation exists, because the notes enable private information to become public.
This supports principle 2(c) that information should be entity-specific. If it is
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not entity-specific, it should already be public information, and then there is no
need to disclose it.
Easley and O’Hara (2004) analytically develop an asset-pricing model, where
information asymmetry exists. This is an extension of previous models (such as
the capital-asset-pricing model), which assume there is no information asymme-
try. Easley and O’Hara divide information into public and private. They show
that private information represents a systematic risk that cannot be diversified
away, i.e. investors have higher risk when there is private information. When
investors see a higher risk, they will demand a higher return on their investment,
increasing the cost of capital for firms. This is further support for principle 2(c),
based on the reasoning given above.
Easley and O’Hara also show that firms with a higher proportion of private
information will have a higher cost of capital. This suggests that disclosures
are especially important for firms with a high level of private information.
Francis et al. (2008) suggest that complexity of operations is one factor, which
is positively associated with the level of private information. Further, real or
measurement uncertainty is a possible driver of the amount of private infor-
mation. This reasoning supports principles 3 and 4, that disclosures are contin-
gent on the existing amount of private information, which in turn is contingent
on operating complexity and measurement uncertainty in the balance sheet and
the income statement.
It is important to note, however, that the relationship between disclosures and
measurement uncertainty can be more complex than it appears at first glance.
Francis et al. (2008) test the relation between earnings quality (a measurement
issue) and disclosures. There are two competing hypotheses for what to expect.
First, based on Grossman and Hart (1980), Milgrom (1981) and Verrecchia
(1983), lower earnings quality (caused, e.g. by higher measurement uncertainty)
leads to more disclosures, as there is greater information asymmetry in such situ-
ations (as we suggested in the discussion above). Second, based on Verrecchia
(1990), higher earnings quality leads to more disclosure, since financial statement
users see such disclosures as more credible.
Findings by Francis et al. (2008) lend support to predictions by Verrecchia
(1990), with regard to voluntary disclosures. This can be interpreted as firms dis-
closing more, when they have less reason to do so (as they have higher earnings
quality, which suggests a lower level of measurement uncertainty). This last point
relates to the behaviour of firms in relation to perceptions by users of financial
statement information. It leads into a suggestion by Easley and O’Hara (2004)
that the precision of information is perceived to be higher for older firms than
new firms. As a consequence, disclosures are more important for new firms.
This applies especially for Initial Public Offerings. Thus, the firm’s age could
be a dimension worth considering in disclosure requirements.
Modelling by Easley and O’Hara (2004) and findings by Francis et al. (2008)
have implications relating to principles 8 and 9. Relating to principle 9, the need
for disclosures is higher when there is a high proportion of private information,
Accounting in Europe 5
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which can be measured as operating complexity and measurement uncertainty. It
can be pointed out that this type of thinking is already manifest in, for example,
IFRS 13 Fair Value Measurement, which requires substantially more disclosures
for Level 3 items (that have a high-measurement uncertainty) than for Level 1 or
Level 2 items (which have lower measurement uncertainty). In addition, user per-
ceptions also play a role, where the need for disclosures are higher, when there is
more perceived uncertainty (such as for new firms).
A further implication of Francis et al. (2008) is that they indicate a possible
difficulty with principles-based standards. Firms have incentives to not disclose
when there is poor earnings quality, i.e. when there is high-measurement uncer-
tainty. It is precisely in such situations that disclosures are needed the most. It
could potentially be difficult to enforce principles-based standards, when man-
agement incentives are going in the opposite direction. This points to a
problem relating to principle 8. It also points to an interaction between disclosure
and audit, because the effect of audit can be to increase the credibility of financial
statement data.
This issue of voluntary disclosure raises a question on which there is a con-
siderable literature, namely the role of economic incentives and of associated
actions by different actors in the financial reporting process. To some extent,
this literature is more closely related to the stewardship function of accounting,
in that it is partly about how financial reporting is used to evaluate management.
A different way to describe this is to say that it has a contracting focus, since it is
about how financial reporting is used in contracts, for example, in those between a
firm’s owners and its management, or between a firm and its lenders. A large
research area here is the accounting choice literature (cf. Fields et al., 2001),
an example of which is studies, of how firms implement a given set of accounting
standards. Another large area of research concerns agency conflicts, which is
focused on how owners (principals) can make managements (agents) work in
their best interests (cf. Beyer et al., 2010).
The accounting choice literature contradicts the point made in principle 14,
which states that ‘preparers, auditors and regulators, each in their specific role,
have a shared interest in fostering the improvement of disclosures, through the
application of all principles above.’ This is an assumption, not a principle, and
it is probably incorrect. If ‘improvement of disclosures’ here means providing
better information to users of accounts, then the assumption appears to be that
users, preparers, auditors and regulators have a shared interest, an alignment of
incentives. In contrast, an assumption made in the literature (which is empirically
supported) is that preparers’ interests are not aligned with those of auditors and
regulators. On a separate note, the key principles are silent on the issue of
whether the notes should contain only information that has been audited.
In this context, disclosures could function as a form of enforcement of recog-
nition and measurement by preparers. By increasing transparency, disclosures
function as a deterrence of recognition and measurement manipulation. Such a
relationship is suggested in Hope and Thomas (2008), for example, and is
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further discussed in Beyer et al. (2010). This concerns several principles in the
DP, such as 1, 3, 4 and 10, which cover the relationship between notes and rec-
ognition/measurement in the primary financial statements; a deeper discussion of
this relationship would be helpful.
