As a financial statement preparer, it is vital to keep in mind that not all financial statement users are accountants and as such, may lack the skillset and knowledge to interpret the statements. Financial statement users may shy away from the volume of pages containing regulatory disclosures. While preparing financial statements, it is important to step into the users’ shoes to create meaningful statements while ensuring compliance with reporting disclosure requirements.
Financial Statement Users
It is equally as important to understand who the end-users of the financial statements are and the purpose of the financial statements. Based on this information, the financial statement preparer should include all relevant information to ensure that the statements are prepared in accordance with their purpose and appeal to the end-user.
Avoid Information Overload
Although accounting standards determine the minimum disclosure requirements, financial statement preparer should discuss with their accountants or auditors the optimal level of disclosure required while keeping the end-user in mind. Disclosures should be meaningful and relevant.
Financial Statements Should be Organized
Financial statement users must be able to follow the financial statements in an efficient manner. For instance, if your financial statements are prepared for lenders, disclosure of the statement of operations showing the company’s profitability before the balance sheet will be more efficient. If your company went through a significant transaction, such as a reorganization or acquisition, highlighting the transaction upfront in the notes provides the user with vital insight early on.
Presenting select quantitative information in a visual way through tables or charts rather than in sentences may improve the readers’ ability to understand the numbers. Further, consider disclosing important information at the beginning of the note disclosure and generic disclosure towards the end to ensure that significant transactions are not overlooked.
Certain financial statement topics may be linked through multiple notes. For instance, a shareholder guarantee of a bank loan will be disclosed in two sections: (1) bank loan note and (2) related party transactions note. As such, it is important to link and cross-reference these notes to ensure the user is aware of both notes.
At times, users may get lost in lengthy disclosures. By maintaining concise disclosures, a financial statement preparer will be able to communicate vital information in an effective and simple manner. Remember, the goal of the disclosure is not to write a novel!
Consistency and Comparability
Consistency with financial statement presentation and disclosures is important for users, especially ensuring financial statement presentation is consistent with other companies within the same industry. Avoid shifting your financial statement presentation and changing disclosures frequently unless mandated by regulatory standards.
It is critical that users of the financial statements understand the story behind the numbers. At GG, our team of professionals work with our clients to ensure financial statements provide the proper meaning for the identified users while complying with regulatory requirements.