In accepting that it is unlikely that complexity can be significantly reduced in the short term, the Task Force has commenced its consideration of strategies that could assist all stakeholders of financial reports to better manage this complexity.
1. Make better use of developments in information technology and delivery
A key area of opportunity to better manage the increasing volume and complexity of financial reporting is new technologies. While technologies offer the potential to manage financial reporting complexity, it is the widespread adoption and acceptance of these technologies by users of financial reports that the Task Force considers as the crucial development to allowing the consideration of technology as a potentially successful strategy.
In recent years, the Annual Report has become the means by which an increasingly wide range of information, both financial and non-financial has been made available to a growing multitude of stakeholders. Over time, the Annual Report has grown to encompass much more than the financial reports, and so the sheer volume of information now contained in the Annual Report has made it increasingly difficult for users to hone in on the information they seek. As commented by KPMG in its recent submission to the UK Financial Reporting Council-
'this has resulted in lengthy complex reports and a loss of focus on that information - both financial and non-financial - that is necessary to present a fair review of the development performance and position of the company'5
Internet and company websites offer users a widely available, cost-effective, and efficient mechanism through which to manage the complexity of financial reporting. Report preparers should move away from the constraints previously imposed by physical production, and focus on meeting users' needs, by providing information in a way that enables users to manipulate data interactively.
That is, while the current trend is for company reports to be provided to users on company websites only in a PDF format (which does not allow users to effectively navigate through particular sections of interest); companies should provide the information contained in Annual Reports to users in an interactive online format which allows users to not only be able to filter the specific information they require, but also be able to access the level of detail suited to their needs.
This approach should not be seen as 'tiering', or restricting certain types of disclosures to certain types of users. Rather, the strategy can be considered as the 'unbundling' of the Annual Report into various segment and user reports. This would allow users to identify the information they require, and the level of detail of information most suited to their needs.
As outlined in this paper, the Task Force acknowledges the additional complexity in financial reporting that results from the volume of non-material disclosures accompanying the financial reports. The Task Force believes that consideration should also be given to allowing companies to present their governance policies and procedures on their websites. This may help to minimise the current boilerplate descriptions that are found in Annual Reports. In keeping with the approach set out above, information on governance and procedure reporting should also be presented in an interactive format.
The Task Force believes that the use of technology has the potential to facilitate the 'unbundling' of reporting, particularly in respect of the various functions of an entity's Annual Report, and in turn financial reporting. This unbundling would allow users more efficiency in locating the financial information they seek to the level of detail most appropriate to their needs. This will be a key area of ongoing consideration for the FRC in the next phase of its deliberations in order to more thoroughly explore the potential for technology to materially assist in managing not only financial reporting complexity, but reporting complexity more broadly.
2. Address legal impediments to preparers determining relevant material disclosures
In identifying the impact of the increasingly litigious environment on financial reporting complexity, particularly the volume of non-material disclosures, the Task Force has reviewed Australia's 'safe harbour' or 'business judgment' provisions as set out in the Corporations Act 2001 (the 'Corporations Act' or 'the Act').
In examining the degree of protection offered directors by these provisions, the Task Force is seeking to understand whether a strengthening of these provisions could result in both a reduction in the number and the length of 'boilerplate' financial disclosures.
The Australian Institute of Company Directors has long called for a broad-based business judgment rule defence to be made available to directors when they make commercial decisions in good faith, having informed themselves about the subject matter and having acted in the best interests of the company, including consideration of the company's stakeholders such as shareholders, employees and creditors.
The Business Judgment Rule is currently set out in subsection 180(2) of the Corporations Act6. This only applies to a breach of subsection 180(1) of the Act - the duty of care and diligence. In addition, there is no safe harbour for forward-looking statements in Australia.
The lack of safe harbours and a broad-based business judgment rule may go some way toward explaining why directors are reluctant to reduce the disclosures in their financial reports, hindering the reduction of complexity.
The Task Force sees that the challenge is to find a mechanism that encourages directors and preparers to properly consider whether or not a disclosure is material, rather than the simpler option of including all disclosures. Accordingly it could be explored if there is any possibility that some variation of the materiality test might provide a safe harbour if directors fail to disclose a matter that later appears to be material.
The FRC's Board Education Task Force might also have a role to play by helping to identify strategies to assist directors and preparers better understand the concept of materiality.
3. Empower users through delivery of financial information via XBRL7
XBRL is a means to deliver financial information to users in a form that enables those users to more readily extract and use the information, by allowing users to manage, arrange and compare data between periods and between companies. It is merely a means to manage and use the information produced in a more effective and efficient manner, and there is nothing to suggest that XBRL would be a reason for imposing new disclosure requirements that were previously considered too onerous.
Lodgement of XBRL financial report information is mandatory in the US, UK, Singapore, Japan, and several other countries for listed entities or all entities; while in Australia, lodgement of XBRL financial reporting information with ASIC is optional at present. Over the past few years ASIC has been actively pursuing initiatives to facilitate the use of XBRL financial reporting in Australia, including the adoption last year of the international IFRS taxonomy.
Analysts and other users have not modified their systems and processes to use XBRL financial information because there is no critical mass of XBRL financial reports. One reason that companies are not yet producing XRBL financial reports is that it is not clear whether analysts are using this information. Possible consultation on mandatory lodgement of XBRL financial information is being considered by the Government as a means to enable companies and users to realise the benefits of XBRL financial reporting.
