What the accounting standard setters think about you
Hello reader of financial statements[i]. I have both good news and bad news for you. Which do you want first? The good? Well the good news is that the financial statements are designed with you, the user, in mind. And the bad? Unfortunately, you might not match the kind of person they had in mind when they were thinking of ‘users’. Ah, you say, that’s why I find them unintelligible. Yes, highly likely that’s the reason.
The good news
Because you may be one of the ‘many users’ who “have to rely on the financial statements as their major source of financial information” the standard setters have said that “such financial statements should, therefore, be prepared and presented with…(your) needs in view.”[ii] So when they are deciding on information that should be given to you in the statements, they select information that they think will be useful to you. That’s good. And they reckon that there are certain attributes of this information that will ensure this usefulness: understandability, relevance, reliability and comparability[iii].
They say that ‘understandability’ means that the information is ‘readily understandable’ by you[iv]’. For ‘readily’ read ‘easily’. That’s even better.
But now to the catch.
The bad news
They only promise easily comprehended information in the financial statements on two conditions:
1. You have “a reasonable knowledge of
a. business and economic activities and
b. accounting and
2. a willingness to study the information with reasonable diligence’[v]
Fair enough some say; it’s not a reasonable expectation for users to just pick up a set of financial statements and expect to understand what they say. But wait, there’s more. It turns out that understandability is readily allowed to be overruled as an attribute.
After giving the above two conditions, the framework quoted above immediately says this:
However, information about complex matters that should be included in the financial statements, because of its relevance to the economic decision-making needs of users, should not be excluded merely on the grounds that it may be too difficult for certain users to understand[vi].
In other words, you need it so you are going to get it whether or not you understand it!
Therefore although it’s indeed good that you were at the forefront of the standard-setters’ minds, I’m afraid the bad news is that, even armed with the knowledge and study time they expect of you, the financial statements may still not be completely understandable to you.
So I’ll leave you to find one other thing to line up under your desk lamp with the statements and your coffee – a friendly financial accountant.
[i] I am referring here to ‘general purpose financial statements’. “Such financial statements are prepared and presented at least annually and are directed toward the common information needs of a wide range of users.” [Framework, Framework for the Preparation and Presentation of Financial Statements, Australian Accounting Standards Board, www.aasb.gov.au, paragraph 6.]
[ii] Framework, paragraph 6.
[iii] Framework, paragraph 24.
[iv] Framework, paragraph 25.
[v] Framework, paragraph 25.
[vi] Framework, paragraph 25.
22/09/2014 @ 9:40 am
I think everyone needs an understand of financials in business and in their personal lives, mortgage lives etc. You cannot leave it up to those whose job it is to prepare everything for you, without an understanding of where your money is reflected, invested, taxed and why.
Big mistake to leave it all to the accountants. you need the basic understanding and I might say, concurrence in what is happening to your money, investments, tax allocation etc.