As preparers were turning their minds to reporting season, the Australian Accounting Standards
Board (AASB) published atimely staff paper, To Disclose or Not to Disclose: Materiality is the Question. It’s a response to concern about ‘disclosure overload’ in financial reporting and should prompt preparers to rethink their criteria for determining which disclosures to include in their financial statements.
The paper suggests some practical actions preparers can take to help reduce the overload and identifies a number of immediate “substantive things not to do when making an assessment about what information should be included in the financial statements”.
Among the do-nots:
. Do not include every disclosure illustrated in model financial statements, as these are a cater for all possible scenarios’ tool.
. Do not blindly copy what other
entities have disclosed, instead of exercising judgement in deciding on appropriate disclosure.
. Do not repeat information from prior financial years, but adapt to changed circumstances.
. Do not disclose accounting policy choices made under accounting standards unless they are relevant and necessary to understanding information provided – this includes not disclosing accounting policies for transaction types not in the financial statements.
. Do not assume auditors will require every disclosure relating to accounting standards.
. Do not fear regulators, such as ASIC, who are increasingly confirming they will not pursue immaterial disclosures.
Bear in mind that items are considered to be material’ if their omission or misstatement, individually or collectively, could influence the economic decisions that users make on the basis of the financial statements. Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances, The size or nature of the item, or a combination of both, is therefore the determining factor.
Further amendments
The AASB also released an IASB Exposure Draft outlining proposed amendments to IAS 1 Presentation of Financial Statements (AASB 101). It proposes narrow-focus clarifying amendments to IAS 1 to address some of the concerns expressed about existing presentation and disclosure requirements, and to ensure entities are able to use judgement when preparing their financial statements. These proposals result from one of several short-term projects under the IASB’s ‘disclosure initiative, which is focused on ensuring that financial reports are instruments of communication and not simply compliance documents.
The proposed amendments:
. 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; and
. Remove potentially unhelpful guidance in IAS 1 for identifying a significant accounting policy.
In summary
The IASB’s efforts are to encourage preparers, auditors and regulators to move away from a ticking-thebox mentality to disclosures; and to change behaviour by emphasising the importance of understandability, comparability and clarity in presenting financial reports.
