The preparation of financial statements is a crucial aspect of financial reporting, offering stakeholders a clear narrative of an entity’s financial health and performance. Central to this process is the disclosure of accounting policies, which provides context to the figures presented. Significant changes were made to the International Accounting Standard IAS 1, which now requires entities to disclose “material accounting policy information” instead of “significant accounting policies.” This change, effective for annual reporting periods beginning on or after 1 January 2023, marks a pivotal shift in how accounting policies are communicated in financial statements. We have however noticed, that preparers of financial statements are still hesitant to update the accounting policies to effect this change and rather still disclose the previous year accounting policies and did not make any adjustments to incorporate this change.

Understanding Material Accounting Policy Information

The amendments to IAS 1 underline the importance of disclosing material accounting policy information, which can significantly influence users’ understanding of the financial statements. Material accounting policy information is crucial if, without it, users would struggle to comprehend other material information in the financial statements.

Conversely, the standard also clarifies that immaterial accounting policy information need not be disclosed. However, if disclosed, it should not obscure material information, ensuring that the focus remains on what is truly important for the users.

To further support these amendments, the International Accounting Standards Board (IASB) also updated IFRS Practice Statement 2, “Making Materiality Judgements”, providing detailed guidance on applying the concept of materiality to accounting policy disclosures. This guidance is instrumental in helping entities assess which information is truly material.

Key Areas of Focus in Practice Statement 2

IFRS Practice Statement 2 offers valuable insights into the concept of materiality, particularly in the context of accounting policy disclosures. Four key areas are highlighted:

1. Materiality Definition: Information is considered material if omitting, misstating, or obscuring it could reasonably be expected to influence decisions made by the primary users of financial statements. Materiality is entity-specific, based on the nature or magnitude of the items in the context of the entity’s financial statements.
2. Primary Users: Primary users of financial statements are assumed to have a reasonable knowledge of business and economic activities. They include existing and potential investors, lenders, and creditors. Entities must consider whether these users need the disclosed information to understand other material aspects of the financial statements.
3. Qualitative and Quantitative Factors: In determining materiality, entities must consider both qualitative and quantitative factors. This assessment is critical in ensuring that the disclosed accounting policy information is relevant and useful.
4. Entity-Specific Information: One of the most challenging aspects of applying the new requirements is ensuring that accounting policy information is specific to the reporting the preparers, who must tailor the information to reflect the entity’s unique circumstances.

Practical Implications of the Changes

The shift from significant to material accounting policy information requires a careful reassessment of the content and structure of accounting policy disclosures. Entities must ensure that their disclosures are tailored to their specific circumstances, avoiding boilerplate or generic statements that do not add value for users.

The key to success in this transition lies in the principles applied during the revision process. These principles include:

• Compliance with IFRS: Ensuring that required disclosures are included.
• Relevance: Avoiding unnecessary disclosures that do not apply to the entity’s specific transactions or events.
• Avoidance of Duplication: Preventing the repetition of information within the accounting policies.
• Clarity and Judgment: Making complex or judgmental areas of accounting policy clear and understandable.

Conclusion

The amendments to IAS 1 represent a significant shift in the approach to accounting policy disclosures, moving towards a more focused and materiality-driven approach. Adapting to these changes is not just about compliance, but about improving the clarity and relevance of the financial information provided to stakeholders. By focusing on disclosing material accounting policy information, entities can offer users deeper insights into their financial statements, improving overall transparency.

As we move into new reporting periods, it’s crucial for preparers of financial statements to revisit their disclosures and make the necessary adjustments to align with the updated IAS 1 requirements. Don’t fall behind in meeting these new standards – review your accounting policies to ensure they meet the expectations of your users and the evolving regulatory landscape.

When it comes to corporate governance and financial disclosure, preparing and executing annual financial statements are crucial milestones for any company, especially in South Africa, where statutory adherence and transparency are paramount. This article explores best practices in preparing these statements, considering South Africa’s regulatory landscape and addressing relevant issues from recent reports.

Understanding Regulatory Requirements in South Africa

South Africa’s regulatory framework for financial disclosure is governed primarily by the Companies Act, 2008 (Act No. 71 of 2008), and regulatory authorities such as the Companies and Intellectual Property Commission (CIPC). The IFRS Accounting Standards or IFRS for SMEs Accounting Standard adopted by the country ensure consistency, comparability, and transparency in financial disclosure across all entities.

