• How to make sense of the madness – decluttering your financial statements
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How to make sense of the madness – decluttering your financial statements

30 August 2018

Chances are you would have heard the term “decluttering” thrown around in the same sentence as “financial statements” and wondered what it is all about.

Well, like all things in life, where possible, we like standardisation and uniformity as it makes things doing things clear, simple, and understandable.

Over time the process of preparing financial statements fully embraced this approach, with accounting firms issuing “illustrative financial statements” and organisations modelling their own financial statements from them, verbatim.

While this made the process of preparing (and then auditing) financial statements easier, the quality of the output deteriorated, coming up well short in providing useful, entity specific information, to the readers.

Due to push back from the investor community, and signalling from accounting standard setters and regulators, organisations were set the task to clean up their financial statements by:

  • Including more relevant information.
  • Removing irrelevant information
  • Communicating information more effectively.

This resulted in many listed companies globally going through a “decluttering” exercise, to bring the presentation of their financial statements more in line with the (new) expectations or regulators and the investor community.


What does the decluttering process involve?

While how and what is decluttered will ultimately be entity specific, the process broadly follows the following core steps:

  1. Remove immaterial notes, and their associated accounting policies
  2. Aggregating similar notes together
  3. Re-order the notes and/or place into meaningful sub-sections
  4. Reword accounting policies and significant estimates and judgements into simple language
  5. Relocate accounting policies and significant estimates and judgements to their respective notes
  6. Include graphs, symbols, and/or colouring to better present information where applicable.
     

What are the results and what type of organisations are endeavouring on the decluttering process?

The results have been impressive and well received.

Almost all listed companies in New Zealand, Australia, the United Kingdom, and Europe have gone through the “decluttering” process, which has now cemented it as industry best practice and the minimum expectation of investors.

However, in New Zealand, a number of non-listed organisations, both for-profit and not-for-profit, have also undertaken a decluttering exercise of their own.

Reasons for doing so vary from case to case, but ultimately the recognised benefit is that it improves the presentation of the organisations financial information, which in turn then supports and facilitates:

  • Dialogue with shareholders and the board of directors
  • Funding opportunities with banks or additional investors
  • The path to investments from Private equity, institutional investors, or initial public offering.

Qualitatively, it also makes a statement that the organisation is a proactive adopter of industry best practice, and sets high standards for itself against its listed peers.
 

Where can BDO step in and assist

Our team at BDO has sat on both sides of the fence with the “decluttering” process, in that we have executed it in a corporate capacity and also advised organisations through the process in a professional capacity.

Organisations typically engage us to both provide suggestions and alternatives regarding the order and layout of the financial statements, as well as examples of suggested simplified wording.

The “decluttering” process is one which allows organisations to give their financial statements an often much needed face-lift, and when done diligently can really make a positive proactive difference to how an organisation is perceived by external and internal parties,

Click here for the further details of the “decluttering” services we provide. 

We look forward to hearing from you to discuss how we might assist your organisation with its “decluttering” process now or in the future.