Clear and concise financial reporting is the clear message coming out from the Disclosure Committee’s “Principles of Effective Communication” published in 2014 as part of the International Accounting Standards Board’s Disclosure Initiative. The temptation is real. Auditors love overloading financial statements with disclosures to protect their personal interests as part of the growing scrutiny of audit institutions globally.
Lengthy boilerplate accounting policies, dumping irrelevant statements of accounting estimates and judgments, plus the truckload of tabular disclosures scattered all over the financial statements—these are the common issues that I see every single time I review financial statements for clients that I serve as consultant. It would appear that the message of “clear and concise reporting” didn’t make it to the Philippines from the western shores.
Let’s be clear—financial statement disclosures are critical elements in aiding users of financial statements to understand the story behind the numbers. Notes to the financial statements are meant to provide supplemental information to the financial statement that aid in understanding the financial statements including the reporting entity’s accounting policies, judgments and estimates (Philippine Auditing Standards 1.112). However, it is important to stress the fact that it is not a checklist that everything needs to be ticked.
While, yes, disclosure checklists are prepared every year by large global accounting firms, they are meant to serve as guides for disclosure completeness. Disclosure checklists are one of the most important tool kits in an experienced financial statements preparer toolbox. These help us determine all the required disclosure. However, the sad reality is that most financial statements are prepared by inexperienced or junior accountants who find it difficult to weigh the disclosures necessary to put into financial statements. Thus, using “disclosure checklists” is a common practice of the junior auditor’s ticking-and-bashing exercise in preparing (or auditing) financial statements.
Disclosures are only relevant if they help the users of the financial statements understand the choices that the reporting entity has made. This would mean that obvious policies, judgments, estimates and even tabular notes should be wiped-out from the financial statements. Here are a few thoughts to consider when preparing financial statements:
Scrap the obvious and put-in the crucial policies. The quality of a financial statement is not measured by the number of pages but its ability to tell the story. Only policies that make a difference are worth mentioning.
Disclose the relevant stories and leave the fluff. Stop bluffing the users with a tome of carefully selected wordings. Tell the real story without covering it with a veil of cloud.
Tables are nice but words can be better. Don’t stuff the financial statements with tables all over! Accountants love their spreadsheets, albeit, tables—but don’t overload the financial statements with tabular disclosures when narratives can work much better.
Users aren’t stupid. Probably the last thing I want to say, but hey, stop disclosing that cash is cash and consists of cash. Be descriptive if you need to or add a paragraph in the notes, but stop assuming that users are ignorant.
Filbert Tsai is the chief strategy officer of continu.ee, a membership-based e-learning platform for professionals that provides quality continuing professional education courses. He is also the chief strategist at UpSmart Strategy Consulting Inc., a corporate troubleshooting firm focusing on helping struggling companies get back to their normal operations.
This column accepts contributions from accountants, especially articles that are of interest to the accountancy profession, in particular, and to the business community, in general. These can be e-mailed to boa.secretariat.@gmail.com.