Creating clear financial statement disclosures is not always easy. Creating (unintentional) confusion? Well, that’s another matter.
Clear Financial Statement Disclosures
Let’s pretend that Olympic (CPA) judges rate your most recent note disclosures, flashing scores to a worldwide audience. What do you see? Tens everywhere—or something much less?
Balance sheets tend to be clear. Why? The accounting equation. Assets always equal liabilities plus equity. But there is no disclosure equation (darn it) and without such, we flounder.
Since we tend to be linear thinkers, we enjoy Pascal more than Hemingway, numbers more than words, debits and credits more than paragraphs. Accountants’ brains are wired that way—at least that’s my excuse.
I recall—in 1983—English teachers coming to my University of Georgia accounting classes. At the time, I thought, “What a waste!” Now decades later, I see the wisdom. Accounting is more than just numbers. It is a communication made up of financial statements and narratives. So, in the name of clearer disclosures, I offer these suggestions.
Consider Your Readers
Who will read the financial statements? Owners, lenders, and possibly vendors. Owners—especially those of smaller businesses—may need simpler language. Some CPAs write notes as if CPAs (alone) will read the financial statements. While accounting is technical, we need—as much as possible—to simplify.
Use Short Paragraphs
Some lengthy paragraphs choke the reader and cause confusion. Breaking long paragraphs into shorter ones makes the print more accessible. And the shortening of paragraphs transforms overwhelming mouthfuls into bite-sized morsels.
Then say what needs to be said, and get out of there. Less is more in many instances. When we try to say too much, we sometimes say…too much. Additionally, short sentences are helpful.
Use Short Sentences
I’m not sure, but CPAs may have invented the run-on sentence. As I read one of those beauties, I feel as though I can’t breathe. And by the end, I’m gasping. Breaking long sentences into shorter ones makes your reader more comfortable. And she will thank you. And while we are addressing more succinct language, how about using more concise words?
Use Shorter Words
CPAs don’t receive merit badges for long, complicated words. Our goal is to communicate, not to impress. For example, split is better than bifurcate.
And attorneys are not our model. I sometimes see notes that are simply regurgitations of legal agreements, copied word for word—and you can feel the stiltedness. Do your reader a favor and translate the legalese into digestible—and might I say, more enjoyable—language.
Long sentences with several numbers can be confusing. Readers comprehend tables more quickly than jumbled narratives.
Write Your Own Note
Too many CPAs copy note examples from the Internet without understanding whether the language fits the financial statements they are creating. Make sure the language is appropriate for your company.
Put Disclosures in the Right Buckets (or Reference)
Think of each disclosure header as a bucket. For example, if the notes include a related party disclosure, then that’s where the related party information goes. If the debt note includes a related party disclosure (and this may be necessary), then make reference–in the related party disclosure–to the debt note. You don’t want your reader to think all of the related party disclosures are in one place (the related party note) when one is somewhere else (the debt note). The same issue arises in subsequent event notes.
Have a Second Person Review the Notes
When writing, we sometimes think we are clear when we are not. Have a second person review the note for proper punctuation, spelling, structure and clarity. If you don’t have a second person available to review the notes, perform a cold review the next day—you will almost always see necessary revisions. I find that reading out loud helps me assess my writing’s clarity.
I also use Grammarly to edit documents. The software provides grammar feedback as you write. If you don’t have a second person to review your financials, I highly recommend this product.
Use a Current Disclosure Checklist
Vetting your notes with a disclosure checklist may be the most tedious and necessary step. FASB and GASB continue to issue new statements at a rapid rate, so using a checklist is needed to ensure completeness.
I hope these suggestions help you win gold–10s everywhere. May you hear your national anthem and glow in the success of clear communication.
By the way, FASB recently issued exposure drafts related to the materiality of disclosures. We need guidance that helps us assess when disclosures are necessary—and when they are not. So hopefully, in the not-to-distant future, we’ll have standards that assist in determining when disclosures are needed.
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