Financial Accounting: Disclosure Initiative and Financial Statements

This report provides an analysis of the IASB's Disclosure Initiative and its impact on financial statements. It explores the importance of clear and effective communication in financial reporting, highlighting how the initiative aims to improve the usefulness and standardization of information disclosed. The report examines the application of the initiative's principles, such as entity-specific information, clarity, organization, linkage of information, avoidance of duplication, and comparability, using examples from financial statements. It also discusses the changes in accounting standards and their effect on disclosure requirements, focusing on the benefits of standardized disclosure principles. The report highlights the importance of transparency in financial reporting for making informed investment decisions and ensuring the reliability of financial statements.

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FINANCIAL ACCOUNTING

Financial accounting
Communication in the financial report has been the major point of discussion and one of the
vital considerations. The IASB has taken up major efforts to improve the communication in
the financial report. The financial report is a mirror to the investors wherein the investor can
check the real view of the business and hence, the communication should of high standard.
Further, it even reflects the disclosure pattern of the business because when the
communication is fluent it provides relevant details to the stakeholders at large.
The debate on the financial statements giving proper and full and proper disclosure of
information has now been much talked about after IASB has released its paper on disclosure
initiatives. The Ministry of Corporate Affairs has vided notification no S.O. 447(E), dated
28th February 2011 has also introduced the new Schedule VI in place of the old one in order
to converge with the accounting guideline reforms across the globe and to come in terms with
the disclosure requirements (Landsman et. al, 2011). The government made the new and
revised schedule Vi applicable to all companies with effect from 30th March 2011 vide
notification no F.N. 2/6/2008- C.L-V. We are moving towards a more refined and useful
disclosure of information in the books of accounts.
This new schedule had brought many changes in the classification. Division and sub-division
of accounts and accounting heads. The presentation was made more elaborate and clear, the
preparation of notes was focused more, and we moved towards a more transparent system of
accounting disclosures.
On March 2017, IASB- International Accounting Standards Board had published a paper DP
2017/1-: Disclosure Initiative- Principles of Disclosure’. These principles aim at bringing
effectiveness of IFRS financial statements. Undoubtedly, the board aims to make the
information available through the financial statements more useful and standardized. I,
having a knack for investments, (it is my bread and butter too) have been using the
information provided by the financial statements often. I wished to make some investments
recently and the stocks under consideration were that of CBA or NAB. I did do quite a bit of
research on them, using their respective financial documents. However, highlighting each
principle as laid in Section 2 of the paper on Disclosure Principle, I put forward my views on
the same:
1. Entity Specific- The entire information related to the entity, its growth or decline, the
new systems and initiatives taken by it over the accounting period, its growth and such other
entity specific details are mentioned in the financial statements. Such entity-specific and not
generic information is very important to take financial decisions (Lai et. al, 2013). However,
many trade secrets and more inside information that may be material for a financial decision
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Financial accounting
might not have been shared in the financial statements. Assume a situation where the board
internally decides to vote against a director or maybe propose to take in an honorary director
on board, which has been kept a secret now but might alter the investment decisions (Morris
et. al, 2014). Similarly, a change of the recipe for a food brand can create ripples at stock
prices but this information (prospective mostly) are not conveyed by these financial statement
disclosures.
2. Clear and Simple- the information in most IFRS financial statements might be clear.
The presentation is really clear. Tables, charts, bars, it’s all used to make sure the information
reaches its user. However, for a layman, to refer these books of accounts and get a picture of
what is going inside the organization and whether the stock looks promising or not, is a little
difficult because of the complexity of the disclosure requirements (Lai et. al, 2013).
3. Organized to highlight important matters- the audit findings on anything important
which need the attention of the user of financial information is clearly put in their disclosures.
