Towards a framework for disclosures in corporate financial reports: a critical analysis

The studies carried out on disclosure in the last two decades have created great interest in the narrative section of corporate reporting. However, despite the undoubted effects of disclosure on the efficiency of the capital markets, as empirical research has shown, the significant increase in information in corporate reporting and the lack of adequate regulation have contributed to incrementing the complexity, subjectivity and unreliability of disclosure. There is a strong consensus in the financial community on the essential role of disclosure in corporate financial reports, with the result that many standard setters have increased their efforts to develop a framework for disclosures. Among others, in July 2012, the European Financial Reporting Advisory Group published a Discussion Paper, “Towards a Disclosure Framework for Notes”, and in October 2012, the Financial Reporting Council (FRC) published the Discussion Paper “Thinking about disclosure in a broader context” that aimed to address the underlying principles and content of corporate disclosure to assist standard setters in developing disclosure requirements on a more consistent basis using a set of agreed principles. From an interpretative and critical perspective of qualitative analysis, this paper examines the main characteristics of the two kinds of disclosure and compares them in order to verify how they fit in with the necessity to rationalize and simplify the current disclosure regime and to create a Framework that may lead to an equilibrium between costs/benefits and providing entity-specific information/comparability. The analysis presented here is supported by an examination of the vast literature on the subject with the aim of highlighting how the two papers in question respond to the issues arising from studies on disclosure. The results of the analysis show that the two Disclosure Frameworks apply different approaches with few similarities. This situation could create various initiatives that complicate the debate on disclosure framework and the identification of disclosure requirements on a more consistent basis of agreed principles. Additionally, the critical analysis underlines the gap between the EFRAG and FRC discussion papers and the features of high quality disclosure identified by the main studies on disclosure. Finally, it presents some reflections about the identification of the key principles for a better disclosure such as user’s needs, placement criteria, materiality and comparability starting from the Conceptual Framework of financial statement. This paper encourages debate on the narrative part of the financial statement and the importance of finding a framework for disclosure that would eliminate the tendency to present a boilerplate lacking in relevance and comparability.