Feedback On Principles Of Effective Communication For Financial Reporting

Max. marks awarded

To,

Chairperson

International standard accounting board (IASB)

30 cannon street, London- EC4M 6XH, United Kingdom

Date: 3^rd March, 2018

Subject: To provide feedback and recommendation on principles of effective communication

Sir,

I have been planning to make investment in two selected organizations listed on the Australian stock exchange that is Common wealth bank (CBA) and National Australia bank (NAB).  I have viewed the notes disclosure by comparing and reviewing the annual report of both organizations and in lieu of that, I have planned to make submission of my response through this report. The disclosure of financial statements are faced with some of the concerns such as prevalence of irrelevant information in the notes, insufficient information in the notes and existence of ineffective communication on the information provided. The disclosure issues are intended to be addressed by the board by releasing of discussion paper that is Disclosure Initiative- Principles of disclosures. Such paper has been released for improving the communication in the financial report. Financial statement prepares finds it difficult and complex to report the information from the annual report to the external users and therefore, it is perceived by the investors that the information displayed in the annual report is not relevant and sometimes it is insufficient (Christensen et al., 2016). If the information is not properly presented, then the reliability of the information would be reduced.

I am writing this letter to raise some of the disclosure issues that have been identified by me while reviewing the annual reports of NAB and CBA. Investor’s faces difficulty in evaluating the financial data presented in the annual report because of absence of illustrative disclosures of financial data and insufficient information presented in the explanatory notes. The presentation should be standardized in terms of both disclosure and preparation of financial statements according to the principles of effective communication as discussed in the discussion paper that IASB have proposed. The communication effectiveness should be increased by banking institutions by disclosing the information in a detailed and proper way (Rutherford, 2016).

The proposed set of principles of effective communication in the discussion paper has been reviewed by me that have assisted me in identifying some of the disclosures issues of the banks. Disclosure initiative that has been proposed by the standard intends to enhance the financial reporting communication by addressing how the disclosure effectiveness can be improved. Seven principles have been identified in the disclosure initiatives for creation of effective communication information in the financial statements. Reviewing the disclosures principles have depicted that the disclosed information in the financial statements should be specific to entity that is it should be tailored according to specific circumstances and business of entity. The disclosed information should be simple and clear so that material information is not lost. In addition to this, the information disclosed should be linked to other related information so that navigation is improved and relationship between the pieces of information is highlighted. Disclosed information should be capable of easy comparing so that usefulness of information cannot be compromised. Information disclosed should be fee from unnecessary duplication in different part of financial information. Moreover, information should be organized in a manner that helps in emphasizing on important matters and are arranged in an appropriate order. The disclosed information should be in an appropriate format by making use of graphs, tables and charts.

To, Chairperson International standard accounting board (IASB)

Being an investor, it would of crucial importance to provide feedback to the IASB for contributing to robust discussion and well grounded disclosure of disclosure principles. It can be inferred from the analysis of annual report of both the entities that there are no appropriate and sufficient disclosures of information to be presented to the users of financial statements or investors. For both the organizations, it is depicted by reviewing the annual report that presentation of financial information have not been done by using segmental approach and does not have any consistent segmental definition (Beatty & Liao, 2014). All the disclosures made in the notes to financial statements are not presented separately. Therefore, it can be said that there is a need to improve navigation as the relationship between the information that have been presented in the report are not appropriate manner. However, I have been able to compare the financial information presented in the table format for considerable number of years that have assisted me in identifying the trend. Such trend helps investors in identifying whether the performance of improved or it has deteriorated over the number of years. Moreover, there is separate presentation of liquidity and credit risk in the notes to financial statement.

Furthermore, the Basel requirement disclosure is considered very important on part of banking institution as Basel is reforms that helps in strengthening the regulations. Reviewing the annual report of both the organization, it can be seen that notes to financial statements adequately discloses the requirement of Basel. Differences in the presentation of financial information using a proper formation have also been identified in the annual report. Data is properly presented by using graph, tables and lists. It can be seen from the annual report of Common wealth bank that there has been very limited use of graphs for presentation of financial data. On other hand, the National Australia bank has not made use of any charts or graphs for disclosing the financial information. NAB divisional performance has not been explained in detailed and are presented only in format of table. CBA on other hand has presented their divisional performance in the table format and the same information’s have been disclosed in a detailed way on the notes to financial statements (Battiston et al., 20160.

Some of the recommendations that I would like to make that will assist in improving the effectiveness of communication of information presented in the financial report. In regards to the gaps that have been identified above, it is required by organization to make some improvement for improving the effectiveness of communication. Organization while presenting the data should incorporate entity specific principle as the specific information’s are collected only through the annual report and general information can be accessed from outside. In addition to this, I would recommend to present data in an appropriate format and using graphs and table should be facilitated. Formatting techniques should be used by organization as the information presented in a proper format would disclose relevant information (Macve, 2015). However, depending upon the circumstances and operations of reporting entity, there should be usage of some common formatting. Moreover, the standard should also outline the common objective for identifying the disclosure requirement.

I would recommend to IASB as an investor by properly evaluating the disclosure issues of both the banks that they should take every possible measure for adopting the effective communication principles. This is so because such effective principles would help investors and users by providing detail information and facilitate the process of decision making. The purpose of disclosure requirement should be understood by reporting entities so that the disclosed financial information can be understood in a proper manner. In addition to this, there should be guidance development by considering the factors that are specific to reporting entities. 

	Base
Particulars	Accounting	Tax
Motor Vehicles-at Cost	$1,00,000	$1,00,000
Depreciation	20%	15%
Depreciation Expenses p.a.	$20,000	$15,000
Period of Utilization (in years)	3.500	3.500
Accumulated Depreciation	$70,000	$52,500
Motor Vehicle (Net Value)	$30,000	$47,500

Reference list:

Battiston, S., Farmer, D., Flache, A., Garlaschelli, D., Haldane, A., Heesterbeek, H., … & Scheffer, M. (2016). Financial complexity: Accounting for fraud—Response. Science, 352(6283), 302-302.

Beatty, A., & Liao, S. (2014). Financial accounting in the banking industry: A review of the empirical literature. Journal of Accounting and Economics, 58(2-3), 339-383.

Christensen, H. B., Nikolaev, V. V., & WITTENBERG?MOERMAN, R. E. G. I. N. A. (2016). Accounting information in financial contracting: The incomplete contract theory perspective. Journal of accounting research, 54(2), 397-435.

Cooper, C. (2015). Accounting for the fictitious: a Marxist contribution to understanding accounting’s roles in the financial crisis. Critical Perspectives on Accounting, 30, 63-82.

Horton, J. (2018). Advanced Financial Accounting and Reporting: Theory, Practice and Evidence. Routledge.

Macve, R. (2015). A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, Or Threat?. Routledge.

Rutherford, B. A. (2016). Articulating accounting principles: Classical accounting theory as the pursuit of “explanation by embodiment”. Journal of Applied Accounting Research, 17(2), 118-135

Scott, W. R. (2015). Financial accounting theory (Vol. 2, No. 0, p. 0). Prentice Hall.

Warren, C. S., & Jones, J. (2018). Corporate financial accounting. Cengage Learning