Chapter 9: Perspectives on the drawbacks of IFRSs: Justification of deviations between ideals
9.5.1 Complexity and overflow of information
Thus far, the challenges faced by users and preparers regarding the implementation of IFRSs have related to the transition process and are considered temporary, since experiences and knowledge of IFRSs is enriched with time. In this section we will discuss the problems or challenges encountered by the interviewees in relation to the nature of the standards and their underlying principles and practical aspects. Such issues were considered to affect the appropriate implementation of IFRSs and to reduce the quality of financial reporting information.
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A concern raised about the appropriate implementation of IFRSs and one of the relevant disadvantages were the constant changes, replacements or amendments to standards and provisions:
‘The changes and developments to IFRSs have to stop or decrease their frequency in order for users to absorb them.’ [FA3]
‘Sometimes I examine a particular area of the financial statements, then I realise that I have more questions, as some things have changed in between, and then I give up! We do not have that much time to devote, I try to become informed about important amendments and changes like financial instruments and the use of fair values, but sometimes I lose track of changes.’
[FA5]
The above statement illustrates another important issue raised; the overflow of information and lack of comprehensibility. Although financial statements under the IFRSs provide more aggregated information, the notes that accompany financial reports supplement and provide information about measurement methods and explanatory information about the accounts that are regarded as helpful. However, the information included is not always understandable.
Interviewees justify the requirement for greater disclosures and the provision of financial information and notes by mobilising the argument of greater relevance in financial reports.
‘If you take annual reports and try to identify how an analysis was done, it won’t make any sense; the information is dispersed in a document of 150 pages, one needs time to figure out what goes on. Under the GGAP there was a simple trial balance at the end of the year, with complete analysis of the entries, and where the numbers came from. We didn’t have any problems in getting information from listed companies...’ [BA1]
‘Another disadvantage [of IFRSs] is the amount of information; suddenly, there is a massive annual report that needs to be filtered. The information provided by the GGAP was incomplete but now things are at the other extreme. This is, however, the right direction for financial reporting, users have to find a way to filter information. The amount of information is overwhelming but it aims to satisfy the information needs of different users.’ [BA2]
‘At some point the information required had to be so detailed, it was irrational; sadism. For example, regarding reporting long-term loans, the interest rates and accounting figures kept on changing and the reported accounting figures did too […] IFRSs require too much information but maybe it is useful for different purposes.’ [ACT1]
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Some preparers argued that companies may be hesitant to disclose ‘proprietary’ information to competitors. On the other hand, smaller and mid-sized companies experienced greater problems, as many of their competitors were private companies that did not need to disclose any segmental information.
Lack of understanding, due to the technical complexity and conceptual abstractness of the IFRSs is raised often, justifying concerns and evidence in accounting literature that IFRSs are understood in depth by a minority, an elite of knowledgeable accountants and auditors. Other users, such as financial analysts and bank managers, including the management of companies, often lack the requisite advanced knowledge and expertise. This casts doubts over the interpretation of financial figures, which might significantly affect economic decisions.
‘If it is difficult to draft annual reports, then one can imagine how difficult is to make use of them. Sometimes, I think that many will read the notes, for example, but few will understand them. Sometimes an auditor is puzzled over how to write something, whether a certain way is better than another’. [AUD6]
‘It takes time and effort to conduct annual reports. We were unsure about presentation and disclosure. At one point the mentality was “Anyway, it doesn’t matter; no one is going to understand them anyway!’’ [AUD5]
The discussion relates to the challenges encountered by users and preparers when using and implementing IFRSs designated specific standards and accounting treatments that were perceived as problematic or complex in application in practice.
‘I don’t have time to examine financial reports in detail, what I am worried about is the financial products. There were several changes after the adoption of IFRSs. I read everything; I tried to understand how companies deal with derivatives, financial instruments and hedge funds.’ [FA3]
‘A great amount of information is required by the IFRSs. A common investor is not going to understand anything, they have to be economists. Even if IFRSs had to be simplified when is simple enough?’ [ACT1]
‘IFRSs are complex and require advanced accounting knowledge. Under IFRSs, accounting practice has moved towards finance. For example, before if someone owed us X we reported that. Now, IFRSs state that you cannot do that, because if we expect to get the money in 5
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years we need to know the present value of the money. A typical example is the case of financial instruments. One needs to know the Black & Scholes model simulations in order to apply and understand the standards.’ [FA2]
Another financial analyst shared a similar concern: ‘Our customers complain that they have to become accountants in order not to be deceived.’ [FA3]