Financial statements tend to be long and difficult to understand. If anything, they have only become longer and more difficult to understand with every new disclosure requirement. Many preparers even wonder whether the lenders and investors who use the statements find them all that useful.
Typically, it’s the notes that confuse users the most. Users need to wade through jargon, duplicate content, and an unpleasant user experience to find what they need. The notes feature a treasure trove of valuable details about the company but are sometimes ignored because the barrier to entry is so high.
The opportunity is great. Analysts and lenders prefer financial statements that tell their stories clearly. Whether public or private, businesses benefit from financial statements that are easy to use and compare with other companies.
The threat is also increasing—at least for public companies. With new Canadian rules for non-GAAP reporting coming into play and the International Accounting Standards Board poised to make its own changes on reporting performance measurements, the notes in financial statements are set to grow.
To help your financial statements communicate what they mean, follow these eight tips. Consider them a checklist to supplement the disclosure checklist you use when preparing financial statements.
1. Put yourself in the users’ shoes
Financial statements are no different from any communication tool: it’s all about the audience. Consider who the users are, what their needs are, and how they will use the financial statements. Preparers need to go beyond not omitting relevant information to not obscuring it.
Keeping the audience in mind is the most important rule of all in making financial statements more usable. All other rules flow from this foundational principle.
2. Avoid disclosure overload
Accounting standards are incredibly complex and have significant minimum requirements. As a result, preparers focus on compliance and ignore materiality. They err on the side of caution, concerned for the expectations of their auditors and securities regulators.
In truth, almost every financial statement can be shortened in some way. In deciding what to keep and what to delete, preparers need to get comfortable with their professional judgement. They should work to formulate their reasoning for excluding information, so they can justify the decision later.
External accounting advisory providers can be an invaluable resource in this area, to provide a sounding board on the internal team’s reasoning.
3. Be entity-specific
Disclosing details and assumptions for a transaction is half the work. Next comes tailoring the information to your company’s specific circumstances. Let users know why in your professional judgement an accounting decision is important—or “judgemental”—for your organization.
Remain engaged when you copy and paste boilerplate language from an accounting standard. You may be able to delete words or even sections that are not relevant to the company.
4. Stay simple, direct, and concise
Financial statements suffer from long and complex words, sentences, and paragraphs. But it is possible to use simple descriptions and sentence structures without ommitting useful information.
Companies tend to regurgitate rules and information from the standards. While there’s nothing wrong with repurposing some key technical terms, try to communicate as much as possible in plain language.
It might also help to shorten your paragraphs, creating white space on the page for users to rest their eyes. This is especially true for financial statements shared as soft copies. Reading on a screen reduces our attention span and taxes our eyesight. The visual breaks help people process your financial statements.
5. Organize the information
While you know and understand the background of every line of your financial statements, your lenders and investors know only what they see. Help them assimilate the information and give it context.
To begin with, communicate the relative importance of sections by their placement in the notes. Some examples of this implicit ranking: include relevant income tax information, but you can probably push it lower in the notes. On the other hand, if your company purchased another company, consider moving it close to the top.
Just as important is how you group information. Companies often scatter related paragraphs in different sections. Instead, consolidate them in one section, and add headings and subheadings so users can easily find what they are looking for. Make sure those levels create a consistent hierarchy of topics.
6. Link similar sections
Many topics belong in separate sections but are still related. In these situations, connect them with internally linked cross-references. This helps users understand their relationships.
7. Say it once, not twice
As you organize the notes and consolidate related information, watch out for topics that are repeated.
Preparers duplicate sections for several reasons, but especially because various members of the team contribute to the document or individuals forget they already mentioned a point.
It may be legitimately necessary to mention a topic in more than one place. In that case, we recommend deleting the second instance—or the less important instance—and cross-referencing from there to its primary location.
8. Boost comparability
Disclose information so users can compare your information to other companies’ and to other reporting periods for your own company.
Lenders and investors expect all financial statements within an industry or vertical to present similar statements. Avoid veering from the standard format of your peers, and make sure to include the metrics common to your company type.
And within your own company, avoid changing the financial statement presentation significantly from year to year.
To learn how BDO’s Accounting Advisory Services can help you revamp your financial statements to tell your company’s story better, reach out to:
Armand Capisciolto, National Leader, BDO’s Accounting Advisory Services
Mary Mathews, Partner, Accounting Advisory Services