The primary purpose of financial statements is to provide relevant and reliable information about the entity’s financial position.
The preparation and formatting of financial statements is often a complex task, involving compliance with a large number of requirements, as reflected in the AAS and FRR.
8.1 Considering the needs of users
There are a large number of parties that are actual or potential users of individual entity and whole of government financial statements. These include:
- Ministers and the Government
- parliamentary committees and individual parliamentarians
- taxpayers and the community generally
- officials of Commonwealth entities
- external providers of goods and services
- beneficiaries and other recipients of goods and services provided by Government
- industry and community groups, and
- the media.
This wide and diverse range of users underlines the importance of public sector entities meeting their financial accountability responsibilities in an efficient and effective manner.
8.1.1 FRR requirements for presenting financial statements
The FRR prescribes the requirements for the presentation, disclosure and certification of financial statements of Commonwealth entities. They are principally based on requirements of the AAS and other pronouncements by the AASB.
Early identification of any changes in requirements, as well as any necessary decisions flowing from the changes, will facilitate completion of the financial statements.
8.2 Using pro forma financial statements
Aids such as pro forma or illustrative financial statements assist entities to ensure their financial statements satisfy reporting requirements. Pro forma financial statements are usually designed to cover a wide range of entities and common transactions and events.
It is not possible for a pro forma to address all possibilities and circumstances. While
pro forma financial statements are a useful aid, strict adherence to their format may result in an unnecessary level of disclosure. This can detract from the financial statements explaining an entity’s particular financial circumstances to readers.
There are opportunities for entities to tailor the disclosures in their financial statements, making them specific to their situation and more useful to users, while complying with statutory requirements.
8.2.1 Reflect the entity’s operations
Pro forma financial statements are necessarily full of general descriptions. Entities should exercise their discretion to change line item descriptions to reflect their own operations. For example, if an entity has two services that generate almost all of its revenue, it could replace the single line item “revenue from services” with two line items, each describing the particular service. This may add slightly to the length of the financial statements.
In making such judgements, entities should take into account the risks of cluttering the primary statements with too many line items and excessively reducing comparability with similar Australian Government entities.
However, it is important to remember that the goal of the financial statements is to provide relevant and readable information and this may require adding relevant information, not just removing information that detracts from readability.
One of the advantages of removing unnecessary disclosure is that it can provide an opportunity to include information of greater relevance to the reader.
8.2.2 Consider the format of note disclosures
Tabular disclosures in pro forma financial statements typically have columns or rows to cover most eventualities. It is usually a simple matter for an entity to delete the rows and columns that are not relevant.
However, in some cases an entity can go further—an entity might have so few rows and columns that a complete reworking of the format will make the disclosure easier to understand and shorten the financial statements. The challenge here is to take the information that needs to be disclosed and to develop innovative presentations and formats that assist readability of the statements.
8.2.3 Use clear primary statements rather than the notes
Pro forma financial statements often include a long list of notes, to cater for a large number of possibilities.
Entities that replicate these notes can end up with many notes that add little information. For example, an entity may have a line item on its Statement of Financial Position “Other Non-Financial Assets” with a supporting note that shows that this is entirely made up of prepayments.
In this case, changing the name of the line item to “Other—Prepayments” has several advantages:
- the Statement of Financial Position provides more information than before
- the reader does not have to read a note to find out what the other non-financial assets were, and
- the financial statements are shortened by one note.
8.3 Removing non-material and irrelevant information
8.3.1 Removal of information that is not material
The concept of materiality (at: 7.2 The application of materiality) is central to financial statements preparation. Information that is not relevant or useful to users may be omitted.
Materiality is often thought of only in quantitative terms. That is, the focus is on ensuring that there are no significant errors in the numbers presented in the financial statements. However, an entity should also consider if a disclosure is material by nature by asking:
- How significant is this information to understanding the financial performance, position and cash flows of the entity?
- Does it help the reader to understand the risks to future operating results or cash flows or financial position?
- Is it a disclosure that stakeholders require for comparisons with similar entities?
If the answer to all these questions is no, then there may be an opportunity to remove immaterial disclosures from the financial statements. However, it is also important to consider materiality in aggregate, that is, while individual items may be immaterial, they may be material when considered with other immaterial items. This is a matter of professional judgement and different questions may be relevant for different entities.
8.3.2 Do not declare what is not relevant
Readers should expect that preparers will disclose an item if it is relevant and material, and that auditors will consider and report on any such matters. However, some financial statements also include statements starting with “the entity has no….”. Such statements, on the items that are not relevant, are unlikely to assist the reader.
If the entity does not have anything to say about a particular matter, unless specifically required to do so by the AAS or PGPA framework, the reader is entitled to assume that the matter is not relevant or not material.
8.3.3 Review the accounting policy note
The accounting policy note can be one of the longest in the financial statements. Often, this note repeats sections of the AAS in a summarised form using technical language. The usefulness for users is questionable—it is not necessary for users who are familiar with the AAS and is unlikely to be meaningful to those who are not. These notes could be refocused on disclosing the following:
- facts about the entity e.g. its legal status, financial reporting requirements and objectives
- choices the entity has made, where the AAS allow a choice of accounting treatments
- significant judgements the entity has made in applying the AAS
- accounting policies only for the most significant items, and
- unusual features of the entity’s financial operations or statements.
8.3.4 Avoiding the duplication of information
At times, when using pro forma financial statements, there may be an overlap between different disclosure requirements that could result in information being duplicated. In such situations it would be reasonable to amend the pro forma to avoid such duplication.
This checklist includes practical suggestions that Commonwealth entities may adopt in preparing their annual financial statements.