Are you still confused about what disclosures should be included and which should be omitted from your financial reports? This is an area of accounting that could be considered more art than science, and unfortunately many people still take that view that over-disclosure is the best option.
There is nothing new to the concept of applying materiality to the disclosures in financial reporting. Back in 2014 the AASB even released a staff paper on this topic.
It is a common criticism of financial reporting that there is a lot of unnecessary and unimportant information contained in the report. This can lead to obscuring some of the more important information. Some of the reasons that have been given for this include:
Due to time pressures, preparers simply repeat disclosures made in prior years rather than considering whether they are still material;
Just as much work is required to conclude on materiality as to prepare the disclosures;
Desire to avoid lengthy debates with the auditors;
Lack of confidence in making the judgement between disclosures that are material and those that are not;
Following the leader: if another company makes a disclosure, it can influence others to follow; and
Fear that a missing disclosure will be challenged by regulators.
The above noted staff paper addresses each of these concerns one by one in a clear and concise manner.
Prepares of financial reports should have confidence to remove disclosures that do not add to the financial report. Every set of financial statements should be unique and specific rather than just being a duplicate of a model set of accounts. For straightforward policies, and where the accounting standards do not allow for optional choices, it is not normally necessary to state an accounting policy.
As a general rule, the less judgement required in a given area, the less disclosure will be required in the financial report.
Mark Twain has been attributed (perhaps incorrectly) with apologising for writing a long letter because he didn’t have time to write a short one, the same applies with preparing financial statements. Yes, it may take longer to determine which disclosures are material and which are not, than not making the distinction at all. However, taking the time and making the effort should result in reducing the clutter in financial statements, improve quality and help the financial statements meet their objective – to be useful to users.
- AASB Staff Paper: To Disclose or Not to Disclose: Materiality is the Question