There is a debate about the extent of disclosures that should be included in annual reports. However, others have argued that instead of having extensive disclosures in annual reports, efforts should have been placed almost exclusively on reducing the quantity of information in such annual reports. This is because it is believed that this excessive disclosure is burdensome and can overwhelm users of financial statements. Also, others are of the opinion that there is no such thing as too much useful information for the users of the financial statements.
A. Why is it important to ensure that an optimal level of disclosure is made in an annual report?
B. What are the barriers that may exist when trying to reduce excessive disclosure of information in an annual report?
In Nigeria, the relevant law governing financial reporting is the Companies and Allied Matters Act (CAMA) 2020. CAMA requires companies to disclose certain information in their annual reports, including information about their financial performance, their corporate governance practices, and their risk management procedures.
However, CAMA does not specify the exact level of disclosure that is required. This means that companies have some flexibility in determining how much information they disclose in their annual reports.
IFRS 12 Disclosure of Interests in Other Entities
IFRS 12 is an International Financial Reporting Standard (IFRS) that requires entities to disclose information about their interests in other entities. This information is important for users of financial statements to understand the risks and rewards associated with an entity’s investments in other entities.
IFRS 12 requires entities to disclose the following information about their interests in other entities:
- The nature and extent of the entity’s interest in the other entity
- The risks and rewards associated with the entity’s interest
- The financial effects of the entity’s interest
- The manner in which the entity’s interests are managed
- The information required by other IFRSs
A) Why optimal disclosure should be made in the annual report of companies
- To ensure compliance with laws and regulations as well as financial reporting standards requirements.
- Requirement of regulations: Companies having several regulations may need to disclose more information to ensure compliance with the regulations requirements;
- Nature of the business: Quoted companies may need to disclose more information in their annual reports, unlike companies that are not quoted on the stock exchange;
- Consideration of various stakeholders: In a bid to provide adequate information to various stakeholders of a company, extensive information is included in the annual report to satisfy all stakeholders, such as shareholders, creditors, suppliers, employees, etc.
- Companies aiming at providing integrated reporting: The need for companies to adopt integrated reporting could also lead to excessive reporting in the annual reports;
- It improves the organization’s reputation and builds trust with stakeholders. More disclosure assists and improves the decision-making of shareholders investments;
- Regulatory compliance: More disclosure shows transparency and reduces penalties or sanctions from regulators; and
- Competitive advantage: More disclosure gives organizations a competitive advantage over those that fail to disclose financial
B) Barriers that may exist when trying to reduce excessive disclosure in companies annual reports:
- The threat of future litigation may outweigh any benefit derived from reducing the disclosure of information in the annual reports of companies.
- Preparers and auditors may be reluctant to change from their current position unless the risk of regulatory challenges is reduced.
- Effect of previous year’s disclosure: If disclosure has been made in the past, it might be difficult not to make similar disclosures in the current year, particularly if there are no standards to support such non-disclosure;
- Preparers may wish to present balanced and sufficiently informative disclosures and may be unwilling to change.
- Company may appear less transparent, leading to lots of trust and credibility amongst stakeholders;
- Failure to disclose non-financial information will expose the company to reputational risk, and
- Lack of competitive advantage: Company will lose customers to other organizations that give more information on non-financial activities like Environmental Stationery Requirement (ESR), environmental reporting, etc.