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Disclosure Initiative to Start with Small Amendments to Statement Presentation Guidance

January 7, 2014

The IASB has begun a project to fundamentally reconsider the way companies compile financial statement footnotes. The board plans to propose small amendments to IAS 1 and explore how to make the concept of “materiality” easier to apply when preparing a set of financial statements. As part of a longer range plan, the IASB intends to conduct more in-depth reviews of IAS 7 and IAS 8.

In its long-range plan to make footnote disclosures less cumbersome for companies and more valuable to investors, the IASB plans to release by the end of March a proposed amendment to change IAS 1, Presentation of Financial Statements.

The IASB wants the exposure draft to clarify several sections of the standard and address what the board believes is an overly literal application of its requirements, said IASB technical principal Kristy Robinson during a December 16, 2013, webcast.

“We think these amendments will give preparers and entities more ability to use judgment when disclosing and presenting information,” Robinson said.

The international accounting board wants companies to know that the materiality principle does not only mean that material items should be included in company financial statements, but companies should also exclude non-material disclosures. The board also wants to remove contradictory examples from the standard and scrap language that has been interpreted as prescribing the order of the notes to the financial statements. Companies would be given some discretion in deciding where they disclose accounting policies in their financial statements. Important accounting policies should be given prominence, while less important policies could be moved to the back of the statements.

The board aims to release the exposure draft in the first quarter of 2014.

The forthcoming proposal is part of the IASB’s broader effort to overhaul how companies draw up the footnotes to their financial statements. In a speech at an IFRS Foundation conference in June, IASB Chairman Hans Hoogervorst said the size of annual company financial reports has ballooned, but the footnote information has become less useful. He characterized annual reports as compliance documents as opposed to instruments of communication and called for the IASB to make changes to “break the boilerplate.”

In October, the IASB formed a staff research group to work on short- and medium-term solutions to address these concerns. In addition to proposed changes to IAS 1, the IASB also plans to work on a paper on the concept of materiality in the first quarter of 2014. The discussion paper—an early-stage standard-setting document—aims to respond to concerns that companies do not apply the concept of materiality well enough in practice. The board plans to assess the usefulness of existing guidance and proposed whether additional guidance is necessary.

Further down the line, the IASB wants to research whether it should replace IAS 1 outright. It also wants to explore whether to replace IAS 7, Statement of Cash Flows, and IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, Robinson said.

The standard-setter plans to conduct research over the next two years and decide in 2015 whether to add these efforts to its formal agenda. The IASB could draw from previous work on financial statement presentation, which had been a convergence effort with the FASB that was set aside when the accounting boards decided to make financial crisis-related issues their chief priority.

Alan Teixeira, the IASB’s senior director of technical activities, described the overall effort as a big project, but emphasized that it would be divided into smaller pieces. He called the proposed amendments to IAS 1 “fairly safe, very intuitive.”

Overall, the IASB wants to encourage a new way of thinking when it comes to disclosures, Teixeira said.

“You’ll see we’re starting to move away from sort of a compliance view of the world to a communications view,” he said.