An important principle in the DP is the idea that disclosure standards should be
principles-based rather than rules-based (principle 8). It should be noted that the
dimension of principles- and rules-based standards is a continuous scale. It is not
a matter of choice between either of the two regulatory approaches. The most
extreme form of principles-based regulation would be to have no regulation of
disclosures, or just a general rule requiring disclosures when relevant. This
leads to an issue discussed in Beyer et al. (2010), which is the conceptual case
that can be made for mandating disclosures through regulation. Beyer et al ident-
ify three possibilities: (1) financial or real externalities; (2) agency costs; (3)
economies of scale.
Externalities relate to the fact that the actors getting the benefit of disclosures
(e.g. users) are not the same as the actors paying for disclosures (e.g. firms and
their current shareholders). Therefore, disclosures could be beneficial for the
economy as a whole, even though no individual actor has an incentive to
provide them. The existence of agency costs, suggests that enforcement of dis-
closure regulation is important. For such enforcement to be possible, disclosure
regulation is necessary. Economies of scale make it more efficient to have one
entity (a regulator) developing disclosure requirements than if it is done by
each individual user. Since all these three are assumedly present, disclosure regu-
lation is assumed to be economically efficient. This supports the idea of having a
framework for disclosure regulation.
The question that follows is to what extent such regulation (accounting stan-
dards) should be principles-based. Empirical research shows that principles-
based standards work well in certain situations, in that they permit preparers to
convey private information. On the other hand, in high-incentive situations, prin-
ciples-based standards tend to perform poorly, especially in the absence of strong
enforcement. This is troubling, since it is in high-incentive situations that finan-
cial reporting is most important.
Ewert and Wagenhofer (2005) can be seen as supporting principles-based
accounting standards. They show analytically that tighter accounting standards
lead to less accounting earnings management, but also to more real earnings man-
agement. This is very costly since it leads to non-optimal action. Thus, this could
support the use of a more principles-based approach.
Empirical research indicates problems with principles-based accounting stan-
dards, while analytical research supports such an approach. It is important to note,
however, that this research is mostly focused on measurement issues, not on dis-
closure. Arguably, principles-based regulation relating to disclosures is more dif-
ficult to achieve. It is harder to know whether a principle is followed properly
relating to disclosures, as it is based more on qualitative judgement. Whether a
certain note contains relevant information, and whether it is understandable for
Accounting in Europe 7
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a user is difficult to enforce and audit. Thus, having principles-based standards for
disclosures is likely to be even more difficult than suggested by existing research.
To some extent, the enforceability issue is already apparent in how current
accounting standards are applied in practice. IAS 1 Presentation of Financial
Statements, for example, states that specific disclosures required under IFRS
do not have to be presented, if they are immaterial (paragraph 31). Regarding dis-
closure of accounting policies, the standard says that they are especially useful
when they relate to areas, where there are alternatives within IFRS (paragraph
119), or for non-regulated areas (paragraph 121). In conclusion, IAS 1
encourages relevant, entity-specific information, and does not require standar-
dised non-relevant information, yet in practice that is what is often provided.
Thus, an important reason for the disclosure overload seems to be how IFRS is
currently implemented, rather than the requirements in the standards. For
example, enforcement agencies require the inclusion of many specific disclosure
items, thus taking a rules-based approach in the enforcement action. A possible
reason is that it is much easier to enforce such detailed requirements than more
general disclosure principles. This, in turn, makes it very difficult for preparers
to follow principle 12. Unfortunately there is not much existing research on
such enforcement issues, even though it is suggested as an important area for
future research by Beyer et al. (2010).
Overall, we see considerable difficulties with a principles-based approach to dis-
closure regulation. If it is done, it probably has to be done in a way that differs from
current practice in IFRS. With respect to the actual principles proposed, our response
is as follows. Principle 1 is a statement that is not supported or explained, making it
difficult to discuss. Principle 2(c) that disclosure should be entity-specific is sup-
ported in research. Further, there is support for context dependency, both as it
relates to financial reporting complexity (principles 3 and 4), and in terms of benefits
to users (principle 9). Principle 12, although likely to be desirable, appears to be dif-
ficult to achieve in practice. Principle 14, on shared incentives, is not supported by
research. This principle has more of the character of a political goal than a disclosure
principle. We see considerable difficulties with principle 8, that disclosure regulation
should be principles-based. For this to work, principle 14 (a goal) must probably be
accomplished first. Whether this will work in practice is, however, far from clear.
Areas for Improvement in Disclosure
The DP suggests that there are two main areas for consideration to improve the
quality of disclosures: (a) avoiding disclosure overload, which may be caused
both by excessive requirements in the standards, and by ineffective application
of materiality in the financial statements; (b) enhancing how disclosures are
organised and communicated in the financial statements, to make them easier
to understand and compare.
We note, however, that in contrast with the assumptions that underpin the
EFRAG report, positive market reactions to more disclosure have been
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extensively illustrated in the literature (Welker, 1995; Healy et al., 1999; Leuz
and Verrechia, 2000; Verrecchia, 2001; Smith et al., 2011; Tang, 2011); for
reviews of this literature, see Healy and Palepu (2001), Core (2001), Leuz and
Wysocki (2008) and Beyer et al. (2010). Providing value relevant information
to otherwise uninformed investors enhances firm visibility and investors’ willing-
ness to invest in the firm (Diamond and Verrecchia, 1991; Chang et al., 2008).
