The tasteless fudge and other common mistakes in financial statements

'Fudge' and 'financial reporting' should never mix.

A note suggesting a financial statement should "fudge" must rate as one of the biggest bloopers of all time.

Also with Carmen Ridley

Some mistakes in financial statements are common in that they appear year after year. Some less common mistakes that have been made in recent years also hold a warning for those preparing financial reports.

The 2009 annual financial statements of New Zealand Farming Systems Uruguay (NZFSU) released to the New Zealand Exchange (NZX) included the suggestion to “fudge” depreciation.

The words “fudge this to equal depn in FA note 11 $2391 – via no ca” appeared in note 3 - Reconciliation of the Profit for the Year with Net Cash from Operating Activities.

This note to “fudge” must rate as one of the biggest bloopers of all time and reinforces the need for accuracy in the reports and for a fresh set of eyes to have a final read of the reports before they are sent out. All too often those preparing the financial statements are too close to them and see what they think should be there rather than what is actually written.

Apparently, the comment was inadvertently left in the company’s financial statements due to an administrative error. NZFSU, while acknowledging the words used were not well chosen, states that they were merely a prompt to reconfirm rounding differences for depreciation as expressed in different notes to the financial statements. In this case, no further action was taken by NZX or the securities regulator.

Common mistakes

Mistakes are known to have been made in general and special purpose financial statements. Here we take a look at some of the more common mistakes, their causes and what can be done to minimise the same mistake happening again.

Too much reliance on model accounts can lead to mistakes. The financial statements exist to tell a story, and each story is unique.

Further, with special purpose financial statements there is a choice about which accounting standards to apply. Model accounts can be helpful and do have a role to play, especially when financial statements are generally prepared only once a year.

However, missing disclosures, incomplete disclosures and unnecessary disclosures are mistakes that are often the result of an unhealthy over reliance on the contents of the model accounts.

For example, too often identification of the presentation currency, the par value of shares, and the date of authorisation of the financial report as required by AASBs 101.51 and 79, and 110.17 are omitted, as is useful information about significant estimation uncertainty and judgements that are required by AASB 101 (e.g., paragraph 125).

While the AASB has relieved entities without public accountability from some disclosure requirement, all entities (i.e. preparers of special and general purpose financial statements) are required to comply with the estimates and judgements disclosures. 

Too much reliance on model accounts can lead to mistakes. The financial statements exist to tell a story, and each story is unique.

Related entity transactions are also often not reported correctly as required by AASB 124. Whilst this may be partly due to entities not wanting to disclose transactions with key management personnel and their related entities, this information is often necessary to allow the users to understand the “story of the business” during the reporting period.

Information about capital management (for-profit entities only), audit fees (AASB 1054.10) and principal activities (AASB 101.138) are other disclosures which have been known to be omitted due to uncertainty about when or if they are needed.

For special purpose and general purpose preparers, only if you are preparing reduced disclosure financial statements are you exempt from the requirements to report. Where the capital management disclosure (AASB 101.134 – 136) is included, it often lacks meaningful information about the entity’s objectives, policies and processes for managing capital. For example, information about how the entity uses the gearing ratio to manage its capital when the entity doesn’t have any external debt.

The same is true of the fair value disclosures required by AASB 7.25-30 and there is often incomplete disclosure of standards issued that are not yet effective (as required by AASB 108.30) as well as failures to disclose information that sensitivity analysis for all market risks had been performed.

It appears that sometimes the relationship of the financial statements to the annual report is also misunderstood or at least overlooked. For example, inconsistencies in the disclosure of segment information, the date of approval of the financial statements and the disclosure of events after the end of the reporting period can sometimes be missing.

While the accounting standards do not prevent the disclosure of information beyond that required by accounting standards, additional information that would assists users in understanding the entity’s story should also be considered.

Generally, it would seem unnecessary to include information about economic dependence, employee numbers and the reconciliation of employee benefit provisions but this information is often included, not in an effort to provide additional information to users, but due to a lack of understanding that these disclosures are not required.

The same is true of the discussion of accounting for the asset revaluation reserve by a company that does not revalue and segment disclosures in unlisted entity financial statements.

Other errors that we have seen are a presentation in the statement of profit or loss and other comprehensive income that combines nature and function of expenses (i.e. showing cost of sales, depreciation and employee expenses on the face of the statement).

We have also observed addition errors and errors with cross references in and between the primary financial statements and the notes, as well as incorrect content in the Directors’ report.

CPA Australia is keen to ensure that its members produce financial statements and annual reports that are of a high standard and tell the real story of an entity. Making sure that the disclosure of accounting policies is guided by the principles of relevance, completeness and specificity is a good start.

The use of a disclosure checklist and having your reports reviewed by a fresh set of eyes might also help.

Carmen Ridley is a member of the CPA Australia External Reporting Centre of Excellence and principal of Australian Financial Reporting Solutions. Mark Shying CPA is senior policy advisor External Reporting at CPA Australia.


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