The conference call of the FEE Accounting Working Party took place on March 11, 2014. The topic for debate was the Complexity Bulletin (a bulletin regarding the complexity of financial statements) prepared by EFRAG together with ANC (the French Autorité des Normes Comptables), ASCG (the Accounting Standards Committee of Germany), OIC (Organismo Italiano di Contabilità) şi FRC (UK Financial Reporting Council). The publication of this Bulletin is part of the EFRAG strategy to stimulate European debates and connect shareholders to the developments related to IASB’s conceptual framework review project.
The question launched by this Bulletin is whether it is necessary to introduce explicit complexity provisions within the IASB conceptual framework, considering that a number of studies developed in the last few years express concern that IFRS compliant financial statements have become too complex, and therefore, less understandable for their users.
The Bulletin’s authors view is that the best formula to define complexity is that offered by SEC (Securities and Exchange Commission) in the Final Report of the Advisory Committee on Improvements to Financial Reporting (2008):
“[…] Complexity in financial reporting refers primarily to the difficulty for:
- Investors to understand the economic substance of a transaction […],
- Preparers to properly apply generally accepted accounting principles […], and
- Other constituents to audit, analyse, and regulate a company’s financial reporting.”
Further on, the document makes a distinction between unavoidable and avoidable complexity.
Unavoidable complexity is justified by the fact that it reflects the economic substance of complex transactions. Complex transactions often require complex rules.
Avoidable complexity has no justification and could be eliminated from the IFRSs for the benefit of users and preparers of financial statements.
The IASB conceptual framework refers to complexity in the context of the discussion of information understandability and cost-benefit relation. The question is whether these statements are sufficient, and if they are not, how the discussion on complexity should be developed in the conceptual framework.
Currently, the general opinion in Europe is that it is not necessary to include these complexity issues in the conceptual framework, as the current provisions are sufficient to highlight real life complexity and the fact that, consequently, financial statements may become more complex in order to reflect the relevant information. Moreover, the inclusion of these assertions may create expectations from some of the users that IASB’s objective is to simplify the IFRSs. The objectives of financial reporting are listed in the conceptual framework, and simplification is not one of them.
Complexity is not necessarily the issue that should be approached, but rather the user’s understanding of the financial statements (understandability). Most frequently, information is not perceived as complex if it is understandable. A less complex information may be perceived as complex if it is not sufficiently understandable. Of great importance in this context is also the users’ knowledge regarding the IFRSs.
The manner the standards are written is also important. The clarity and sufficiency of the English wording are necessary for understanding the text of the IFRSs. In many instances, the standards include principle-based provisions, and in order to understand and apply these principles, it is necessary to refer to interpretations, guidance and guides.
The business model can be one of the main causes of complexity. For example, the business particularities may influence the recognition by component of the revenues generated by a transaction or contract. Complexity could be reduced by using materiality. Nevertheless, this instrument is used not only by the auditor, but also by the entity’s management. certain more complex information may be required by one entity’s auditor, while the same type of information is not required by another entity’s auditor. Consequently, the same complex information may be avoided by one entity, but not by another.
All of these issues should be taken into account in the IASB standard-setting process and could be implemented in the standard issuing procedures.
From the perspective of financial statement preparers, a temptation to reduce complexity in the reporting preparation process may appear. For example, if reporting based on the business model would be more complex, a decision might be made to report on a basis that does not rely so much on this model.
FEE is currently analysing the Bulletin and will issue a common opinion of its members that may be useful to EFRAG and its partners, as well as to IASB, in order to clarify the complexity of the IFRSs.
