How to Write Clear Financial Statement Disclosures
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 judges rate your most recent disclosures, flashing scores to a worldwide audience. What do you see? Tens everywhere—or something else?
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 in our communication.
CPAs tend to be linear thinkers. We enjoy Pascal more than Hemingway, numbers more than words, debits and credits more than paragraphs. Our brains are wired that way.
But accounting is more than just numbers. It is the communication of financial statements and disclosures. In the name of clear 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 them. While accounting is technical, we need—as much as possible—to simplify.
Use Short Paragraphs
Lengthy paragraphs choke the reader. Breaking long paragraphs into shorter ones makes the print accessible.
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
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 the reader more comfortable. And she will thank you.
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.
Attorneys are not our model. I sometimes see notes that are 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.
Use Tables
Long sentences with several numbers can be confusing. Tables are easier to understand.
Write Your Own Note
Too many CPAs copy disclosures from the Internet without understanding the language. Make sure the language is appropriate for your company.
Put Disclosures in the Right Buckets
Think of each disclosure header as a bucket. For example, if the notes include a related party note, then that’s where the related party information goes. If the debt note includes a related party disclosure (and this may be necessary), place a reference in the related party note to the debt disclosure. You don’t want your reader to think all of the related party disclosures are in one place (the related party note) when they are not. The same issue arises with 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, perform a cold review the next day—you will almost always see necessary revisions. I find that reading out loud helps me to assess 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 recommend it.
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 necessary to ensure completeness.
Winning Gold
I hope these suggestions help you win gold–10s everywhere. I think I hear the national anthem.
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This is very useful tips. I’ll try to follow it next time. Thanks for sharing it.
Excellent article with very good points.
Now we need an article with a selection of standard disclosures. Maybe a forum to submit sample disclosures. No reason to re-invent the wheel. Any number of people have probably written the perfect disclosure for most situations.
Sure, there are ample sample disclosures in various resource material and on the internet. But many of the disclosures you find go directly against the grain of your article.
Clarity!
Thanks, Bill. I agree with you about the fair value notes. I see some that are over two pages long. Too much information lessens clarity. And shortening the sentences helps.
My 2 cents:
Exxon Mobil’s description of fair values accounting policies takes up about ten sentences, including descriptions of Level I, II and III inputs. Anything more is confusing.
If the financial statements are presented in accordance with GAAP, the accrual method does not have to be disclosed. That IS GAAP!
The standard reports shown as examples have needlessly long sentences. These sentences typically merge two or more required statements as indicated in the actual standards. Don’t be afraid to modify the examples by breaking up the ideas into smaller bites.
Don’t use the word “comprise” unless you have actually looked up the correct usage. The phrase “is comprised of” is not correct usage.
Thanks Armando.
Excellent recommendations