Poor disclosure of financial information

At the time to conduct the operations related to the financial reporting, it is needed for the managements of the business operations to comply with all the regulations and standards of both International Accounting Standards Board (IASB) and International Financial Reporting Standards (IFRS) (Nobes 2014). The main aim of this report is to analyze and evaluate different aspects of the conceptual framework of both IASB and IFRS. The first part of the report discusses about the aspects of poor disclosure of the financial information of the companies to the investors. The next part of the report discusses about the sufficiency of definition of operating profit and earnings before interest and tax (EBIT) in IFRS framework. The last part of the report discusses about the capability of the IASB’s definition of profit or loss and comprehensive income for meeting the needs of the stakeholders. 

The managements of the business organizations have certain responsibilities related to the financial reporting as it is the prime job of the managements of the companies to disclose the required financial information of their business operations so that the potential investors and the other users of the financial statements cab obtain the information required for their investment decision-making process. However, in the recent years, there are many instances where the managements of the business entities have been involved in the ‘boilerplate’ disclosure of the financial information and it leads to the poor representation of the financial statements to the users (Lang & Stice-Lawrence 2015). In this particular context, ‘boilerplate’ disclosure refers to the specific situation where the users of the financial statements like the investors and analysts consider the presented financial information of the companies as being too generic and lacking relevance; and this aspect makes the financial information less useful and purposeful for decision-making. Now, the main issue is that whether the managements of the companies in actual involve in this kind of boilerplate disclosure of the financial information or not (Lang & Stice-Lawrence 2015).

In this situation, it needs to be mentioned that this particular issue is not new in the process of financial reporting as the managements of the companies use to take assistance of this kind of disclosure for their personal benefits. According to the observation of the IASB, it has been found that the financial statements of the business entities often contain highly irrelevant financial information and not enough relevant information; and the main reason of this kind of disclosure is the ineffective application of the materiality concept and absence of appropriate financial judgment (Campbell et al. 2014). Financial disclosure by the companies often includes too much information to cover the void and this aspect creates confusion among the investors. It has been observed that the preparers of the financial statements in the companies often take into account the disclosure requirements of IFRS by not considering their relevance as their tendency is to copy the notes disclosures from the illustrative examples; and in this process, they fail in making the financial information specific to the specific financial circumstances of the companies (Hassanein & Hussainey 2015).

Sufficiency of definition of operating profit and earnings before interest and tax (EBIT)

Apart from the above, there are other reasons for the ‘boilerplate’ disclosure of the financial information. It is a fact that the process of financial reporting disclosure has been growing in a complex manner and it leads to more disclosure. More disclosures become unnecessary for the business entities. Risk-aversion is another reason for this kind of disclosure. The preparers of the financial statements have the tendency to disclose everything required by IFRS so that they cannot be blamed for the omission of the financial information (Florou & Kosi 2015). After that, the preparers of the financial statements have the tendency to direct copy the wordings of IFRS disclosure requirements from the financial illustrations that make the financial information less relevant with the specific financial circumstances of the entities. Lastly, the preparers of the financial statements often fail to appropriately apply the concepts of materiality and judgment and this leads to irrelevant disclosure of the financial information (Florou & Kosi 2015). Thus, the above discussion indicates towards the fact that the preparers of the financial statements use to hide the valuable financial information of their companies with the help of ‘boilerplate’ disclosure.         

It can be seen from the analysis of the current conceptual framework of IFRS that there is definition provided of Operating Profit and Earnings before Interest and Tax (EBIT). However, in this context, it needs to be mentioned that there are many doubts related to the sufficiency of the definitions of operating profit and EBIT. It can be observed that most of the business entities use the definition provide by IFRS for operating profit, but it does not automatically equate how the users see it (ifrs.org 2018). There are certain items like restructuring and impairment charges that are considered as ‘non-operating’, but they are gains or losses from the sales of the businesses or from long-lived assets. At the same time, it can be seen that there is lack of consensus among the users related to the fact that what operating profit constitutes. The presence of various failed attempt can be seen for defining operating profit (ifrs.org 2018).

At the same time, the framework of IFRS contains the definition of EBIT and it is considered as a widely used credit metric related to debt for the commercial and industrial companies. However, it can be seen that there is not wide use of this definition by financial institutions where they treat the interest on the customer account as operating expenses. For this reason, it is needed for the companies to decide on the relevance of the sub-total of EBIT. Apart from this, the business conglomerates with financial and non-financial operations have to face separate challenge related to the definition of EBIT (iasplus.com 2018). For example, under the regulations of IFRS, interest on pension is considered as a separate expenditure for the companies. Now, under the definition of EBIT as per IFRS, whether this expenditure needs to be considered as interest in the calculation of EBIT or not. At the same time, another major challenge can be seen related to the implications of capitalized interest costs. It indicates towards the presence of a confusion related to effects of capitalized interest costs in the calculation of EBIT (iasplus.com 2018).

IASB’s definition of profit or loss and comprehensive income

Thus, it can be seen from the above discussion that the business organizations have to face difficulties while using the definitions of operating profit and EBIT provided by IFRS; and this aspect indicates towards the insufficiency of the definitions of these two items by IFRS.

It can be seen from the conceptual framework of IASB that there is the definition of Profit or Loss and Other Comprehensive Income. According to IASB, the classification of income and expenses is done in the statement of profit or loss, or outside the statement of profit or loss that is in the statement of other comprehensive income (Zhang & Andrew 2014). According to the definition provide by IASB, the statement of profit or loss is considered as the primary source of information about the financial performance of the companies in a specific period; and this statement contains the total of the profit or loss of the company that helps in showing the financial performance of the companies (ctcp.gov.co).

At the same time, according to IASB, there are some specific income and expenses that are included in the other comprehensive income due to the presence of this reclassification from the statement of profit or loss; and the main aim to include this income and expenses in the other comprehensive income is to use them in the future in order to ensure more faithful representation of the financial performance of the business entities. According to IASB, income and expenses included in the other comprehensive income are not to be subsequently reclassified (van Mourik 2014).

It can be seen from the above discussion that IASB has provided the effective definition of profit or loss and other comprehensive income. The above discussion indicates towards the fact that the users of the financial statements of the companies can obtain detailed information about the profit or loss position of the company that helps them in determining the financial performance of the business entities (Mora & Wagenhofer 2014). On the other hand, the statement of other comprehensive income helps in showing the users the items that the business organizations have to reclassify from the statement of profit or loss. In the presence of this information, the users become able in making effective investment decisions.

Conclusion

It can be seen from the above discussion that there are certain factors in the business organizations that leads to the ‘boilerplate’ disclosure of the financial information by the managements of the companies like the complexity in the disclosure requirement of IFRS, direct copy from the illustrative example of IFRS and others. After that, it can also be seen that there is lack of sufficiency in the provided disclosure of operating profit and EBIT by IFRS due to the fact that they excludes some of the major financial items. Lastly, the definitions of profit or loss and other comprehensive income provide the users with the required information for decision-making process.

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