Question Three

a) Developing a framework for disclosure is at the forefront of current debate and there are many bodies around the world attempting to establish an overarching framework to make financial statement disclosures more effective, coordinated and less redundant. It has been argued that instead of focusing on raising the quality of disclosures, these efforts have placed their emphasis almost exclusively on reducing the quantity of information. The belief is that excessive disclosure is burdensome and can overwhelm users. However, it could be argued that there is no such thing as too much useful information for users.

Required:

1. Discuss why it is important to ensure the optimal level of disclosure in annual reports, describing the reasons why users of annual reports may have found disclosure to be excessive in recent years. (9 marks)

2. Describe the barriers, which may exist, to reducing excessive disclosure in annual reports. (6 marks)

b) The directors of Handshake Limited Liability Company, a public limited company, have read various reports on excessive disclosure in the annual report. They have decided to take action and do not wish to disclose any further detail concerning the two instances below.

1. Handshake is a debt issuer whose business is the securitization of a portfolio of underlying investments and financing their purchase through the issuing of listed, limited recourse debt. The repayment of the debt is dependent upon the performance of the underlying investments. Debt-holders bear the ultimate risks and rewards of ownership of the underlying investments. Given the debt specific nature of the underlying investments, the risk profile of individual debt may differ. Handshake does not consider its debt-holders as being amongst the primary users of the financial statements and, accordingly, does not wish to provide disclosure of the debt-holders exposure to risks in the financial statements, as distinct from the risks faced by the companys shareholders, in accordance with IFRS 7 Financial Instruments: Disclosures. (5 marks)

2. At the date of the financial statements, 31 January 2020, Handshakes liquidity position was quite poor, such that the directors described it as unsatisfactory in the management report. During the first quarter of 2020, the situation worsened with the result that Handshake was in breach of certain loan covenants at 31 March 2020. The financial statements were authorized for issue at the end of April 2020. The directors and auditors reports both emphasized the considerable risk of not being able to continue as a going concern. The notes to the financial statements indicated that there was ample compliance with all loan covenants as at the date of the financial statements. No additional information about the loan covenants was included in the financial statements. Handshake had been close to breaching the loan covenants in respect of free cash flows and equity ratio requirements at 31 January 2020 The directors of Handshake felt that, given the existing information in the financial statements, any further disclosure would be excessive and confusing to users. (5 marks)

Required:

Discuss the directors view that no further information regarding the two instances above should be disclosed in the financial statements because it would be excessive.

(Total 25 marks)