Accounting standards, regulation and law seem to place ever increasing requirements as to the amount of information that should be disclosed in annual financial reports.
In the light of financial reporting complexity, it is not surprising that some preparers are saying it is becoming more difficult to present clearly their financial performance, and a number of users of financial statements are commenting on the difficulty of being able to understand the importance of the information they are presented with.
The growth in financial reporting requirements is largely in response to the increasing complexity and diversity of business models, coupled with the demands from regulators for greater transparency in the wake of financial crises. Many preparers therefore find it difficult to decide what information they should include in their accounts and what they can leave out without running the risk of criticism.
It is perhaps therefore understandable that there has been an increase in what the Accounting Standards Board (ASB) has recently described as "clutter". In its publication Cutting clutter the ASB identifies two specific problem areas:
- immaterial disclosures that inhibit the ability to identify and understand relevant information
- explanatory information that remains unchanged from year to year.
The publication, which is relevant to both IFRS and UK GAAP preparers, acknowledges that preparers alone cannot improve the clarity of financial statements and addresses at some length the ways in which the ASB is already working with other bodies to try to assist the process and the ideas it has for future improvements. This will take time and the ASB also identifies some places where it considers that preparers can improve the clarity of their financial statements without any change to the framework under which they report.
As part of its publication, the ASB has provided two short aids for preparers to assist with the preparation of the annual financial report. One is a planning aid which, among other things, suggests that preparers think in advance as to what they want the overall message of the financial statements to be and what they will determine to be material in the current period.
The second aid is for use at the stage when the financial statements are reviewed and includes considering whether new disclosures duplicate or replace other disclosures which should now be removed or refined. While not explicitly referred to in the aid, we suggest that this process should also include considering whether explanatory information in relation to past events is still relevant.
Smith & Williamson commentary
The remainder of this newsletter addresses a number of proposed new standards which will all result in new accounting and disclosure requirements. This is not the first time that we have seen a call for removing so-called "clutter" in financial statements. The ASB's publication and other similar documents do however identify that time pressures on preparers at the finalisation stage is one of the contributing factors to accounts containing what might be seen as unnecessary information. For anyone wanting to try and improve the clarity of their accounts, a simple starting point might be to spend a couple of hours reviewing last year's financial statements while considering the following questions.
- Do the financial statements 'flow' in a logical order or have they become confused?
- Are there are any disclosures with nil amounts where amounts are likely to be nil again?
- Are there any accounting policies for items that are either immaterial or types of activity no longer carried out by the business?
- Are notes supporting items in the primary statements actually providing any additional information about those items?
- Are there any disclosures specific to events in one period that will not need to be repeated?
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
