Financial statements must be crisp and informative

Corporate India has travelled quite a distance in terms of financial reporting over the years, and regulatory interventions have considerably enhanced the quantitative part of reporting. What about the qualitative part is the question that needs to be answered?

While moving from an era of opaqueness and minimal information before the turn of this century to embracing a spate of Accounting Standards by the turn of this century and now the forced adoption of International Accounting Standards via IND AS, financial reporting discipline has improved by leaps and bounds.

The moot point is: Has it enhanced the ability of the average reader of the financial statements to comprehend the issues underlying therein?

A cynic recently remarked in a seminar, “With the maze of information flowing into published annual reports like directors report, management discussion analysis, corporate governance report, ESG report, pie charts, diagrams, etc., it is difficult to locate the profit and loss account and the balance sheet.”

The latest move of the Department of Company Affairs via notification dated March 31, 2023, to switch to disclosure of material accounting policy information has come at the right time and a step in the right direction. Incidentally, the International Accounting Standard 1 in paragraph 117, which was amended in 2021, requires entities to disclose Material Accounting Policy Information as against Significant Accounting Policies.

The notification of March 31, 2023, appears to be a fallout and is in line with the IAS requirements. It emphasises in para 117C the need to provide entity-specific information that is more useful to users of financial statements than standardised information.

Specific vs General

Corporates went overboard and reported in a detailed manner in the notes on accounts section. Issues like revenue recognition, depreciation methodology, provisioning for expected credit losses, impairment of investments were dealt with in such an elaborate manner that it was impossible to fathom what the crux of the matter was. Most of it seemed like cut and paste.

The notification has mandated that companies will henceforth report only “specific accounting policy information” as against generic motherhood statements-like information. While there are doubts as to what would constitute “material” in this context, one is sure that this will settle into something workable as time rolls on. More importantly, this laudable initiative should hopefully reduce the Notes on Accounts to at least half of what in presented now.

The mood is to make corporates report what is necessary and essential to enable the user of financial statements to make the right decisions and, in the process, weed out the unnecessary and irrelevant stuff. Brevity and precision in communication are best taught in classrooms but in the context of corporate financial reporting they are now becoming legislated.

As mentioned at the outset, we moved from “less” to “excess” and now it is towards what is “necessary”. The wheel has turned a full circle and for good reasons. In the final analysis will it be worthwhile to have a one page summary to the financials covering five or six specific issues of that year’s performance. What should be the contours of this one pager could be worked around but the purpose being that the layman user of the financial statements should form an informed opinion only by reading the one pager. Let us avoid any situation that entails looking for the needle in the haystack.

The writer is a chartered accountant

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