Good reporting doesn’t happen by accident; it needs planning

Financial statements are often seen as a “tick-box” exercise. Approaching the preparation of financial statements in this way means that important decisions about their content will only be decided after year end. As financial statements reflect historical events based on the facts and circumstances that existed at that time, it would be difficult to “re-invent” this data after the financial year. It would be equally difficult making accounting policy and materiality decisions for the first time during the preparation of the financial statements. Yet, most preparers leave these decisions to the last minute!

Changes in accounting policies

Most changes in accounting policies result from new accounting standards or changes to existing standards. To effectively plan to implement a change in accounting policy, an entity may need to know what the changes are; sometimes as early as two years before the effective date. Consider the following example:

Example An entity needs to adopt a new Standard for the year ended 31 March 2028. The transitional provisions require retrospective application and retrospective restatement of the new Standard. Retrospective application requires changes to the accounting of transactions that existed in prior and current years as if the updated Standard was always in place. Retrospective restatement means that prior year amounts presented in the financial statements should be changed. If the effective date is 31 March 2028, the entity would need an opening balance for 1 April 2027, a closing balance for 31 March 2027, and an opening balance for 1 April 2026. Trying to estimate these balances after the fact would be incredibly difficult. Preparers would also need to be careful of not applying hindsight when accounting for past transactions and events. Apart from getting the accounting right when the Standard should be implemented, having this information well in advance of the effective date would also mean that the entity can comprehensively provide the information required by GRAP 1 on the potential effects of new or revised accounting standards on an entity’s financial position and performance in the years leading up to the implementation.

Applying materiality

We often receive questions from preparers about whether an item is material, usually in the context of a disagreement with the auditors. It is almost impossible for an external party to answer whether something is material for an entity if they do not have a documented materiality framework in place.

Materiality ensures that the most relevant information is provided to users of the financial statements as this information potentially could affect the decisions they want to make. A materiality framework should be developed and adopted before the start of any financial reporting period. Having a materiality framework in place means documenting an entity’s users; the decisions the users want to take; what is considered material quantitatively and qualitatively; and how this affects accounting policies, including recognition, measurement, presentation and disclosure.

A materiality framework should be developed by management, discussed by the Audit Committee and approved by the relevant governance structure. As the auditors are invited to attend Audit Committees as observers, they should be able to provide feedback about whether management’s assumptions are appropriate.

Having a formal, documented process for considering materiality means that deliberate action is taken by management in developing its systems, data requirements, policies, processes and preparation of the financial statements.

Bringing it all together  

The financial statements are often long and provide information that has no or little impact on how users will hold officials accountable and make financial, economic and social decisions. It is critical that preparers identify what is most important to users, and this requires deliberate actions by management. It is critical that preparers engage with users, identify what they need, and put this into action by developing a materiality framework and planning to adopt changes in the financial statements well in advance of their effective date.

Plan to publish a great set of financial statements 🧮