International Financial Reporting Standards_guide.pdf

8 Chapter 1 Framework for the Preparation and Presentation of Financial Statements
for imposing market discipline. For a risk-based approach to bank management and supervision
to be effective, useful information must be provided to each key player: supervisors,
current and prospective shareholders and bondholders, depositors and other creditors, correspondent
and other banks, counterparties, and the general public. Left alone, markets may
not generate sufficient levels of disclosure. Although market forces normally balance the
marginal benefits and costs of disclosing additional information, the end result may not be
what players really need.
1.5.5 The public disclosure of information is predicated on the existence of quality accounting
standards and adequate disclosure methodology. The process normally involves publication
of relevant qualitative and quantitative information in annual financial reports, which
are often supplemented by biannual or quarterly financial statements and other important
information. Because the provision of information can be expensive, disclosure requirements
should weigh the usefulness of information for the public against the costs of providing it.
1.5.6 It is also important to time the introduction of information well. Disclosure of negative
information to a public that is not sufficiently sophisticated to interpret it could damage an
entity (especially if it is a financial institution). In situations where low-quality information
is put forth or users are not deemed capable of properly interpreting what is disclosed, public
requirements should be phased in carefully and tightened progressively. In the long run,
a full-disclosure regime is beneficial, even if some immediate problems are experienced,
because the cost to the financial system of not being transparent is ultimately higher than the
cost of revealing information.
1.5.7 The financial and capital market liberalization of the past decades brought increasing
volatility to financial markets and, consequently, increased the information needed to ensure
financial stability. With the advance of financial and capital market liberalization, pressure
has increased to improve the usefulness of available financial sector information through the
formulation of minimum disclosure requirements. These requirements address the quality
and quantity of information that must be provided to market participants and the general
public.
1.5.8 Transparency and accountability are not ends in and of themselves; nor are they
panaceas to solve all problems. They are designed to improve economic performance and the
working of international financial markets by enhancing the quality of decision making and
risk management among market participants. In particular, transparency does not change the
nature of banking or the risks inherent in financial systems. Although it cannot prevent financial
crises, transparency may moderate the responses of market participants to bad news by
helping them to anticipate and assess negative information. In this way, transparency helps
to mitigate panic and contagion.
1.5.9 A dichotomy exists between transparency and confidentiality. The release of proprietary
information may enable competitors to take advantage of a particular situation, a fact
that often deters market participants from full disclosure. Similarly, monitoring bodies frequently
obtain confidential information from financial institutions, which can have significant
market implications. Under such circumstances, financial institutions may be reluctant
to provide sensitive information without the guarantee of client confidentiality. However,
both unilateral transparency and full disclosure contribute to a regime of transparency. If
such a regime were to become the norm, it would ultimately benefit all market participants,
even if in the short term it would create discomfort for individual entities.
1.5.10 In the context of public disclosure, financial statements should be easy to interpret.
Widely available and affordable financial information supports official and private monitor-