Best Practices in Preparation of Annual Financial Statements

Early Planning and Preparation:

• Establish a timeline for the preparation process, ensuring adequate time for gathering financial data, reconciliations, and reviews.
• Facilitate the installation of the latest Caseware Working Papers and relevant templates, ensuring the appropriate number of licenses are available to the team.
• Assign responsibilities to qualified personnel who understand the appropriate regulatory requirements and accounting standards.
• Coordinate Caseware training for any new staff members.

Compliance with Accounting Standards:

• Adhere strictly to the IFRS Accounting Standards or IFRS for SMEs Accounting Standard when preparing financial statements.

Prepare the Caseware Working Paper file as follows:

• Initiate a roll forward of the file.
• Run an update and read the release notes to understand the compliance changes available in the latest template.
• Map the trial balance to obtain insights on additional disclosures required for the current year.
• Maintain consistency in the application of accounting policies and disclosures across reporting periods where compliance changes are required.

Transparency and Disclosure:

• Provide clear and comprehensive disclosures on material accounting policies, estimates, and judgments made in the preparation of financial statements.
• Provide detailed working papers for calculations (e.g., Cashflow worksheet), along with lead sheets available in Caseware Working Papers to help users understand the underlying balances.

Quality Assurance and Review:

• Conduct internal reviews and quality assurance checks to identify and rectify errors or inconsistencies.
• Seek external audit advice or peer reviews to validate the accuracy and completeness of financial statements.

Communication and Stakeholder Engagement:

• Engage with stakeholders, including shareholders, regulators, and investors, to ensure that their information requirements and expectations are well understood and adequately represented.
• Communicate financial results and disclosures clearly and effectively to enhance transparency and trust.

The preparation and execution of annual financial statements in South Africa require adherence to rigorous regulatory standards and best practices. Addressing issues highlighted in reports, such as those from Business Live, underscores the importance of governance, transparency, and accountability in maintaining investor confidence and statutory adherence in South Africa’s dynamic business environment.

Learn more about how Caseware’s IFRS Financial Statements and SME Financial Statements can empower your financial statement preparation process.

Kenya, 30 August 2022: Caseware Africa, a division of Adapt IT, has introduced a new cloud-based app in Kenya: SME Financial Statements. The new solution, which will be rolled out to various African regions, has been completely redesigned to leverage the benefits of the cloud, as well as everything Caseware has learned from its clients over the past decades, says Nienke Krüger, Product Manager: Financial Reporting at Caseware Africa.

“This new cloud-based application has been designed from the ground up to revolutionise the way that preparers create financial statements. We have leveraged our extensive experience over many years with our clients to design a process that is user-friendly and streamlined,” she says. “The new approach takes into account regulators’ growing insistence that only material information is presented in the financials – something that can prove quite tricky for inexperienced or infrequent users.”

SME Financial Statements uses checklists, questionnaires and integrated queries that expand and collapse, only displaying content relevant to the current engagement. This will enable users to work much more efficiently by empowering them to focus their time only on relevant items and will greatly assist them in streamlining the process to produce the financial statements as the final output document.

Another big advantage of SME Financial Statements is that it enables users to integrate the trial balance information directly from the company’s accounting package. This eliminates the tiresome, error-prone, and manual process of exporting and importing data via spreadsheets. Currently, direct integrations from Xero, QuickBooks and Sage Business Cloud Accounting are supported, with more packages to be added in line with market demands.

These features provide users with significant timesaving and greatly reduces room for error, Ms Krüger says. A built-in workflow ensures that information is entered only once, reducing the risk of inconsistencies, duplication, and errors. The solution also allows users to insert logos and graphs into the financial statements and save external documents in the same file.

“SME Financial Statements is powered by Caseware Cloud and can be accessed from any device at any location, completely secure, at any time. It enables multiple users to work on the same document at the same time, thus supporting greater collaboration between team members across both the client and accounting firms. That makes for huge productivity gains,” Ms Krüger says. “It’s also much easier to update the application as new functionality is added.

“This app has been carefully designed based on Caseware Africa’s vast experience and intellectual property to assist preparers to create accurate SME compliant statements as quickly and painlessly as possible” says Ms Krüger.

Ms. Krüger confirms that this is a significant development for Africa’s SMEs. “In due course, post the introduction of SME Financial Statements in the Kenyan market, the app will be rolled out to other regions across the continent, which presents an exciting opportunity for practices and SMEs to enhance their business efficiencies as they continue to strive for growth.”