Columnists
When size doesn’t matter in the financial statement disclosures
Monday March 13 2023
Disclosures on litigation and pending legal cases involving an entity are important to stakeholders. FILE PHOTO | SHUTTERSTOCK
Disclosures within the financial statements are described as material if omitting or misstating these disclosures could influence decisions made by users of those financial statements that provide information on a specific organisation.
Materiality, therefore, is an entity-specific concept and depends on the nature or magnitude of events and transactions about a particular organisation.
Hence, when organisations decide what disclosures or information to provide in their financial statements, they should consider the nature, magnitude or both of matters affecting the organisations.
Most organisations quickly identify information to be disclosed based on its magnitude or size. However, some matters require disclosure in the financial statements regardless of their size or magnitude.
When viewed through the lens of investors and broader stakeholder groups, these are disclosures deemed relevant in understanding the value creation or otherwise of matters impacting an organisation’s financial fortunes and future viability.
Some information that may be considered material to an organisation regardless of size includes the following.
Disclosures on litigation and pending legal cases involving an entity are important to stakeholders. How often have we seen organisations suffer significant disruptions to their operations due to litigation?
Related party transactions are equally important information for stakeholders. For example, they highlight the level of dependencies between related party organisations, which is vital information for stakeholders on how organisations create value.
Transactions or events that impact profitability or asset and liability values in ways that alter key performance indicators (KPIs), such as profit or loss, liquidity ratios etc., should be disclosed.
Organisations should disclose these events and transactions based on their impact on key metrics that influence the decision of users and stakeholders.
Also, organisations should consider disclosing information that enables users of the financial statements and stakeholders to understand why the organisation has yet to achieve their financial expectations.
It goes a long way to demonstrate transparency and build trust with stakeholders.
