Simplifying financial reporting is an ongoing process of change.
Each year financial reporting teams, audit committees and auditors should work together to identify new areas for improvement and focus.
As transactions and balances change, and as new accounting standards are implemented, financial statements should be streamlined to ensure that the most important events are the most prominent in the reports.
Materiality is an overarching principle
Accounting standards have moved to a principle-based model with the overarching element of materiality. Materiality is providing the right level of information for readers to understand the position and performance of the entity—not too little but also not an overwhelming level of information concealing what is most important for the reader to know.
The accounting standards state that an entity need not provide a specific disclosure required by an Australian Accounting Standard if the information resulting from that disclosure is not material. This is the case even if an Australian Accounting Standard contains a list of specific requirements or describes them as minimum requirements.
So, even if an accounting standard requires a disclosure, if it is not quantitatively or qualitatively material, the disclosure does not need to be included.
Is the annual performance explained through reading the statements?
Financial statements should be focussed on delivering information to readers about the most significant and relevant aspects of an organisation’s activities, services and assets. Think of the organisational strategy and what is used to deliver strategic objectives—is this reflective of the main content of financial statements?
There may need to be additional disclosure beyond those compliance requirements of the standards for the ‘big-ticket’ items of activity. This is also considered in AASB 101—entities should add additional information if it is needed for understanding the impact of particular transactions, other events, and conditions on the entity’s financial position and financial performance.
Steps for focussed financial reporting
Reflect on the financial report as a whole and think about whether a reader will understand the operations of the business from reading the financial statements. Do the statements need to focus, reorder or reduce disclosure? Perhaps also adding extra information for major activities may help with a reader’s understanding?
The following areas may help your review for focused reporting:
- Is the report structured for easy reading? Does a reader need to move to multiple elements of the report to understand the material transactions and balances? If this is the case, perhaps the report can be restructured to have the important information grouped together alongside the accounting policies and estimates disclosure.
- Do the accounting policies reflect the material areas of the financial statements, and incorporate both recognition and measurement principles?
- Is the language included in the report easily understood? Recognition and measurement policies, as well as new accounting standard impacts, can be an area of focus.
- Is only material information disclosed? Has materiality been defined?
- Is information extracted from proformas tailored, particularly Sunshine Department financial statements? Only the FRRs are mandatory for government departments. Sunshine Department financial statements are only a guide and do not have to be followed if there is a better way to disclose for your entity.
Great resources for reference: