Question: Financial statement disclosures
One of the projects that the International Accounting Standards Board (IASB) is currently undertaking is the Disclosure Initiative project, with the aim of improving communication in financial reports.
The IASB has identified three main concerns about disclosures in financial statements, namely: there is not enough relevant information in the notes, there is irrelevant information in the notes, and there is ineffective communication of the information provided.
The IASB released a discussion paper in March 2017, DP 2017/1 ‘Disclosure Initiative - Principles of Disclosure' and is currently seeking feedback on the disclosure issues identified and on the Board's preliminary views on how to address them.
You are an investor who, for years, has struggled to work through and understand all of the note disclosures when analysing and comparing the financial reports of companies that you are considering investing in.
You are currently considering investing in either Westpac Group or ANZ. After reviewing and comparing the note disclosures provided in their 2016 annual reports, you plan to make a submission in response to the IASB's discussion paper. In your submission, you plan to provide feedback in response to ‘Section 2 - Principles of Effective Communication'of the discussion paper, given the difficulties that you have faced due to ineffective communication in financial reports.
In section 2 of the Discussion Paper, the IASB has proposed that a set of principles of effective communication be developed. The seven principles identified in the Discussion Paper are that information in the financial reports should be:
• Entity specific;
• Clear and simple;
• Organised to highlight important matters;
• Linked to related information;
• Free from unnecessary duplication;
• Comparable; and
• In an appropriate format.
The IASB is also of the preliminary view that it should develop non-mandatory guidance on the use of formatting in the financial statements.
The IASB suggests that this guidance could help to improve the effectiveness of information communicated in the notes.
Required:
Download the Discussion Paper DP 2017/1 ‘Disclosure Initiative - Principles of Disclosure'.
Download the 2016 annual reports for Westpac Group and ANZ. Review and compare the notes that form part of each entity's financial reports.
Prepare a letter to the IASB. In your letter:
• Discuss which of the seven principles of effective communication you feel are lacking the most in the note disclosures contained in the 2016 financial reports of Westpac and ANZ (and hence which principles you think that the IASB needs to put the most work into, in order to make significant improvements to communication in financial reports).
• State whether you think that the guidance on the use of formatting in the financial statements should be developed, and whether you think that it would improve the effectiveness of information communicated in the notes. Explain why or why not.
(Word limit: 1200 words)