Tips to improve the quality of your entity's financial statements
It’s the time of year again when entities are in the process of compiling their financial statements and preparing for the upcoming audit.
In recent desktop reviews undertaken by the ASB, a number of areas were identified where preparers can improve the quality of the financial statements. These include: - Applying materiality in preparing the financial statements.
- Reviewing and amending accounting policies so that they are relevant to the entity’s activities.
- Describing the impact of Standards of GRAP that are not yet effective.
Applying materiality in preparing financial statements
The financial statements should provide users of the financial statements with relevant information that helps them to hold entities accountable and make decisions. Materiality helps preparers to understand what information will be relevant to users.
Materiality should be considered when formulating an entity’s accounting policies as well as deciding what information to present and disclose in the financial statements.
The Standards of GRAP only apply to material items. This means that an entity need not apply: - The recognition and measurement principles in the Standards of GRAP when formulating an accounting policy for an item that is immaterial. An entity develops its own accounting treatments for immaterial items. Examples include not applying the asset-related Standards to low value assets or transaction costs that are immaterial. GRAP 3 on Accounting Policies, Changes in Accounting Estimates and Errors provides guidance on the development of accounting policies.
- The presentation and disclosure requirements of the Standards if the effect of applying them is immaterial. For example, an entity may not separately present a type of asset on the face of the statement of financial position as required in GRAP 1 on Presentation of Financial Statements if it is immaterial.
Materiality is considered from both a quantitative and qualitative perspective. Thresholds and criteria should be developed to clearly identify what is material for an entity, as well as ensuring that consistent decisions are made by preparers when applying the Standards of GRAP to that entity.
Developing accounting policies and deciding what to present and disclose in the financial statements requires judgement. Preparers should clearly document their materiality considerations as well as discuss them with the relevant oversight structures such as the audit committee.
The ASB’s Guideline on The Application of Materiality to Financial Statements pro
vides guidance on how to apply materiality: http://www.asb.co.za/wp-content/uploads/2019/04/The-Application-of-Materiality-to-Financial-Statements.pdf
Reviewing and amending accounting policies
Entities’ accounting policies frequently repeat the principles in the Standards without explaining how they have been applied by the entity, and often include policies for transactions or events not undertaken by the entity.
Accounting policies need to be reviewed and amended so that they: - deal with transactions undertaken and events that occur at an entity, or judgements and assessments that have been applied by management; and
- explain how the principles in the Standards have been applied by an entity in preparing their financial statements.
Examples of what can be done to improve existing accounting policies are included in the annexure. FAQ 3.2 issued by the Secretariat should also be consulted.
The financial statements should also only include those accounting policies that are significant to an entity. An entity could, for example, present its significant accounting policies in the financial statements and make a complete list of all accounting policies available on its website. This fact could be explained in the financial statements.
Disclosing information about the impact of Standards of GRAP that are not yet effective
GRAP 3 requires entities to disclose (a) the existence of issued but not yet effective Standards of GRAP, and (b) known or reasonably estimable information relevant to assessing the possible impact of the application of the new Standard of GRAP on the entity’s financial statements in the period of application.
Entities frequently just disclose a list of Standards that are not yet effective, with some Standards on the list that are not relevant to an entity’s activities. As the purpose of the disclosure is to provide predictive information to the users of the financial statements about potential changes to an entity’s financial performance, financial position and cash flows, disclosure of a list of Standards is insufficient.
An entity should disclose information about those Standards that are not yet effective, and which are relevant to an entity’s activities. The information should include information about the possible impact of the Standard on the entity’s financial statements. Entities should refer to the list of not yet effective Standards of GRAP included in Directive 5 on Determining the GRAP Reporting Framework. Entities should also consult FAQ 1.16 issued by the Secretariat.
Common questions
The Secretariat issues Frequently Asked Questions based on questions commonly asked by stakeholders. There were two specific questions that were asked on a number of occasions during the last audit cycle: - The treatment of fully depreciated assets. See FAQ 2.2 and 2.8.
- The classification of expenses by nature or function in the statement of financial performance. See FAQ 3.4.
The FAQs can be accessed by following this link: http://www.asb.co.za/frequently-asked-questions/.
Available resources
Apart from consulting the FAQs, there are a number of other resources available on the ASB’s website that may assist in preparing the financial statements. These include: Annexure accompanying the Newsletter article |
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