Evidence in Tang (2011) and Smith et al. (2011) support the importance of dis-
closures for investors, showing that disclosures assist with various types of
investment decision-making. For example, information risk is assessed differ-
ently by investors depending on the disclosures they have access to.
Disclosures also facilitate the placement and trading of shares at fair prices,
improves the market liquidity and lowers the cost of capital (Diamond and Ver-
recchia, 1991; Kim and Verrrecchia, 1994; Botosan, 1997; Botosan and Plumlee,
2002; Li, 2010a, 2010b). Gelb and Zarowin (2002) document a positive relation
between voluntary disclosure and stock price informativeness, indicating the
importance of providing sufficient information to investors. Vergauwe et al.
(2012) find consistent evidence that more audit disclosure decreases the bid –
ask spread when model inputs are used to value investment property in the
balance sheet. However, they find no evidence that audit effort increases the
reliability of fair value estimates. High-disclosure quality is associated with
increased trading from both informed and uninformed investors, with evidence
suggesting it reduces information searching costs (Brown and Hillegeist,
2007). Therefore, disclosure quality appears to ‘level’ the playing field
between privately informed and uninformed investors. Furthermore, evidence
also exists that investors punish firms for insufficient disclosure (Welker, 1995;
Leuz and Verrecchia, 2000; Lambert et al., 2007) as they want to ‘price
protect’ themselves against potential losses from trading with better informed
market participants; Schleicher et al. (2007) found that narrative disclosures
are more informative for loss firms compared to profit firms.
Previous research has also, however, found that the advantages of increases in
disclosure come at a cost. Increases of required disclosures in a post-IFRS
environment raise concerns related to proprietary costs. Katselas et al. (2011)
find that lobbying firms opposing the implementation of IFRS 8 Segment Report-
ing cited the threat of releasing sensitive information to the market (i.e. potential
proprietary costs) as a disadvantage of the proposed standard. Further, Pisano and
Landriani (2012) find that the actual implementation of IFRS 8 resulted in
increases in disclosure in firms with higher levels of competition, supporting pro-
prietary cost theory.
Moreover, as disclosures in annual reports have become longer and more
complex in the past two decades, individual users of annual reports are increas-
ingly likely to experience problems in searching and locating information (Smith
and Taffler, 2000; Hodge et al., 2004). These problems are exacerbated to the
extent that individual users have only limited time to absorb information for
any given company. Cole et al. (2009) surveyed 849 stakeholders who use
Accounting in Europe 9
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financial statements, including investors, suppliers, competitors, customers and
consultants. The study found on average that respondents spend less than 15
minutes perusing the financial statements and do not look at the notes.
Problems of disclosure overload for individual users include the time associated
with searching and locating relevant information (Janvrin and Mascha, 2010).
Paredes (2003) gives a broad overview of the effect of information overload and
implications for mandatory disclosure requirements, reviewing empirical evidence
from investor psychology and behavioural finance fields. He points out that infor-
mation overload can arise even if only material information is disclosed – simply
having too much information can be detrimental. An obvious implication is the
need to exclude immaterial information, which increases the overload without
adding anything useful. There is also a further risk of an adverse effect on the
quality of the information itself, with research indicating that the impact of relevant
information on auditors’ judgements is weakened in the presence of irrelevant
information about client characteristics (for example Glover, 1997; although
there is no similar research in relation to the impact of immaterial information
on investors’ decisions). In general, less readable 10-Ks are associated with
greater dispersion, lower accuracy, and greater overall uncertainty in financial ana-
lysts’ earnings forecasts (Lehavy et al., 2011), supporting the idea that lower read-
ability negatively affects even professional financial analysts. Miller (2010) finds
that longer and less readable filings are associated with lower overall trading,
mainly due to less trading activity from small investors. Moreover, two elements
seem to be causing this association: disclosure (non-)comparability across firms,
and variations in disclosure complexity over time (Miller, 2010). Furthermore, evi-
dence also shows that despite regulation, firms still aim to obscure negative news to
investors. The evidence in Li (2008) discussed the above points to managers mis-
using discretion allowed by the legislation to mitigate the adverse consequences of
bad news. Using a measure of text readability to assess the complexity of disclos-
ures in annual reports, Li (2008) finds that firms with easier to read annual reports
have more persistent positive earnings,while firms with lower earnings have harder
to read annual reports.
Overall, the literature supports the need for effective organisation and com-
munication of disclosures, while providing mixed evidence with respect to the
question of disclosure overload, with a key consideration being whether the
focus is on the individual investor or on the market as a whole. Many studies
identify particular disclosure items, and show positive effects for firms providing
the identified disclosures. This indicates that more disclosure is better than less. A
word of caution is necessary however, as it is difficult to obtain ‘negative’ find-
ings in research, such as proving that a particular disclosure item is not useful. For
this reason, such results are not seen in research, and conclusive evidence on dis-
closure overload is hard to find.
On a separate note, if a disclosure overload problem does exist, it may not be
caused by the current standards within IFRS. Rather, it could be driven by the
actions of enforcement agencies and preparers, as noted above.
