Ralph Martin

The global push to simplify financial statements is gathering momentum, and those preparing accounts should take the opportunity to conduct their own “decluttering” process, says Crowe Horwath’s Audit Technical Director Ralph Martin.

He says there is widespread acknowledgement that financial statements have become too lengthy and complex, and those preparing accounts should take advantage of recent changes to accounting standards to make them far more accessible to investors or other readers.

“Financial statements have grown in size every year, with a typical ASX-listed company often preparing more than 100 pages of information. Although listed companies are the most visible example, private companies, charities and government entities often experience similar issues.

“It’s not surprising that some companies revert to preparing two sets of financial reports; those required to comply with the Australian Accounting Standards, which are increasingly regarded as a compliance exercise, and those where the company produces additional, specifically tailored reports for its shareholders.

“While it can be tempting to place blame purely on the accounting standards themselves, ‘disclosure overload’ can also arise from the way that some financial statements are prepared, with over-reliance on generic templates and checklists, without consideration for what investors would like to know, and how best to present information to them.

“We see situations where companies with small market capitalisations are producing lengthy reports for shareholders. You have to ask what the benefit is.”

The International Accounting Standards Board (IASB) launched an initiative to work out how to reduce “disclosure overload”, with a key outcome being a revised version of AASB 101Presentation of Financial Statements.

The revised standard clarifies several key concepts around financial statement preparation, including:

• Changing the structure of the financial statements in order to give more prominence to relevant areas.
• Applying the concept of materiality to ensure that information within the financial statements is relevant to the readers.
• Although each standard contains specific minimum disclosure requirements, a company doesn’t need to provide a specific disclosure required by an Australian Accounting Standard if the information is immaterial.
• Those preparing financial statements should not try to obscure material information by “hiding” it in a large volume of immaterial information.

Martin says these principles are designed to reassure those who prepare financial statements that they have the freedom to apply the concept of materiality and exercise judgment in deciding what should be included in financial statements.

“This includes a greater focus on relevance, removing unnecessary notes and wording, change to the order of the financial statements and to use plain English.

“For example, it’s not necessary to include a note for every material balance. Rather, consider which notes genuinely provide further useful information to the end user.

“Also, using plain English is key. The use of technical language and accounting jargon is a common complaint by readers of financial statements, particularly when describing accounting policies.”

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