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Financial statements 'hindering, not helping' communication

Companies' financial statements should be slashed in order to focus on what's important, according to a working group.

Companies' financial statements should be slashed in order to focus on what's important, an international accounting working group believes.

The New Zealand Institute of Chartered Accountants and Institute of Chartered Accountants of Scotland say more tightly focused information would better enable those seeking to assess the financial performance of companies to do their job.

They formed a joint working party after a request from Sir David Tweedie, recently retired chairman of the International Accounting Standards Board (IASB), to help reduce the volume of disclosure requirements in international financial reporting standards .

Their report findings are being presented to the IASB today.

Auditor-General Lyn Provost was part of the group and says annual financial statements could be reduced by about a third as a result of what it proposes.

Both ICAS and NZICA hope the IASB will implement their recommendations sooner rather than later.

Joint chair Tony Frankham, recently retired board chair of Auckland International Airport and former president of NZICA, says the widely held view internationally is that disclosures have grown to the point that they reduce the usefulness of financial statements.

“The recommendations now deserve the support of those involved in the various jurisdictions in preparing, auditing, issuing and using financial reports in every country using IFRS."

In recent years, the financial reporting community, including investors, has become concerned about the increasing size of annual reports (the working group cites a 44 percent increase from 2005 to 2010 for UK listed companies).

It says this has led to readers being blinded by so much data that key messages about a company’s performance are drowned out by the detail.

"So much financial data is hindering, not helping, communication.”

If companies could "lose the excess baggage", financial statements could focus more on what is important to users, and reduce printing and distribution costs.

Preparers would then spend less time on arranging numerous detailed disclosures and more time on providing meaningful information, the group says.

Isobel Sharp, a visiting professor at Edinburgh University Business School and a senior partner with Deloitte, co-chaired the joint working party.

She says: “We have carried out a massive spring cleaning exercise, throwing out those disclosure requirements which simply add clutter to the financial statements and helping preparers be bolder in deleting details which are simply not important to readers of financial statements.

"The current excess disclosure baggage carries the penalties of extra cost and poorer communication. We are recommending that preparers pack only the essentials into their reports.”