10 R. Barker et al.
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Defining the Purpose of the Notes
The DP proposes a definition of the purpose of the notes to assist in deciding as to
what financial information should be required (see the appendix). We agree that a
definition is helpful for standard-setters, because otherwise there is no basis for
determining a logically coherent approach to a DF. However, in formulating
such a purpose, diversity in interests among stakeholders, and diversity in views
of disclosures should be considered, as discussed above. Beyer et al. (2010)
point out that empirical accounting research often is focused on one issue at a
time, leading to an underestimate of dynamics and complexity of studied phenom-
ena. The same issue could apply in the development of a purpose for the notes.
Similarly, we need to consider the two fundamental qualitative characteristics
that make financial information useful i.e. relevance and faithful representation.
As outlined in Chapter 2 of the DP, both of these qualitative characteristics need
to be applied when identifying the information to be recognised in the notes.
An important question is whether there is a purpose for the notes that is distinct
from the overall purpose of financial statements, because if it is not there, then
there is no need for the purpose of the notes to be defined independently. On
this view, an independent definition would either be superfluous or it would be
incorrect: if the financial statements are designed to meet users’ needs, then so
too are the notes. An independent definition of purpose may be needed,
however, to the extent that the different nature of the notes allows them to
serve the broader purpose of financial reporting in a different way. In particular,
clarity of purpose is required in two respects: first, in order to define the scope of
the notes, for example whether they relate exclusively to the financial statements;
second, in order to define the level of materiality that is applied.
With respect to the specifics of the proposed definition, two of the key prin-
ciples in the DP concern the definition of purpose. Principle 1 contains a direct
definition of the purpose, while principle 2 gives a delimitation of the contents
of the notes (see the appendix). Both are commented on below.
In its current form, the proposed definition is not particularly helpful, primarily
because it is logically circular. It is stated that the purpose of the notes is to
provide a relevant description of the items presented in the primary financial
statements and of unrecognised arrangements, claims against and rights of the
entity that exist at the reporting date.
2
Relevance is defined in terms of users’
needs (Chapter 2, paragraph 9a). Users’ needs are met by useful information
(Chapter 3, paragraph 2). Useful information concerns the nature and amounts
of the entity’s economic resources and claims (i.e. the balance sheet, Chapter
3, paragraph 2) and the changes in the entity’s economic resources and claims
that result either from the entity’s financial performance or other events (i.e.
the flow statements, Chapter 3, paragraph 2). In other words, useful information
is information about the primary financial statements, and thus, the defined
purpose of the notes to the financial statements is to be the notes to the financial
statements.
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There is a need to break this circularity. The purpose refers to the Conceptual
Framework, in that it uses the term ‘relevance’. This term is defined in the Con-
ceptual Framework as financial information having predictive value, i.e. that it is
useful in making decisions that are based on future economic events. As such, the
user and the type of information need to be specified. For example, asset-pricing
models refer to investors and they use financial information to predict future
value creation, as well as systematic risk (cf. Easley and O’Hara, 2004). If the
focus is on information asymmetry and agency conflicts, financial information
may be used in various contractual situations. In order for the term relevance
to be useful in formulating the purpose of the notes, both the setting and the
type of information disclosed should be specified. Once that is done, research
can provide guidance to the meaning of relevant information.
With respect to principle 2, it is not clear that the proposed definition success-
fully ‘defines the boundary of the notes’ (Chapter 2, paragraph 11). Several cases,
including risk, are noted in paragraph 12, and we would agree that it is difficult to
make a meaningful distinction between risk disclosures that relate to items on the
face of the financial statements and those that do not. The problem of classifi-
cation is probably greater, however, than the identified cases in paragraph 12
suggest. For example, much of the management commentary in an annual
report is relevant to a users’ understanding of the financial statements. In
general, there are blurred distinctions between, on the one hand, a simple disag-
gregation of items of the face of the financial statements and a piece of infor-
mation that constitutes a ‘relevant description’ and, on the other hand, between
a relevant description that is confined to the financial statements and one that
also concerns forward-looking information.
The delimitation of the notes is contextual, in that it depends on what is
included in other parts of financial statements. For example, if there is substantial
qualitative information in the MD&A, the need for such disclosures in the notes
decreases.
The delimitation of the notes depends on the extent to which information in the
notes is qualitatively different from other financial statement information. That is,
if disclosure in the notes has a different effect on users than similar information
elsewhere in financial statements, that is an important factor in delimiting the
content of the notes. In this respect, research on differences in market reactions
between information included in the income statement or balance sheet compared
to disclosures in the notes is helpful.
Users’ Needs
Chapter 3, paragraph 4 of the DP notes that a DF should indicate ‘what specific
users’ needs are to be fulfilled by the notes’ under the assumption that ‘disclos-
ures are required only to provide supplementary information to the amounts
reported in the primary statements.’ This phrasing implies that there are some
needs that can only be met by disclosure in the notes and that these needs are,
12 R. Barker et al.
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at least to a certain extent, incremental to those implied by the Conceptual Frame-
work. However, the DP does not directly identify users’ needs. Rather, it puts
forth categories of disclosure (e.g. components of the line item, what the item
is, etc.), yet it describes these as ‘categories of users’ needs’. Arguably, the
actual line item being presented is not a need in itself. Instead, it responds to a
need (i.e. for a certain type of information) that users have. The DP then goes
on to provide more details on what each of these categories means, and ends
up referring to valuation (‘help users assess the prospects for future net cash
inflows to an entity’) and stewardship.
We are left wondering whether valuation and stewardship are too broad to effi-
ciently serve as ‘users’ needs’ in a DF, especially given the argument put forth for
the existence of a DF – that of providing incrementally relevant information,
without simply duly repeating what is already in the main financial statements.
