As the PFMA reporting deadline looms, it is often all about whether the financial statement numbers are accurate and complete, compiling supporting evidence for the auditors and just generally focusing on the minutia. It is easy to lose focus on the big picture of why we prepare financial statements.
While all the things I have mentioned are necessary, it is important not to lose sight of who is going to use this information and what decisions they are likely to take. This is broadly what materiality is about. We have been advocating throughout the year that entities apply the voluntary Guideline on The Application of Materiality to Financial Statements. If applied as intended, this would have resulted in entities considering materiality throughout the reporting period by identifying their users, what decisions they are likely to take, developing materiality thresholds and criteria, and using these to formulate accounting policies, identifying what information should be disclosed, and how it should be presented. However, if entities have not applied the Guideline from the start of the year, it is not too late to apply materiality at this stage in the process.
So, how could materiality be applied now? Entities often use automated reporting tools, or a reporting template. A key factor in using these tools should be ensuring that information is specific to the entity and tells its story, rather than being generic. This may mean modifying the output of the reporting tool, or modifying the reporting template. Here are a few simple tips that can be used to make the financial statements more relevant: - Only present accounting policies that are relevant to the entity’s activities. For example, if an entity does not have transfers and mergers, then a policy is not required in the financial statements.
- Explain how the principles in the Standards of GRAP have been applied by an entity when describing accounting policies. Many financial statements merely repeat the principles in the Standards rather than explaining to what transactions they apply and how they are recognised, measured, etc.
- Only present items separately when they are material. Immaterial items should be aggregated together. This helps to avoid cluttering the financial statements with line items that are not important for users to know about individually. A typical example is the correction of prior period errors. Entities often present the correction of each error separately in the statement of changes in net assets or notes, when they could be combined in a more meaningful way.
- Do not repeat information in different parts of the financial statements. Standards may require similar disclosure for different items. These should be combined in a way that is both relevant and understandable to users.
While not relevant to applying materiality, the information in the financial statements should be understandable. Avoid using accounting jargon. The simpler the language in the financial statements, the more likely users are to engage with them.
As a parting thought, it is important to remember that the financial statements prepared play a critical role in strengthening our democracy. The published financial statements ensure that citizens and others have relevant, credible information available to them when they vote, when they engage in public participation on the budget and development plans, etc. It is our duty as accountants to ensure that we understand the role we play in broader society, and that we exercise diligence in doing so.
Jeanine Poggiolini
Chief Executive Officer |
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