Media Release - 19 July 2011

Jenni McManus
Communications Manager
Ernst & Young
+64 21 971 599

Cutting the clutter from financial reports

 
22 July 2011

Relief could be in sight for investors struggling with information overload in company financial statements and for those charged with producing these accounts.

The New Zealand Institute of Chartered Accountants (NZIAC) and its Scottish counterpart, the Institute of Chartered Accountants for Scotland (ICAS), have produced a report recommending big changes aimed at making financial statements more user-friendly, while continuing to comply with International Financial Reporting Standards (IFRS).

A major concern is the increasing requirement for detailed financial disclosures, especially since New Zealand’s adoption of IFRS. Although some new disclosures have been introduced, in response to calls from investors for more details in some areas (e.g. about off-balance-sheet vehicles) especially following the global financial crisis, many have been introduced in new or revised accounting standards during the past 10 years with no review of their overall impact on the length or usefulness of the resulting financial statements.

Also at issue is the lack of emphasis in IFRS on materiality – a key accounting principle where information is disclosed if leaving it out, or misstating it, could influence economic decisions made by investors, lenders or other users of an entity’s financial statements.

Materiality depends on the size or nature of the item, judged in its surrounding circumstances. While it is important that material information is disclosed, including a raft of immaterial detail will produce lengthy accounts where important information is obscured by irrelevant detail.

New Zealand corporates have identified “disclosure overload” as a key barrier to transparency in financial statements.

Kimberley Crook, head of Financial Accounting Advisory Services at Ernst & Young and a member of the joint NZICA–ICAS group, says the current situation does not help anyone involved in the financial reporting process.

“For many organisations, the preparation of a set of financial statements inevitably has become a compliance exercise – ticking the boxes in disclosure checklists to make sure all the requirements are met. These voluminous disclosure requirements have not only increased compliance costs but also have raised serious concerns about the usefulness of the information provided.”
Readers of financial statements are left with the difficult task of trying to make sense of it all, she says.
“Many are put off from even reading the financial statements and others struggle to find important information amongst the sea of detail. They can’t see the wood for the trees.”

Crook says it is time to prune back financial reporting disclosures so financial reports serve their intended purpose – to provide transparent, useful information for investors, lenders and other stakeholders.
“I’m optimistic that many will welcome the group’s report and support its call for reducing disclosure requirements.”

Losing the excess baggage – reducing disclosure in financial statements to what’s important  proposes an increased emphasis on materiality, removing information on accounting policies (unless these have changed), replacing existing requirements for detailed reconciliation of various asset or liability balances with reduced requirements to disclose a summary of material changes in these balances, significant cuts in the mandatory disclosures required for financial instruments, and reducing mandatory disclosures required in many other accounting standards.

-ENDS-

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This press release has been issued by Ernst & Young New Zealand, a member firm of Ernst & Young Global Limited.