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FEE believes that the Discussion Paper (DP) provides a useful review of some of the major issues involved in developing an effective disclosure framework applicable to all the different elements of the annual financial report, including management commentary, corporate governance and financial statements.
FEE agrees that disclosures would need to be considered beyond the confines of the notes to the financial statements. Therefore, FEE prefers the scope of the DP to that of the EFRAG, ANC and FRC Discussion Paper, 'Towards a Disclosure Framework for Notes'.
However, FEE acknowledges that the above-mentioned joint discussion paper with EFRAG forms an important part of the full disclosure picture but it is rather limited in scope. In order to find remedies to the shortcomings of financial reporting (such as overload and complexity), addressing disclosures in financial statements in isolation appears to be insufficient.
In FEE's view, the debate should take a broader perspective focusing on both the financial statements and the narrative section of the annual financial report.
Therefore, FEE supports the development of the DP, which considers how a disclosure framework might apply in a broader context.
Developments over the years have significantly increased the level and complexity of disclosure requirements. This evolution has intended and unintended consequences on the readability and understandability, as well as the auditability of the financial statements as a whole.
The increasing volume of information has not always enhanced the accessibility and usefulness of the information presented in the financial statements as the length and complexity of the annual reports may obscure important disclosures relating to the performance of the company.
There is increasing criticism that financial statements may not appropriately respond to users' needs. Those who mandate the disclosures in annual reports should consider changing their current practice of mandating detailed disclosure requirements as this may only reinforce a “checklist” approach to disclosures. They should rather describe in each standard why certain information is required to be disclosed and why it is relevant to users. A clear articulation of the objectives and a linkage to users’ needs would help companies make better judgements regarding what information should be disclosed.
Therefore, having a clear understanding of the users’ needs before proceeding to mandate disclosures is more likely to result in effective and practical financial communication. Therefore, FEE agrees with the FRC that a disclosure framework should address the question of the users’ needs.
Materiality is necessarily a matter of professional judgement applied to the financial statements as a whole that cannot be reduced to a mechanical exercise. Therefore, it is difficult to provide a very detailed description of materiality that can be applied at disclosure level.
FEE acknowledges that the understanding and application of this concept may differ in practice among preparers, auditors, users of financial statements as well as enforcement authorities.
Significant diversity in practice in the application of materiality in IFRSs among preparers, auditors, enforcers and among different entities is undesirable.
Materiality is currently defined within the IFRSs. It is regarded as an entity-specific aspect of relevance based on the nature or function, or both, of items to which the information relates. Hence, materiality is by definition subject to judgement (i.e. all facts and circumstances have to be taken into account) and both qualitative and quantitative considerations are required. Therefore, it would be unrealistic to expect that uniformity in the application of the concept of materiality could be achieved.
FEE would support the development of further guidance, in relation to materiality, in particular on qualitative factors, but only at a global level. In addition, FEE would like to note that auditing standard-setters, such as the IAASB, provide additional guidance on this issue to auditors. In FEE's view, it is important that any further guidance developed by the IASB is consistent with the guidance of the IAASB.