Enhancing accounting policy disclosures

Kristen Haines

1 November 2023

Accounting policy disclosures are an often overlooked area of financial statement disclosures, but are an essential feature that can make financial statements meaningful and useful to users of financial statements.

The requirements around accounting policy disclosures have had minor amendments, shifting the terminology from significant accounting policies to material accounting policies. Whilst we do not believe the change in wording itself should have a substantial impact, the amendment is a good reminder to stop and reconsider the appropriateness of your accounting policy disclosures.

Accounting policy disclosures are your opportunity to explain what the application of accounting standards mean for your organisation. They are a key element of explaining the financial statements, allowing users insight into the thinking behind the numbers you have included. Well written accounting policy disclosures can significantly enhance the useability of financial statements.

What makes accounting policy disclosures material?
AASB 2021-2 Amendments to Australian Accounting Standards – Disclosure of Accounting Policies and Definition of Accounting Estimates, effective for years beginning on or after 1 January 2023 (June 2024 year-ends), has made minor amendments to the disclosure requirements around accounting policies and has provided further clarity on when accounting policies should be considered to be material, rather than significant as they were deemed previously. Accounting policies will be considered material if they:

Have changed during the period and the change has had a material impact on the numbers recognised in the financial statement
Explain which policy the entity has chosen from one or more options permitted by Australian Accounting Standards
Are created because no explicit policy exists in Australian Accounting Standards and the entity has had to determine their own accounting policy
Relate to an area where the entity is required to make significant judgements and assumptions in applying the policy
Relate to an accounting issue that is complex and users would not otherwise understand material transactions in the financial statements.

It is important to note that when transactions are considered immaterial, the associated accounting policies would also be considered to be immaterial and therefore not be required to be included.

Location of accounting policy disclosures
There are no specific requirements as to where accounting policies should be located. Traditionally accounting policies have all been disclosed together in note 1 of the financial statements. Recently there has been a move to include the bulk of the policies in the relevant note to the financial statements. For example, when you are reading the tax note disclosures, the tax accounting policies will be included at the end of that note, other holistic notes such as consolidation and foreign currency translation are often then included as one of the last notes to the financial statements.

There is no right or wrong way to present this information and you may present them where you think is most appropriate for your organisation. However, we have found that when the policies are presented in the underlying relevant notes, they tend to be more succinct and better tailored to the specific facts and circumstances of the organisation compared to when the accounting policies are all contained in a separate note.

Use of templated accounting policy disclosures
All financial reporting software included generic accounting policies within their template financial reports. As these are template accounts to be used by many different organisations across different industries and with different circumstances, the policies in these template accounts tend to be simple regurgitations of the requirements in the accounting standards. They also tend to cover off all potential aspects of the standards because they are designed to be applied by any organisation.

The generic nature of the disclosures often results in excessive and irrelevant disclosures including for example, four to five pages of accounting policies on financial instruments, including policies for complex arrangements, that for many corporate entities in particular, will never be relevant. Although it can be tempting to leave in all those additional disclosures because they might be relevant someday, it is not appropriate to do so and can lead to financial statements being misleading.

AASB 101 Financial Statement Presentation requires entities to ensure that immaterial accounting policy information does not obscure material accounting policies. Therefore, it is essential that you consider whether including that information is consistent with the requirements of the standards.

Other templated disclosures are so generic that they don’t include any useful information to users. For example, templated accounting policies around revenue recognition typically summarise the five steps of revenue recognition in AASB 15 Revenue from contracts with Customers. As demonstrated in the example below, the tailored example uses less accounting jargon, is more explicit about how the company applies the standard and overall is shorter, easier to understand and more useful to users.

Templated disclosure

Revenue is recognised in accordance with the requirements of AASB 15, that reflects the transfer of promised goods or services to the customer at an amount of the consideration that is expected to be received in exchange. This is done by applying the five-step model as follows:

Identify the contract with the customer
Identify the performance obligations
Determine the transaction price
Allocated the transaction price to the performance obligation
Recognised revenue as and when control of the performance obligation is transferred.

Tailored disclosure

The Company recognises revenue when goods have been dispatched from the Company’s warehouses as this is the point in time control passes to our customers. Due to the existence of volume rebates, the Company applies the most likely method to estimate the amount of variable consideration it will ultimately be entitled to in relation to each sale and considers whether that amount is appropriately constrained in recognising the revenue. A contract liability is recognised for any consideration received that may need to be refunded.

ASIC has also noted in 23-149MR ASIC highlights focus areas for 30 June reporting that disclosures should be specific to the circumstances of the entity and its businesses, assets, financial position and performance. In addition, when considering the information that should be disclosed, directors and preparers should put themselves in the shoes of investors and consider what information the investors would want to know. This further supports that templated accounting policies are a useful starting point, but should be tailored to the specifics of your organisation.

Tailoring the policies should involve considering, how you apply the standards and what aspects are relevant to you. This may seem like a tedious task, however as accounting policies tend to be relatively stable over time this is likely to be a one-off investment to ensure that your financial statements are much more meaningful and user friendly.

Next Steps
Now is a great time, whilst you are not in the midst of year-end to really consider and refine your accounting policy disclosures, to enhance your financial statement disclosures going forward. If you would like assistance, please contact your local Moore Australia advisor, and we can use our expertise to assist you in making more meaningful financial statement disclosures.