Disclosure dilemmas - getting the right mix

The XRB’s Technical Director of Accounting Standards, Charis Halliday outlines the key ingredients for best practice disclosures.

Companies often face a 'disclosure dilemma’ when deciding what to include in their financial statements and how it should be presented. 

There will inevitably always be a vast amount of information that could potentially be disclosed, but not all of it is relevant or material and including too much can be just as problematic as including too little. There are three things to watch out for:

  • not enough relevant information,
  • too much irrelevant information and,
  • presenting information poorly.

Couple this with a checklist approach to compliance and the result can be long boilerplate disclosures which make it difficult for users to identify relevant information and to make informed decisions.

Think of your favourite restaurant and its menu:

  • does it tell you everything that’s in each meal, or just the key ingredients?
  • is the menu presented in a logical easy to follow way?
  • does it change seasonally or is it always the same?

Smart restaurants know what their customers like and prepare and present their menus accordingly.  Companies can take the same approach by keeping user needs at the forefront. To cut the clutter and stop boilerplate disclosures, companies can focus on:

  • Understanding what users want to see
  • Removing irrelevant or immaterial disclosures
  • Re-ordering and re-labelling accounting policies and notes so that important information is prioritised
  • Re-thinking how the information is presented to enhance understanding and;
  • Using plain language and avoiding jargon.

Is change worth the effort?

According to the UK Financial Reporting Council, the answer is an emphatic yes. Their publication What makes a good Annual Report and Accounts highlights that companies with higher quality annual reports tend to have lower costs of debt and equity capital, more accurate analyst earnings forecasts and more constructive, insightful and well informed dialogue with investors.

Want to see some examples?

Have a look at the IFRS Foundation’s case studies Better Communication in Financial Reporting. By describing a few companies’ journeys towards improving the way they communicate information in their financial statements (including a New Zealand example), these companies’ experiences demonstrate that relatively small changes can significantly enhance the usefulness of their financial statements.

The financial statements are easier to read and understand because the companies identified what information was relevant to their investors, prioritised it appropriately and presented it in a clear and simple manner. In some cases, this resulted in companies including additional information that is useful for investors and, in other cases, removing information that is immaterial.

Struggling with materiality decisions?

Materiality is key, but it can be challenging in practice to move away from the ‘checklist approach’ to disclosures. The IFRS Practice Statement 2 Making Materiality Judgements provides relevant guidance, particularly the sections on ‘Primary users and their information needs’ and ‘A four step materiality process’ to help you get started.

Published: 11 April 2023

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