Could the IASB be disruptive?
LSCA Technical Committee chair Jamie Tomlin questions whether the IASB could be disruptive by changing its approach to how financial information is structured, starting with its discussion paper on financial instruments with characteristics of equity.
In a recent article, James Naylor highlighted some of the classification issues arising from the International Accounting Standards Boards’ discussion paper on Financial Instruments with Characteristics of Equity. The paper is however much more ambitious than merely looking at whether an instrument is a liability, or equity, or something which falls between.
In recognising that financial instruments do not always fit neatly into a binary classification, the paper proposes additional presentation and disclosure requirements. It also introduces a rethink about how to determine and where to present changes in the carrying amounts of certain instruments within the performance statement, with more amounts being recognised in Other Comprehensive Income!
The presentation changes would also draw greater distinction between financial liabilities depending upon how their carrying amount is affected. The additional disclosures would provide more information about:
- priorities on liquidation;
- any potential dilution of ordinary shares; and
- contractual terms and conditions.
While it is difficult to argue that this information is not useful, I have two issues and one challenge with this.
Firstly, the inclusion of information on liquidation may seem to conflict with the going concern basis, but simply calculating this with a complex group structure could prove extremely 'challenging'.
The second, and not unrelated to the above, is how much more disclosures can be, or should be, included in financial statements while still retaining their ‘understandability’. Recent years have seen a focus on managing, limiting, even reducing the amount of disclosure. It would be a shame if the hard work done to limit the growth of disclosures were to recede.
Finally, if much of the disclosures are useful, the debate then shifts to a wider question about how information in financial statements should be structured. The current linear approach, with the occasional re-ordering therein, really does not suit large amounts of disclosure.
Greater thought should be given to how information is sign-posted. Or how technology could be better used to meet a reader’s needs. That would be much more interesting, and might even lead the IASB to being, in modern terms, ‘disruptive’.
Jamie Tomlin is chair of the LSCA Technical Committee.
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