by John Hughes
I’ve already made some comments about the SEC’s staff paper, An Analysis of IFRS in Practice, generated after examining the most recent annual financial statements of 183 companies domiciled in 22 countries, and setting out an array of apparent deficiencies, ambiguities and opportunities for improvement. But I think it’s worth returning to the subject one more time. After all, regulators don’t tell us that often how they look at things, and the SEC paper could be used as a kind of supplementary checklist, nudging preparers and auditors to tread particularly carefully in the areas it mentions, if they want to avoid receiving a comment letter on those issues. Of course, Canadian regulators don’t look at things in exactly the same way as the SEC, but presumably there’s enough overlap that the paper is useful for our domestic purposes too (not least, of course, because Canadian regulators have no doubt gone through it in detail and extracted some lessons).
An immediate problem in what I just said though is that it’s the kind of attitude that prioritizes petty compliance over materiality: you might be confident a particular disclosure isn’t material, but because its absence could be questioned by regulators, you make the disclosure anyway, rather than take the chance of having to explain it later. I must admit I succumb to this caution myself all the time. It’s entirely misplaced – why worry if regulators raise a comment, as long as you’re comfortable you have the right response to it? – but I think many people tend to regard any kind of communication from the OSC or others as an implicit adverse judgment, and one they want at all costs to avoid, regardless that it means cluttering up the statements.
The SEC is clearly aware of this problem: “The Staff does not intend to suggest that disclosures in these instances (i.e. the instances where they had unresolved questions about the statements) were necessarily deficient or that the disclosures should have been prepared with the purpose of communicating to a regulator the manner in which a company complies with a set of accounting standards. The Staff recognizes that financial statements are intended to facilitate investor decision-making, and additional information that would have benefited the Staff in this analysis may be of less incremental value to an investor.” It’s an important point, but one potentially overshadowed by the many detailed issues listed. For example, on the subject of inventories,, the report observes: “Some companies did not disclose the amount of reversals of write downs during the period and the circumstances that led to the reversal, as required by IFRS.” This seems like an obvious area in which one ought to be able to assume that an absence of disclosure simply means there’s nothing to say. But since the SEC mentions the issue, it’ll just encourage more companies to ploddingly specify that the amount of reversals of write-downs recognized during period was nil (comparative period – nil). The paper has many things along these lines.
It also muddies the waters in various places by seeming to comment on how disclosures might improve on what IFRS requires. For instance, in the context of property, plant and equipment, it says: “Some companies indicated that costs incurred during a start-up period were capitalized but did not describe the nature of costs capitalized or the time span of the start-up period. Such disclosures could help facilitate investor comparisons of financial statements, as the details of cost capitalization may vary across companies.” Well, I suppose they could, although it’s hard to see how an investment decision could ever turn, even marginally, on such trivia. But regardless, IFRS doesn’t require providing such information, so it seems like an arbitrary observation at best. Even geekier is the complaint that only two companies “provided additional disclosure regarding their application of the initial recognition requirements of IAS 12 to finance leases and the provision for asset closure and restoration costs.” I can see how that would ruin someone’s day…
In a somewhat more relevant vein, the paper makes a number of observations about the use of sub-totals on the income statement (they counted up eighteen different kinds). Here again, these observations don’t all necessarily seem to be getting at deficiencies in how entities applied IFRS, but it’s plainly an area the SEC staff doesn’t like and won’t be able to resist asking questions about (not that we didn’t know this already). Canadian regulators have spent some time on this aspect of things too.
Many of the other issues are long-established weak spots under Canadian GAAP. Over the last decade, I think Canadian regulators may have commented just about annually on the weakness of accounting policy disclosures about revenue, but it never really gets much better. No surprise to see this in the SEC report as well. Anyway, despite any reservations, there’s probably enough material in there to jog every practitioner’s thought processes in some respect at least.
The opinions expressed are solely those of the author