08 December 2015
The European Securities and Markets Authority (ESMA) has issued a Public Statement aimed at improving of the quality of disclosures in IFRS financial statements. In the statement, ESMA stresses the need for concise and clear disclosures focused on the relevant facts that are specific to the entity and that are necessary to understand its financial performance and position.
According to ESMA, the following principles/objectives should be considered regarding the disclosures made in annual reports:
Issuers should focus on entity-specific disclosures and avoid boilerplate language. IFRS is principle-based but disclosure requirements are sometimes applied as if they were rules-based. When applying IFRS, issuers should be as specific as possible to their own circumstances. The use of boilerplate text in the financial statements without tailoring to the specifics of the entity offers less or even no valuable information to users. For example, an investor should be able to identify significant accounting policies – that is, those that are important or unique to the business’ operations, where there is a choice of policy under IFRS or where significant judgement has been exercised in the selection and/or the application of the policy.
Relevant information is information that is necessary to understand the issuer’s financial performance and position and that could influence an investor’s economic decision. Investors should be able to easily access relevant entity information in the financial statements. For example, an investor should be able to identify an issuer’s main revenue streams and their relative contribution to total revenues.
IFRS refer to the principle of materiality, which, when applied, should result in adapting the level of detail of the information provided in the financial statements based on the relative importance of the transactions, other events and specific conditions concerned. Effective use of the materiality concept should enhance the clarity and conciseness of financial statements. Although all relevant information should be contained in the IFRS financial statements, issuers should review elements which are no longer relevant, remove elements which are no longer required and consider deleting immaterial information from the financial statements. For example, an accounting policy is not required to be disclosed if it does not apply to any item in the financial statements.
Financial statements should be written in as clear and concise a way as possible, while still including all material information. The most relevant information should not be obscured by a large amount of less relevant information. Financial statements should be user friendly and issuers should help readers understand the financial information. Issuers should consider reorganising the financial statements, using cross-referencing where possible or modifying the layout to improve conciseness and clarity.
IFRS financial statements are usually published together with other documents, for example, the management report. Users expect consistency between information included in the financial statements and information included in the accompanying documents. Issuers and auditors should ensure such consistency.