The International Accounting Standards Board is aiming to make it easier for investors to understand financial reports by providing new definitions of common financial terms.
The board is responsible for setting the International Financial Reporting Standards, which are applied in more than 120 countries. After soliciting feedback from investors and other stakeholders, it unveiled on Wednesday its plan for rulemaking over the next five years.
As far as financial reporting, the IASB said, “Investors told us that, at present, valuable information is often hidden by ‘boilerplate’ disclosures and that financial information is often poorly presented. It can be difficult and time-consuming for users of financial statements to identify the most useful information among all the information that is disclosed and important information may not be included.”
The board said it would “take a fresh look at how financial information is presented, how it is grouped and in what form it is made available.” According to The Wall Street Journal, the new definitions of financial terms such as earnings before interest and taxes, or ebit, are intended to “help market participants judge the suitability of a particular investment.”
“We want to give investors the right handles to look at a balance sheet,” IASB chairman Hans Hoogervorst said, adding that the current IFRS gives companies too much flexibility in defining terms, which often makes it difficult to compare financials.
“Even within sectors, there is a lack of comparability,” he noted.
The IASB also wants to improve the formatting of corporate income statements. “We will go in the direction of requiring more formatting, not just comparability of the bottom line, but above the bottom line as well,” Hoogervorst told Reuters. “There has been for years a huge demand from investors to do this.”
The WSJ said firms that decide against adopting the new IASB definition for ebit, for example, could be required to reconcile their own ebit calculation into one based on the IASB’s definition, creating more work for their finance staff.