Even the books of accounts have clear information on the thing which is not a part of the
regular course of action of the business. This makes the use of financial statements more
reliable (Horton & Serafeim, 2010). There was absolutely no difficulty faced in this regard.
Any spe4cific audit findings, any specific disclosure of inefficiency or non-compliance to
laws is always mentioned by way of notes in the financial statements (Kieso et. al, 2010). As
matter of fact, and non-disclosure of such information is detrimental to the goodwill and fair
play on the part of the company and is a major non-compliance for that matter.
4. Linked to related information- all items in financial statements are linked to each other
by way of notes to accounts, footnotes and workings. Everywhere, where a part of the
information is placed as a note, a reference to the note number and at times page number
references are always given (Nobes & Parker, 2010). A content page in each financial
statement showed the page number which helps in finding precise information instead of
navigating across each page to find a particular information (Byard et. al, 2011). All pieces of
information are put together. There was no challenge faced in this area and this principle
seems to be working effectively for all financial statements.
5. Free from unnecessary duplication- This principle had gone for a toss when a closer
and clearer look at the financial statements is provided. Often information is repeated as a
demand of statutory requirements. There is so much information, most being repetitive that it
often becomes difficult to sieve the most important information from the less important ones
(Horton & Serafeim, 2010). Hence, it leads to difficulty because of the vast size of the
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Financial accounting
information. The information should be present in a concise fashion that helps to project the
accurate information and leads to a smooth process of decision-making.
6. Comparable- The standardization of financial statements following similar accounting
concepts, is easier. An entity which applies the standards and principles of IFRS can find it
difficult to compare the same to that which follows Indian accounting standards. It would be
like comparing apples to oranges. However, as far as the disclosure is concerned, if similar
policies and principles are being followed, as is the case that I have picked up, of comparing
the financial statements of CBA and NAB, since the disclosure principles are standardized, it
is very easy to look, compare and decide. Assets, liabilities, directors, their profiles, the future
course of action, you can compare each item and weight them (Hamilton et. al, 2011).
7. In an appropriate format- this principle is not fully put to use by all the organizations
yet. Charts, pies, graphs make sure the information is understood by a layman as well. They
summarize all the financial details in pictorial forms to make the data more useful for
stakeholders.
Therefore, disclosure pattern and communication assumes to be of vital importance and
influences the decision making process. Therefore, the disclosure initiative by the company is
of immense importance as it not only sheds light on the performance of the company but even
projects the appropriate information that is highly useful in the process of decision-making.
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Financial accounting
References
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analysts’ information environment. Journal of Accounting Research, 49(1), 69-96.
Doi: 10.1111/j.1475-679X.2010.00390.x
Hamilton, K., Hyland, B., and Dodd, J. L. (2011). Impairment: IASB-FASB Comparison.
Drake Management Review, 1(1), 55–67. Doi:
https://pdfs.semanticscholar.org/8d8f/5fd070193d6fa52e79d1dee9cc6632159d8a.pdf
Horton, J., and Serafeim, G. (2010). Market reaction to and valuation of IFRS reconciliation
adjustments: first evidence from the UK. Review of Accounting Studies, 15(4): 725-
751. Doi: https://doi.org/10.1111/j.1911-3846.2012.01159.x
Kieso, D., Weygandt, J., Warfield, T., Young, N., and Wiecek, I . (2010). Intermediate
Accounting. Toronto: John Wiley & Sons Canada.
Morris, R. D., Gray, S. J., Pickering, J., and Aisbitt, S. (2014). Preparers' perceptions of the
costs and benefits of IFRS: Evidence from Australia's Implementation Experience.
Accounting Horizons, 28(1), 143-173. Doi: https://doi.org/10.1111/auar.12168
Nobes, C & Parker, R. (2010). Comparative International Accounting. FT Prentice Hall.
Lai, C., Lu, M., and Shan, Y. (2013).Has Australian financial reporting become more
conservative over time?. Accounting & Finance, 53, 731-761. Doi:
https://doi.org/10.1108/JFRA-01-2015-0019
Landsman, W. R., Maydew, E. L., and Thornock, J. R. (2011). The information content of
annual earnings announcements and mandatory adoption of IFRS. Journal of
Accounting and Economics, 53(2), 34-54. Doi: 10.12691/jfa-5-1-4.
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