03 August 2017

ICAEW: non-comparable disclosure under IFRS is a problem

ICAEW published a new briefing that reports the difficulties met when collecting data on the three topics investigated - pension discount rates, impairment and capitalisation of development costs - in order to study international differences in IFRS practice.

Dr Nigel Sleigh-Johnson, Head of Financial Reporting at ICAEW, said:

“IFRS reporting has brought improvements in financial reporting and in international comparability. However, the quality of disclosure still differs markedly across the world, and can be insufficient. This can make it difficult to compare practices across companies and across countries.”

The topic with the largest amount of non-comparable disclosure is pension discount rates: only 67% of financial statements examined were found to be comparable for analysis. Among other problems, the research found that pension discount rates were often not distinguished by country and were disclosed as a relatively wide range. Additionally, although it has been a requirement since 2013 to disclose the duration of the pension obligation, which is important for comparing pension discount rates, many companies do not provide comparable disclosure in this area. [...]

Among other problems, the ICAEW found many instances of:

• pension discount rates not distinguished by country

• discount rates disclosed as a range

• duration of the pension obligation not disclosed

• impairment charges mixed in with depreciation/amortisation

• impairment of PPE mixed in with that of other types of asset

• impairments netted against reversals

• capitalised development costs mixed with other intangible assets

• lack of disclosure of the year’s research and development expense.

This is an issue of non-comparable disclosure under IFRS. The severity of the problem varies by country, but as a data problem it should be of interest to analysts. Some of the thinness in disclosures may be due to immateriality but the ICAEW suspects some non-compliance with IFRS disclosure requirements, which should concern auditors, the IASB and regulators.

The ICAEW particularly investigated whether firms disclosed sufficient information to allow an analyst to compare like-with-like among IFRS reporters (called ‘comparable’ disclosure here). For example, the ICAEW asked whether there is enough disclosure to identify:

• the discount rate used for pension obligations relating to workers in the parent company’s country;

• the amount of impairment reversal on PPE for a particular year; and

• the capitalised development costs during the year.

From this perspective, many firms made inadequate disclosures. For example, impairments of PPE were sometimes mixed with depreciation, sometimes mixed with those for other assets and sometimes netted against reversals.

For pension disclosures, 32.7% of firm-years had non-comparable disclosure of discount rate. The main problems were that 10.1% of firms disclosed a range of rates rather than a rate, and that 10.7% of firms disclosed a weighted average rate for several countries. Disclosures did improve over time, particularly with a revised version of IAS 19 which had effect in 2013. However, only 38.1% of firms made comparable disclosures of both rate and duration of obligations in 2013, the first year in which duration had to be disclosed. Disclosure quality varies hugely across countries, with UK firms being the best (68.9% satisfactory disclosure of both rate and duration) and South Korean the worst (2.6%).

For impairment and its reversal, comparable disclosure was more prevalent (95.3% of firm-years). A very high proportion of the problems (of various types) relate to France, Italy and Spain.

Full report

© ICAEW - Institute of Chartered Accountants in England and Wales