4. Develop guidelines that encourage more use of financial reporting terms and definitions
The Task Force recognises that each industry, and indeed each company, will have unique matters which it believes should be presented clearly to investors. Thus the Task Force sees no value in constraining the use of relevant industry-specific financial or non-financial information.
However the Task Force would support the development of a glossary of suitable terms and definitions, with companies strongly encouraged to either use these, or explain why their variation is appropriate. Such guidance should also emphasise the importance of each company clearly defining all ratios and other items used in the presentation of financial results.
5. Urge the IASB to undertake reforms
Though this Task Force has concentrated on ways of managing complexity, rather than how to reduce the technical complexity of IFRS, it does wish to express its support for calls by the Australian Accounting Standards Board (AASB) for the IASB to establish a framework for presentation and disclosure.
The current standards have, on a topic-by-topic basis, led to a considerable volume of potential disclosures for reporting entities. The Task Force is of the view that those disclosures could now be rationalised by adopting an approach that synthesises the disclosures under objectives. For example, all of the disclosures relating to an entity's infrastructure (e.g. property plant and equipment, leased assets, intangibles used in production) might be brought together under a disclosure objective that aims to better draw out the entity's operating capacity and changes therein.
The lack of a clear framework is a reason that 'Other Comprehensive Income' lacks meaning and consistency. It also has led to differences in views in standard-setting debates being somewhat subliminal between those who would recognise income once, in one part of income, without recycling, and those who think that profit or loss is the only real income and that recycling is essential. This confusion at the standard-setting level makes it difficult for preparers and users to convey results in a straightforward way.
6. Consider better ways of influencing the IASB
A basic tenet of accounting standards is that proposed requirements need to be exposed for critical review by all interested parties. Preparers (as one such party) have been expected, among other matters, to identify difficulties that that such proposals might provoke. In the domestic standard-setting environment, the distance between preparers and the standard-setters is relatively short. Moreover, for those who regularly involve themselves in commenting on proposals, there is the benefit of a professional relationship with the standard-setter that better enables both parties to appreciate each other's viewpoints.
With global standard-setting, not only is the distance much greater; the relationships are far more complex and aggregated, often involving various filters such as those that come through industry and other groups making collective submissions. This can mean a loss of entity-specific comment or information being conveyed to the standard-setter and an absence of good relationships. It can also be more difficult for individual organisations to be aware of developments in the international arena.
The Task Force notes that the IASB has devoted considerable resources in what it terms 'extended reach-out' to complement its formal due processes. Whilst that reaching-out has assisted in building knowledge and relationships, it has also demonstrated that global standard-setting is beginning to mature and has many more influences on it than domestic standard-setting. The IASB has to sample a global population in forming its views, and the domestic population may not be heavily represented in such sampling.
In practical terms, the IASB cannot just establish and maintain relationships with only the most significant reporting entities in every country as we head to 120 or more countries adopting IFRS - they are now receiving 800 to 1000 submissions on some topics. Thus we are seeing an increasing recognition by the IASB and the IFRS Trustees in the role of user and industry groups and of standard-setters (both domestically and regionally), and the importance of developing strong relationships with these groups. Further, we are now seeing an emergence of multi-lateral arrangements between regions.
Australia is playing a leading role in the Asian-Oceanian Standard-Setters Group (AOSSG) - a group bringing together 25 jurisdictions (including Japan, China and India). It is seeing the IASB paying close attention to the AOSSG's views and members are being regularly encouraged by the IASB to research issues across the group before bringing them to the IASB. When the weight of opinion among members is evident on an issue, the IASB quickly sees the need to respond.
Preparers, users and other parties who may wish to influence particular proposals on the grounds of unwarranted complexity need to appreciate the shifts taking place in the IASB's engagement model and to seek effective relationships with relevant groups, standard setters and, where possible, the IASB itself. It is unlikely that individual entities will be able to see all the relationships and views being brought to bear on their particular issues.
Moreover, individual companies who wish to influence the development of a particular standard should recognise that one voice, amongst the many hundred that the IASB is listening to, is unlikely to be heard. Companies should seek to identify several, or many, others who share their views. The AASB, AOSSG and global industry groups, play a role here. As bodies that represent a large number of constituents, they may assist in ensuring that the IASB understands fully the alternative views that are being presented.
Participation in the face-to-face outreach programs that the IASB holds can also increase the likelihood of specific points of view being well understood by the IASB. This presents a particular challenge in Australia, as IASB roundtables are not generally located in Australia. Increased use of video conferencing, and the establishment of an IASB office in Tokyo in October this year, will over time assist direct involvement by Australian companies in debate with the IASB.
The FRC encourages Australian representation on international accounting and auditing boards as much as possible so we can influence positive outcomes. A list of Australians on these boards is provided on the next page.
5 KPMG submission to UK Financial Reporting Council's discussion paper 'Effective company stewardship – enhancing corporate reporting and audit' (2011)
6 Care and diligence-civil obligation only
Care and diligence-directors and other officers
(1) A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:
(a) were a director or officer of a corporation in the corporation's circumstances; and
(b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.
Note: This subsection is a civil penalty provision (see section 1317E).
Business judgment rule
(2) A director or other officer of a corporation who makes a business judgment is taken to meet the requirements of subsection (1), and their equivalent duties at common law and in equity, in respect of the judgment if they:
(a) make the judgment in good faith for a proper purpose; and
(b) do not have a material personal interest in the subject matter of the judgment; and
(c) inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and
(d) rationally believe that the judgment is in the best interests of the corporation.
The director's or officer's belief that the judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold.
7 eXtensible Business Reporting Language