8. Structuring the financial statements

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
• 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 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.

8.1.2 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
• the financial statements are shortened by one note.

8.2 Removing non-material and irrelevant information

The concept of materiality (at: 7.2 The application of materiality) is fundamental 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:

1. How significant is this information to understanding the financial performance, position and cash flows of the entity?
2. Does it help the reader to understand the risks to future operating results or cash flows or financial position?
3. 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.

Better practice entities:

• do not disclose information that is not relevant
• review their accounting policy and overview notes to ensure that they are focused on facts about the specific entity. In particular they should detail the entity’s:
  • legal status
  • financial reporting requirements
  • objectives, plus:
    • any choices of AAS that the entity has made (where a choice of AAS is permitted)
    • significant judgments made in applying AAS
• any unusual features of the entity’s operations or financial statements
• only detail accounting policies for the most significant items in the financial statements
• avoid duplication of information.

8.2.1 Additional Resources