The general view in the academic literature is nicely summarised by Young
(2006), who points out that, our knowledge about the information needs and
decision processes of actual users of financial statements is limited and that cat-
egories of users are mostly asserted, rather than specifically identified and exam-
ined. A valuable contribution here is the literature survey in Clatworthy et al.
(2013), which is the output of EFRAG’s own initiative, conducted in partnership
with the Institute of Chartered Accountants of Scotland.
Another possibility to help restrict the broad concepts of valuation and stew-
ardship is to refer to the qualities of financial accounting information that
responds to users’ needs. To a certain extent, the Conceptual Framework has
this same approach. Pike and Chui (2012) use structural equations modelling
to analyse survey data on how individual’s intention to use or rely on financial
statements is influenced by the five qualitative characteristics of accounting infor-
mation (understandability, relevance, reliability, comparability, consistency).
They find that only reliability affects a person’s intention to use financial state-
ments. Interestingly, they also find that familiarity with accounting strongly
affects the intention to use financial statements for decision-making purposes.
This particular result, emphasises the stated assumption that the general user
has reasonable knowledge of accounting standards, carries a lot of weight. Fre-
derickson et al. (2006) consider the alternative possibilities for disclosing stock
options compensation under US GAAP in a series of experiments. They find
that users view voluntary footnote disclosure as the least reliable reporting
alternative, compared to mandated income statement recognition and voluntary
income statement recognition. In the light of this research, the DP could focus
on improving the reliability of footnote disclosure as a way to respond to the –
more broadly conceived – users’ needs.
Standard-setters could also think of the role that accounting standards play for
users of accounting and financial reporting disclosures. Recent research points to
an expectation-defining role of accounting standards. Specifically, Clor-Proell
(2009) investigates users’ expectations about accounting choices in an exper-
imental setting. She shows that when there is a mismatch between actual and
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expected choices, users are more likely to seek additional information that would
explain the mismatch. Accounting standards can conceivably influence users’
expectations of what they should find in footnote disclosures. In this sense, as
long as the expectation has been formed, whether or not that information actually
meets users’ needs becomes of second-order importance.
The results of some research on financial analysts could inform standard-
setters with respect to the nature of information predominantly used by analysts.
Previts et al. (1994) argue that financial analysts’ information needs exceed tra-
ditional, transaction-based reports. Rogers and Grant (1997) use content analysis
of analysts’ reports matched with the contents of the annual report to show that
financial analysts appear to rely mostly on the MD&A, rather than on the
actual financial statements or the footnotes. This finding speaks of the kind of
information that analysts rely upon the most. Breton and Taffler (2001) take
one step further in this direction, still using content analysis of analyst reports,
to show that analysts rely crucially on nonfinancial, soft, qualitative and impre-
cise information in their primary task of making stock recommendations.
To sum up, the wording relating to users’ needs in the DP is rather imprecise.
Standard-setters should be aware of the expectation-defining role that accounting
standards serve, and perhaps consider how the proposed framework would
change already existing user footnote disclosure expectations. Other suggestions
based on existing research would be to connect footnote disclosures more to a
reliability characteristic of disclosure – which would serve both valuation and
stewardship – when describing users’ needs.
Risk and Stewardship
The DP discusses risk and stewardship at some length. Our response on this
issue is addressed in part by our response above on the nature of useful disclos-
ure. We would add that Danckaert et al. (2008) investigate the usefulness of
stock market risk disclosure regulation, for a sample of cross-listed firms on
the NYSE. They examine the usefulness of (1) the total incremental risk disclos-
ures made in Form 20-F in addition to those made in the annual report and (2)
the required business and industry risk disclosures imposed by specific stock
market regulation. Investigating the annual report, as well as the Form 20-F
of 318 firm-year observations over the period 2007 – 2008, they find that the
incremental risk disclosures made in Form 20-F and especially credit risk dis-
closures and business and industry risk disclosures, result in a decrease of the
bid–ask spread. Moreover, their results also show that US investors react
strongly to bad news and precise risk disclosures. Overall, these findings show
that Form 20-F is a useful source for providing additional risk information
and that additional stock market regulation is beneficial for stock market partici-
pants. Although there is already substantial risk information in the annual state-
ments, the investors value the additional risk information demanded by the US
market.
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‘One Size Fits All’
The DP discusses a distinction between a ‘one-size-fits-all’ approach to disclos-
ures and an alternative approach where reporting requirements are be more pro-
portionate, based on various characteristics such as entity size, or else vary
whether they relate to interim or annual financial statements.
In our response, we note that requirements for alternative disclosure regimes
raise a number of questions that have been more or less debated in the academic
literature. We have reviewed aspects of this literature above. We focus here on a
specific application raised in the DP, namely whether disclosure requirements
should vary with entity size. The issues to address here are: why the standard-
setter should require alternative disclosure requirements; how and for whom
those alternative disclosure requirements should be applied; and what conse-
quences might be expected from this approach.
On the first of these issues, most proponents of alternative disclosure regimes
argue that IFRS is too complicated for small firms, and compliance and prep-
aration costs greatly exceed the benefits of reporting under a high-quality set
of accounting standards. Therefore, the argument is made that small firms
should be able to follow reduced disclosure requirements. There are two issues
underlying this argument. First, do alternative disclosure regimes really lead to
more efficient application of regulation? Second, will such requirements turn
the tables on IFRS and transform it into a rules-based set of standards as indus-
try-specific guidance has transformed US GAAP (Schipper, 2003)?
