Sunday, June 8, 2008

IFRS: Information Overload?

Very interesting quote

Increased volume and complexity of financial disclosures –
Reviews of the 2005 financial statements of EU companies suggested financial disclosures under IFRS increased by upwards of 30% over prior national GAAP levels. Changes in level of disclosure in Canada are expected.

This is a quote from the CICA publication “20 Questions Directors and Audit Committees should ask about IFRS Conversions”

The quote is out of context (apologies) but I put it up for discussion of the broader issue of the increasing level of disclosures.

You could analyze the above quote with a critical or even cynical eye. So perhaps some of the countries in the EU started with less disclosure than in Canada? Surely the increase in disclosure will subside once we are over the initial years of implementation when increased disclosure is required to explain the effects of the new accounting? Will one come up short if there is not about 30% more disclosure on adoption? Will we then have provided too little disclosure? This is something like the feeling you get when after assembling furniture you have screws and other hardware left over – I must have left something out you say?

The important point is that there will be more disclosure on the adoption of IFRS. There will be increased disclosure in any event even without IFRS implementation. This is a continuing trend and management and boards must deal with it.

What are the implications of this information explosion?

One result will probably be an acceleration of the move to paperless reporting (or at least paper-reduced reporting). There is only so much real estate in an annual report. Who wants their annual report to resemble the telephone directory of the Greater New York or L A area? Let’s protect our trees. I am particularly sensitive to this. My name is “Sycamore” after all.

Securities Analysts do not seem to be concerned about where the financial information, or other information, resides just as long as they can get at it. With some analysts it seems that more is always better. Of course information has to have integrity – it needs to be accurate, timely and relevant among other factors. This is certainly part of a business case for automated financial information that allows users to search for relevant key information.

Check out the coming of XBRL for some background in the area of automated financial reporting. You may have heard about XBRL and perhaps you were afraid to ask? Here are some interesting sources that will help you.

A presentation by the Chairman of the SEC

XBRL in plain English

The Business Case for Automated External Financial Reporting

(A free download)

I will come back to a discussion of XBRL later in a future blog entry. What are the implications during IFRS conversions? What are the implications for data tagging under IFRS?

Another implication for the exploding level of disclosure is the business imperative to obtain and maintain control over the process of developing the disclosures. The process can be very manual and subject to error. In the old days accountants were worried about getting the numbers right. The notes came later and were often thought of as explanations of numbers. Measurement was King (or Queen) in financial reporting. We have come a long way since those early days and there is a lot of emphasis, and quite rightly so, on the quality of disclosures both within and outside the financial statements. It’s a whole package, often driven by regulatory requirements that extends to Management Discussion and Analysis, special reports like corporate sustainability and beyond. Appropriate controls must be adopted in the development of this information. Have the right people been involved? Are the numbers consistent? Are the messages consistent? Are we even using the right version of a source document? It goes on and on. The devil is surely in the details when ensuring that one has acceptable disclosure controls.

Finally are we dreaming the impossible dream when we seek to simplify financial reporting into plain English, French, Arabic, Italian, Spanish or whatever?

In Canada, we used to say in the "old days" that financial information should be understandable by “the old lady in tennis shoes” or “Joe six pack” (yes people did not seem to fuss about political correctness in those days). You get the point though – I am referring to he “ordinary” man or woman. I would not underestimate “the old lady in tennis shoes’ (she might have been a CEO or a CFO) she can bring us back to common sense.

The world is complex indeed and we have been seeking the answer to this simplification conundrum for years. How to simplify and maintain integrity? What do you think? How does one convey complex financial information to non financial people? At least we should be able to explain it to members of boards of directors!

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