Addressing disclosure overload: The interim measures

SUITS THE C-SUITE By Wanessa G. Salvador

First Published in Business World (08/18/2014)

(First of two parts)

“IT’S as thick as a book” or “I got lost halfway through.” These are common complaints we hear from readers, users, and even preparers of financial statements. Certainly, disclosure requirements need to keep up with changes in accounting and regulatory standards that often result in more data to prepare. However, the growing volume of disclosures has become overwhelming to the point that they can undermine the usefulness and readability of financial statements. This is the problem of disclosure overload.

To address this problem, the International Accounting Standards Board (IASB) has embarked on a ‘disclosure initiative project.’ While work on a final authoritative guidance is still ongoing, the IASB issued last March its first exposure draft (ED) entitled “Disclosure Initiative — Proposed Amendments to International Accounting Standards (IAS) 1” as a short-term measure to respond to some of the immediate concerns.

This two-part series will summarize these proposed amendments and discuss how companies can cope with disclosure overload while waiting for the IASB to issue the final guidance or framework.

Disclosure overload refers both to the growing volume of disclosures and to the quality of the disclosures contained in financial statements. According to IASB Chairman Hans Hoogervorst, one reason for the overload is because many preparers of financial statements would rather include everything in the disclosures rather than risk being asked by the regulator to restate their financials. After all, it seems unlikely that a Chief Financial Officer would be fired for producing voluminous disclosures, while restatements could potentially limit one’s career. Mr. Hoogervorst also notes that excessive disclosures are sometimes used to bury unpleasant yet relevant information. In some instances, it may also be easier to just follow a disclosure checklist, rather than put in the effort of producing helpful and understandable information.

Besides the IASB, the International Auditing and Assurance Standards Board (IAASB) has also been looking into this matter from an audit perspective. The European Securities and Markets Authority has also already issued a consultation paper, and has solicited comments from various parties, on applying materiality to disclosures.

Addressing disclosure overload entails the recognition of common themes underpinning the issue. Based on discussions and debates among preparers, readers, and users of financial statements, the July 2014 Ernst & Young (EY) publication titled Applying IFRS: Improving Disclosure Effectiveness identified three common themes that underpin disclosure overload: (1) format/structure, (2) tailoring, and (3) materiality.


Paragraph 114 of IAS 1 lists a particular order for the notes to the financial statements. Some preparers have perceived this as a required order and have therefore shown resistance in changing the sequence of their notes. In the Exposure Draft on the proposed amendments to IAS 1, the IASB emphasized that the main consideration of an entity should be the enhancement of the understandability and comparability of its financial statements, and not compliance with the particular ‘order’ listed in IAS 1. The IASB clarified that entities actually have the flexibility to decide the order of their notes to financial statements, and are not limited to the particular order listed in IAS 1.

EY also gathered suggestions on how to improve the structure of the disclosures in the financial statements. Some of these are:

• Improving the navigation of financial statements. Users of financial statements sometimes find themselves flipping through a lot of pages just to find the disclosure they want to read, an exercise that can sometimes be frustrating. This may be addressed by including summary pages or content listings to help users more easily navigate through the notes and find relevant information. Other means of improving navigation include traditional headers and cross references.

• Grouping together relevant disclosures on a per-account basis. Typically, the note on significant accounting policies is followed by the note on judgments and estimates, with the succeeding notes providing quantitative disclosures on specific accounts such as cash, receivables, etc. As a result, readers may have to keep going back to the earlier note/s on the policies and/or judgments and estimates in order to gain a better understanding of the succeeding quantitative disclosures on each account. Grouping all the relevant disclosures per account will help users of financial statements relate and link the accounting policies with their related quantitative information. This can also assist preparers in identifying policies that do not have any impact on, and are irrelevant to, the financial statements and can, therefore, be removed from the disclosures.

• Sequencing the notes in order of importance. This can help ensure that the company’s financial information is efficiently communicated. There are already a few entities that have applied this approach, but there are challenges. There may be a difference in views — what one sees as insignificant may be deemed relevant by others, an occurrence which may happen even among those in the same industry. Another challenge is that this approach may reduce the comparability of financial statements across industries. Consistency in the order of notes from one year to another should also be observed unless a change in circumstances warrants the re-ordering of the notes.

• Grouping disclosures by nature. This involves splitting the financial statements into sections and will further help users navigate through the financial statements. Similar to the previous approach, this will also require a high level of judgment and may reduce comparability between entities.

• Presenting an ‘Executive Summary’ or ‘Key developments’ note. Providing either of these upfront may help users focus their attention on key information or developments. However, some may argue that it would just add to the clutter rather than address the problem of disclosure overload. It is important to consider the circumstances and purpose of the financial statements in assessing whether the Executive Summary or the note on key developments will improve its effectiveness.

In next week’s column, we will look into other considerations when managing disclosure overload, such as tailoring disclosures to address the information needs of users and using one’s judgment in applying specific accounting policies.

To be continued

Wanessa G. Salvador is a Director of SGV & Co.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the authors and do not necessarily represent the views of SGV & Co.