Related to the first point, Bradford (2004) recognises that due to regulatory
economies of scale, the costs of regulation will invariably exceed the benefits
for some sizes of businesses, but the fact that small business exemptions may
be efficient does not mean they always are. This is because exemptions have
their own costs, such as differential rule-making, enforcement, and information
costs. Bradford (2004) shows analytically that once these transaction costs are
taken into account, the efficiency of small business exemptions depends on the
particular regulation. Therefore, the increased efficiency of regulation compli-
ance costs argument is less straightforward than it seems. On the second point,
looking at the IFRS experiment with ‘little IFRS’ for small- and medium-sized
enterprises (SMEs) (e.g. Pounder, 2009) the answer is probably ‘no’, but
depends on the parties interested in reduced disclosures and their lobbying power.
On the issue of how, and for whom, alternative disclosure requirements should
be applied, one approach is to set out a list of minimum disclosures required – as
done in IFRS for SMEs (Grant Thornton, 2010), while another approach is to
provide a list of disclosures that could be eliminated. These approaches are
quite different and yield different interpretations as to why a firm does not dis-
close something. For example, users can interpret non-disclosure as either non-
compliance, or irrelevancy of the requirement based on the operations of the
company. Considering these two possible views, the two approaches could
trigger different interpretations. Joshi and Ramadhan (2002) survey 36
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professional accountants working in small and closely held Bahrain companies
on the adoption of IASs. The responses show that, external auditors exerted
the greatest influence in getting firms to adopt IAS, and that companies simply
disregarded requirements, which are not applicable in terms of recognition,
measurement and disclosure.
Who gets to apply reduced disclosure requirements is a more thorny issue. Gao
et al. (2009) provide evidence on the unintended consequences of using ‘bright-
line’ thresholds in regulation. They examine the consequences arising from small
firms being granted exemptions from Sarbanes – Oxley Act of 2002 Section 404
requirements. In the Securities and Exchange Commission parlance, ‘non-accel-
erated’ filers are companies with public float less than $75 million that were able
to postpone compliance with Section 404 until 2008. Small businesses opposed
this regulation, because compliance costs disproportionately affected them rela-
tive to large firms (Eldridge and Kealey, 2005). Using a carefully constructed
control sample to account for company evolution, Gao et al. (2009) show that
when small companies are exempted from costly regulations, they have an incen-
tive to stay small. This finding is robust to alternative explanations, such as
remaining small, so as to maintain insiders’ private control benefits. In order to
stay small, the exempted firms undertake less investment, make more cash
payouts to shareholders, reduce the number of shares held by non-affiliates,
make more bad-news disclosures, and report lower earnings compared to the
control sample firms. This paper is a good example of how ‘bright-line’ rules
can distort behaviour (Hayes, 2009).
The third, and final, issue concerns the consequences that might be expected
from allowing alternative disclosure regimes. The main take-away from the
scarce literature here is that disclosure exemptions/restrictions can create a
vicious circle. Small firms with already reduced information environment
report under reduced disclosure rules that may further restrict users’ access to
information and, potentially, even damage firms’ disclosure reputation. While
it could be argued that small unlisted firms that are closely held or managed by
their owners do not in fact need a rich information environment, the case of
small listed firms is different. Another issue is comparability to other entities.
The general feeling is that IFRS is designed for large listed companies. What
about small listed companies? Would we expect small listed companies to
have less disclosure and would we allow them to have access to alternative dis-
closure requirements? This goes back to which entities will be allowed to apply
alternative disclosure requirements.
There is some literature on how analysts regard small listed companies and
their disclosure practices, but no relevant research on (non-)comparability
caused by alternative disclosure requirements. For example, O’Shea et al.
(2008) investigate the effect of information disclosure on daily stock price vola-
tility of Australian metals and mining companies. They measure information dis-
closure by the number of announcements on the stock market. They find that the
volatility impact of similar disclosures is greater for small and mid-sized firms
16 R. Barker et al.
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than for large firms. Their explanation is that poor disclosure practices (i.e. repeti-
tive, used as self-promotion tool) of small and mid-sized firms result in exces-
sively volatile stock prices. The implication is that consequences related to
disclosure may be larger for a small firm due to the lack of other information
sources (i.e. fewer analysts following to produce/process and intermediate infor-
mation between the firm and investors).
Fortin and Roth (2010) explore the relationship, for a sample of small US
firms, between the number of analysts following a firm and various firm-level
characteristics. This issue is interesting, because small firms receive limited
attention from the financial and business press, thereby making the role of ana-
lysts in mitigating information asymmetry all the more important. Fortin and
Roth find that small firms with better corporate governance (superior shareholder
rights) are followed by more analysts. This supports the view that analysts prefer
to cover firms with reduced agency conflicts and better information disclosure.
The link between corporate governance and disclosures is supported by Griffin
(2003). He finds that analysts decrease coverage of firms following corrective dis-
closures. The main implication is that analysts avoid firms with poor governance,
because they are more likely to produce incomplete or misleading disclosures.
One interesting capital-market setting requiring reduced disclosures, but which
has not really been explored in the literature, is the Alternative Investment
Market (AIM) part of London Stock Exchange. AIM is designed for small com-
panies that want to list on a fairly liquid market with less stringent admission and
on-going disclosure requirements. Mallin and Ow-Yong (1998) look at a sample
of companies listed on this market. They find that companies that do not raise new
capital upon admission to the AIM possess relatively weaker corporate govern-
ance structures, reinforcing the role of context and incentives in determining
the optimal disclosure regime (Healy and Palepu, 2001).
