Introducing More IFRS Principles of Disclosure – Will the Poor Disclosers Improve?

Abstract

The current paper was prepared for the International Accounting Standards Board (IASB) Research Forum 2017 and evaluates the effects of introducing more principles of disclosure as part of the IASB Disclosure Initiative. We perform a literature review of academic research on how entities have complied with disclosure requirements in the past. The review shows high levels of non-compliance and high volatility across entities, including poor disclosers being far below the average. We find no clear pattern of higher compliance for International Financial Reporting Standards (IFRS) with more reliance on disclosure principles as compared to specific requirements (i.e. IFRS 7, IFRS 8), but note the methodological problem of measuring compliance with disclosure principles. Academic research suggests that the degree of compliance depends on entities’ incentives for providing or withholding information in combination with local conditions for primary users, auditors and regulators. Based on our review, we argue that increased reliance on entities to act in ‘good faith’ when complying with disclosure requirements, in capital-market contexts where entities may be in high-incentive situations and have low costs of non-compliance, is potentially risky in terms of how well the Standards protect primary users from poor disclosers. More emphasis is needed on ensuring that the disclosure requirements are enforceable and auditable in order to secure a certain minimum level of disclosure.

Keywords:

• disclosure
• accounting principles
• IFRS
• compliance
• enforceability

Acknowledgements

The authors gratefully acknowledge the useful comments provided by Paul André, Ann Tarca, Sonja Wüstemann, one anonymous reviewer, and participants at the IASB Research Forum in Brussels, 2017, and the EUFIN Workshop in Florence, 2017.

Disclosure Statement

No potential conflict of interest was reported by the authors.

Notes

1 The Principles of Disclosure project is one of the most important projects of the Disclosure Initiative (IASB, 2017a, p. 16). Some projects of more limited scope have already been completed within the Disclosure Initiative (the 2014 Amendments to IAS 1 to remove barriers to the exercise of judgement, and the 2016 Amendments to IAS 7 to improve disclosures of liabilities from financing activities) and the project related to guidance on making materiality judgements was completed in September 2017 (the Materiality Practice Statement, IASB, 2017b).

2 According to the IASB 2010 Conceptual Framework (2.11, emphasis added), materiality is ‘ … an entity-specific aspect of relevance based on the nature or magnitude, or both, of the items to which the information relates in the context of an individual entity’s financial report.’

3 Some would argue that principles referring to recognition and measurement will also have many different outcomes, as they rely on future uncertain events (e.g., ‘value in use’ calculations). However, we would argue that measuring an asset or a liability under uncertainty in accordance with a principle will have a compliant measurement outcome, sometimes in terms of an acceptable interval reflecting the uncertainty level. This is conceptually different from applying a principle of disclosure, where infinite options appear to be available if we consider the proposed principles of effective communication.

4 We are grateful to Professor Sonja Wüstemann for providing this definition of enforceability.

5 Occasionally, the classification of requirements as ‘mandatory’ was not clear-cut and a few papers with voluntary elements were included.

6 The lowest level, level 2, is described as follows by the Chartered Association of Business Schools (2015, p. 7):

Journals in this category publish original research of an acceptable standard. A well regarded journal in its field, papers are fully refereed according to accepted standards and conventions. Citation impact factors are somewhat more modest in certain cases. Many excellent practitioner-oriented articles are published in 2-rated journals.

7 The study by Taplin et al. (2002) also report on disclosure compliance levels in Australia, Singapore and Hong Kong.

8 The main part of the data (72%) in Street and Nichols (2002) is European, whereas 28% is from developing/emerging-market countries. Prather-Kinsey and Meek (2004) is primarily based on data from IAS adopters in developed countries (about 10% of the observations are from developing/emerging-market countries).

9 There are some observations from emerging/developing countries in these studies: less than 10% in Street et al. (1999), Bradshaw and Miller (2008), Hodgdon et al. (2008, 2009), and Taylor and Jones (1999); less than 20% in Hope et al. (2007) and Street and Bryan (2000); and less than 30% in Street and Gray (2002).

10 The compliance level observations of emerging/developing countries from the transnational studies were included in Figure 1. The same procedure was followed with regard to developed countries in Figure 2. Please note that there are observations pertaining to developing/emerging-market countries in some of the transnational studies of developed countries (see note 9).

11 A good example of targeting ‘best-in-class’ disclosers is the use of the word ‘compliance’ in quotation marks in the IASB’s press release referred to earlier (IASB, 2012), suggesting that there is some minimum level of superficial compliance in the minds of the regulators which is quite different from what the entities would achieve if they applied the standards as intended by the standard setter.