Critical Analysis Of Effective Communication Principles In IASB’s Discussion Paper

Purpose of the Memo

The objective of this memo is to present a critical analysis of the proposed principles of effective communication that have been highlighted in the discussion paper named “Disclosure Initiative – Principles of Disclosure” which has been issued by IASB in March 2017. The critical analysis of the various proposed principles outlined in the memo would allow the firm to take a position on whether to endorse the position taken by the IASB or oppose the same. Further the critical analysis of the effective communication principles would also allow the firm to advice on additional principles which may not be reflected in the current version of the draft issued.

An analysis of the various principles of effective communication that have been outlined in the Section 2 of the above mentioned discussion paper is carried out below.

• The first principle is that information provided requires to be specific to the underlying entity which allows the information to be relevant for the circumstances that the entity may be facing. Clearly, this makes sense or else information would be so generic that it would not be possible to segregate one from other and in the process the information would lose the underlying meaning. This principle would help in addressing the issue of “boilerplate” language that is often used and does not disseminate any useful information for the external stakeholders (AASB, 2017). 

• The second principle is that information presentation should be direct and concise whereby all the material information is captured and the length is not unnecessarily increased. This is again a very crucial aspect which ensures that there is no duplication of information and only the relevant information is included. This is required so that the users do not have to skim through long texts of communication to derive useful information. Also, the direct information ensures minimal use of technical jargon which tends to inhibit effective communication since majority of the users are not well versed with such technical jargons (IFRS, 2017). 

• The third principle is regarding the organisation of information which must be carried out in a manner which is in order and also highlights the significant issues within the same. This is a critical principle as not only the information stated should be correct but it should be disclosed in a manner that it is  easier for the users to read and understand the same. Proper organisation of the information ensures the same. It makes sense that all the relevant information about a particular aspect is represented at a single place so that all the viewpoints and aspects related to the matter may be stated which would allow better analysis of the given aspect (E&Y, 2017). 

• The fourth principle relates to the developing linkages between the various parts so that the navigation can be improved and also the users can understand the cross linkages. Even though the intention of this principle is benign but one should be cautious while adhering to this as too much cross linkages and cross references can eventually make it more difficult for the users.  However, an advantage of adhering to this principle is that unnecessary duplication can be avoided (IAS, nd). 

• The fifth principle is that information must not be duplicated in the annual report or various components of financial statements. This is necessary so that the disclosures are concise and not overly bulky. Also, the other principles highlighted above also tend to provide support for the same especially through developing cross –references which can be used to avoid information duplication (E&Y, 2017). 

• The sixth principle of effective communication endorsed in the discussion paper is that the manner of presentation of information should be such that comparison across periods and entities can be facilitated. Clearly, this is quite useful from the perspective of primary users of financial statements who rarely look at financial information in isolation. The presented financial statements are compared with either the previous periods or with other entities so as to make sense of the performance of the company. 

Hence, it makes sense that the disclosures should be made in a manner that tend to facilitate comparison (AASB, 2017). 

• The seventh principle is that the information must be provided in the manner that is befitting for the type of information. This is clearly quite imperative since the disclosure format for different information types would differ. It is quite laudable that the discussion paper proposes flexibility in this regards which is quite essential and it is in the interest of the users of financial statements that reporting entities are provided flexibility regarding the disclosures (IFRS, 2017).

It is apparent that the above principles of effective communication are a step in the right direction considering that these are guidelines which would ensure that the informational needs of the external stakeholders would be better served. Also, a key positive aspect of these principles is the inherent flexibility that these boast which provides a relatively free hand to the reporting entities to ensure that requisite information is disseminated in a timely and appropriate manner.  Thus, the firm would endorse the above principles that the IASB discussion paper highlights since these would serve the interests of the users of financial statements. However, it makes sense that certain additional principles of effective communication are also added to uphold the interest of the users. One of these would be that the information disclosed should only consist of those material facts which are useful for the users and must not contain non-material information which adds to the complexity. Also, it would be useful for addition of a glossary which could reflect the meaning of the various technical jargons that have been used in the disclosures. This would go a long way in enhancing financial literary of the host of users which today rely on the professionals for interpretation of the financial reports.

Thus, it would be appropriate to conclude that the various principles of effective communication highlighted in the discussion paper would go a long way in serving the objectives of the financial disclosures. Also, if the recommendations in this regard are also included, then in the long run, financial literacy of primary users can also see a significant improvement.

Analysis of Effective Communication Principles in IASB’s Discussion Paper

Yours Sincerely

STUDENT NAME 

LETTER

Dear Sir

I wish to inform you about the recent discussion paper by IASB titled “Disclosure Initiative – Principles of Disclosure” which besides other things highlights the various principles of effective communication which the various reporting entities (firms) need to adhere to. The various principles that are highlighted in that discussion paper are briefly highlighted below (AASB, 2017).

• The information provided in the annual report or any financial report needs to be specific and not generic.
• All the material information should be captured but the information should be simple and direct.
• The organisation of the information should be such that the disclosures are arranged in an appropriate order and highlight pivotal matters.
• Efforts must be made to link the information in different section so that the interpretation of information can improve.
• There should not be duplication of information and efforts must be made to avoid the same.
• The information must be presented in a format that allows comparison with previous periods along with other entities.
• The format for representation of information should be appropriately chosen by the concerned firm or business.

In view of the above proposed guidelines, it may be required in the future that the presentation of disclosures would have to be altered. As a result, the current disclosure regarding the plant, property and equipment might have to change to incorporate the above aspects.

One of the principles that would be relevant is that the format of the representation should be one that is best suited. The current disclosure regarding the plant, property and equipment does not adhere to the best format. As a result, this information can be better represented in the following manner.

Also, the depreciation information should be represented separately in a methodical manner whereby the asset value at the beginning of the year must be stated, disposals and assets bought should be adjusted and then after deduction of the depreciation expense relevant for the concerned financial year, the value of the assets at the end of the year need to be stated. Additionally, it is also imperative to present the information so to the users can compare the information with the previous periods. This is quite relevant for the fixed assets and thereby in the relevant notes to account, there should be a comparison in a tabular format for atleast two years which would provide the user an opportunity to compare the various entries with corresponding entries in the past besides providing an entity.

It is essential to note that changes in the presentation would not be limited to disclosures related to plant, property & equipment but would extend to disclosures related to other aspects of financial statements as well. It is expected that these changes in the presentation would enhance the communication of key information to the users of the financial statement and thus would prove beneficial over the long term.

We would keep you notified of any updates in this regards and would be also willing to help in making the shift if and when required.   

References

AASB (2017) Disclosure Initiative – Principles of Disclosure [online] Available at https://www.aasb.gov.au/admin/file/content105/c9/ITC35_04-17.pdf [Accessed April 16 2018]

E&Y(2017) Disclosure Initiative – Principles of Disclosure [online] Available at https://www.ey.com/Publication/vwLUAssets/ey-disclosure-initiative-principles-of-disclosure-april/$FILE/ey-disclosure-initiative-principles-of-disclosure-april.pdf [Accessed April 16 2018]

IAS (n.d.) Disclosure Initiative – Principles of Disclosure [online] Available at https://www.iasplus.com/en/projects/major/principles-of-disclosure [Accessed April 16 2018]

IFRS (2017) Snapshot: Disclosure Initiative—Principles of Disclosure  [online] Available at https://www.ifrs.org/-/media/project/disclosure-initative/disclosure-initiative-principles-of-disclosure/discussion-paper/education-materials/principles-of-disclosure-snapshot-2017.pdf/ [Accessed April 16 2018]