Materiality
The DP notes that, under IFRS, an entity does not need to disclose information
that is not material. This raises the question of whether a DF should reinforce
the application of materiality, for instance with a statement that states that imma-
terial information could reduce the understandability and relevance of
disclosures.
Our response on this issue is to support the need for guidance on materiality,
and to suggest that the DF should provide an example to help guide the preparer
in applying materiality to the notes. We note that research on materiality for dis-
closures is scarce, but that existing evidence suggests that the application and
interpretation of materiality in the case of disclosures differs across firms. For
example, in the context of postretirement benefits, Liu and Mittelstaedt (2002)
find that the process of evaluating materiality for disclosures is inconsistent
across firms. Szabo (2012) states that materiality plays a significant role in
distinguishing between Corporate Social Responsibility information that is
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mandatory to disclose and that which is voluntary. Doupnik and Seese (2001)
uncover differences in the way firms judge the materiality of individual countries
to be disclosed in the segment information footnote, with firms moving away
from the threshold provided by the relevant standard (i.e. SFAS 131). In some
cases, managers prefer more stable measures of size (e.g. total assets) rather
than current income to judge materiality (Gleason and Mills, 2002).
Liu and Mittelstaedt (2002), Szabo (2012) and Doupnik and Seese (2001)
discuss concerns that material information may be excluded from the financial
statements. There is little discussion in the literature of a key argument in the
EFRAG paper, that immaterial information is being included in financial state-
ments, to the detriment of users who then need to identify what is material.
Exceptions can be found in the law literature. Hewitt (1977) notes that materiality
is a necessary limit on full disclosure, because full disclosure of every fact would
result in too much information for any person to digest in a meaningful manner.
He goes on to state that the manner of presentation of information may affect
materiality so that even where all facts are fully disclosed, a material omission
may occur. This can happen under the ‘buried facts doctrine’ if the most impor-
tant facts are not sufficiently highlighted but are hidden in the document.
Enhancing Communication
A further issue, raised in Chapter 5 of the DP, is that of enhanced forms of com-
munication of financial information, which invites a discussion of effects of infor-
mation technology. Financial information in simple PDF or HTML form provides
users with a wide availability of information, in a convenient manner (Lymer,
1999). However, as discussed above, the size of financial reports has increased
over the years and there is the possibility of information overload. As a result,
traditional format financial report users are likely to experience problems in
searching and locating information presented in the notes (Hodge et al., 2004).
In Chapter 5, there is mention of eXtensible Business Reporting Language
(XBRL) and how it can assist in the way information is organised and accessed.
We believe that XBRL has the potential to improve the effectiveness of note dis-
closures. This could also have consequences for future earnings as Li (2008) finds
a positive relationship between easier to read financial reports and future earn-
ings. XBRL is currently mandated in the USA, with other countries likely to
follow within the next five years. XBRL is derived from Extensible Markup
Language, which is a format that provides major benefits in storing, exchanging
and communicating financial information (Pinsker, 2004). The unique tags that
characterise XBRL data enable efficient retrieval (Baldwin et al., 2006). Using
an experimental approach, a study by Muthusamy et al. (2012) compares the use-
fulness of the XBRL format financial report in comparison to PDF and finds that
financial information presented in XBRL format is significantly more relevant,
understandable and comparable to users. There is scope here to reconcile the con-
flict in the current environment, identified earlier, between information overload
18 R. Barker et al.
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from the perspective of the individual with the demand for more information
from the market as a whole.
In this context, we draw attention to evidence that different stakeholders
appear to assign a different importance to information presented on the face of
financial statements compared with information disclosed in the notes. For
instance, auditors are willing to tolerate more error in disclosed numbers than
in recognised numbers (Libby et al., 2006), and loan officers put more emphasis
on recognition of stock options in the income statement rather than on disclosure
of stock options in the footnotes (Viger et al., 2008). In line with Maines and
McDaniel (2000), who use an experimental design to show that nonprofessional
investors are influenced by the format of disclosures, Bamber et al. (2010) find
that managers indeed act as if they believe that the location of information
matters. For example, the location of (other) comprehensive income is informa-
tive with respect to their overall earnings management and disclosure quality be-
haviour (Lee et al., 2006).
Some papers investigate the consequences associated with the location of
specific disclosures. The persistence of special items is higher for special items dis-
closed in the footnotes relative to special items presented in the income statement
(Riedl and Srinivasan, 2010). The placement of an accounting restatement
announcement in a press release is significantly associated with stock returns,
such that firms with more visible announcements are penalised more by the
stock market (Files et al., 2009). Therefore, information placement appears to be
a pervasively important aspect in corporate disclosures. This line of findings
stands in sharp contrast with the (‘rational’) efficient market view, supported by,
for example, Al Jifri and Citron (2009), who provide evidence that markets effi-
ciently incorporate goodwill information regardless of its location for presentation.
On the question of what should be included in financial statements rather than
elsewhere in a financial reporting package, there was research triggered by rising
stock prices in the 1990s, on whether earnings and balance sheet information had
become less value relevant, and what might be done to improve its value rel-
evance (for example Francis and Schipper, 1999; Lev and Zarowin, 1999). But
these papers do not discuss whether there is some information that might be rel-
evant for users making investment decisions, but which does not belong in a set of
financial statements. Some of the literature on conservatism implies that users do
not find information about unverifiable gains helpful, and prefer ‘hard’ infor-
mation they can trust, and hence use to assess information from other sources
(LaFond and Watts, 2008). But that literature focuses on recognition, rather
than specifically on disclosure.
Apart from note disclosures, a valuable source of information in financial report-
ing is the Management Discussion and Analysis (MD&A), which contains manage-
ment’s view on the company’s operations and future prospects (Clarkson et al.,
1999; Cole and Jones, 2004). In a recent study, Brown and Tucker (2011) find
the primary users of the MD&A schedules, to be investors rather than analysts
and also document stagnation in MD&A content. This suggests that firms tend
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to ‘copy and paste’ the schedule with only minor changes between years, which
results in restricted usefulness. However, the tone changes between subsequent
MD&A filings do have an impact. Management’s tone change adds to portfolio
drift after taking into account accruals and earnings surprises (Feldman et al.,
2010). The incremental value of the information conveyed by the tone change is
stated to depend on the strength of the firm’s information and disclosure environ-
ment. Li (2010a, 2010b) confirms the importance of tone in the MD&A, as well as
the limited use that analysts make of these schedules. MD&As are also evidenced
to have an impact on a firm’s cost of capital, stock return volatility and analyst fore-
cast dispersion (Kothari et al., 2009).
Conclusion
This paper has summarised the response of the EAA’s FRSC to Towards a Dis-
closure Framework for the Notes, a DP issued jointly by EFRAG, ANC and FRC.
Overall, we are very supportive of the initiative to place disclosures on a sounder
conceptual foundation, and our comments should therefore be interpreted as
seeking to contribute to furthering the aims set out in the DP.
While our paper covers a range of issues, each drawn from our interpretation of
the academic literature, there are perhaps two broad themes with which to con-
clude. The first concerns the diagnosis of the problem in the DP, which is that
existing financial reporting is characterised by, on the one hand, disclosure over-
load and, on the other hand, an absence of a conceptual framework for organising
and communicating disclosures. For a variety of reasons set out above, this paper
offers much greater support for the second of these two factors than for the first.
The second broad theme is the purpose of the proposed DF, and the principles that
are derived from this purpose. This paper is broadly supportive of these aspects of
the DP, while stressing the need for the framework to better accommodate the
context within which financial statement disclosures are used. In practice, this
context is characterised by variation in information, incentives and enforcement,
each of which has a considerable effect on the appropriate disclosure policy and
practice in any given situation.
Notes
1
In this text we use the term ‘literature’ to refer to existing research.
2
We note that a definition of the term ‘unrecognised arrangements’ is not provided.
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Appendix. Key principles in the DP (EFRAG et al., 2012)
General objective of a DF
To ensure that all and only relevant information is disclosed in an appropriate
manner, so that detailed information does not obscure relevant information in
the notes to the financial statements.
Purpose and content of the notes
1. The purpose of the notes is to provide a relevant description of the items pre-
sented in the primary financial statements and of unrecognised arrangements,
claims against and rights of the entity that exist at the reporting date.
2. Consequently:
(a) The disclosures in the notes should provide information which amplifies
and explains the primary financial statements;
(b) The notes should focus on past transactions and other events existing at
the reporting date; information about the future that is unrelated to those
past transactions and other events, is not provided in the notes; and
(c) Information in the notes should be entity- specific.
3. As a complement to reported numbers showing the entity’s financial situation
and performance in the balance sheet and profit and loss, notes should
provide information such as, but not limited to, (a) assumptions and judgements
that are built into the reported numbers of items in the balance sheet and profit
and loss; (b) information on risks that may affect these reported numbers; and
(c) alternative measurements where this information would be relevant.
4. It is necessary to consider the implications of recognition and measurement
attributes on the disclosure requirements so that, ultimately, the usefulness of
information is assessed as a whole. In particular, the more uncertainty affects
the amounts inthe primary statements, the more disclosures are usually needed
Setting the disclosure requirements.
5. Disclosure needs to be an objective distinct from other objectives, specifi-
cally from recognition, measurement and presentation.
6. Disclosure requirements should be developed and justified with the same
level of depth and scrutiny as recognition, measurement and presentation
requirements.
7. Disclosure requirements should be set in a consistent manner across the
whole set of accounting standards, including the level of granularity.
8. Disclosure requirements should be principle-based and detailed rules should
be avoided.
9. Disclosure requirements should achieve proportionality to the entity’s users’
needs, and meet a reasonable cost-benefit trade-off in all circumstances.
Alternative disclosure regimes may have to be put in place to achieve
proportionality.
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10. Disclosure requirements should not be used to compensate for inadequacies
in recognition, measurement and presentation requirements.
11. Disclosure requirements should be set as to avoid any possible overlap within
notes and reviewed over time to eliminate requirements that are no longer
relevant.
Applying the requirements
12. Care should be taken in applying the materiality principle in practice, bearing
in mind that disclosing immaterial information (and information on situ-
ations that do not apply in practice to the reporting entity) reduces the rel-
evance and the understandability of disclosures.
Communicating information
13. Disclosure requirements should be applied with a view to communicating
information to users rather than a compliance exercise.
Succeeding in practice
14. Preparers, auditors and regulators, each in their specific role, have a shared
interest in fostering the improvement of disclosures, through the application
of all the above principles.
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