ACCT 2501 Financial Accounting

I am writing this letter that will form a part of recommendations for incorporating the principles of effective communication in presenting the financial information in the annual report of company. Such recommendation will help entities in improving the effectiveness of disclosures for the financial statement users. Being an investor, currently, I am intending to make investment in stocks of two companies that are listed on the stock exchange of Australia that is Common wealth bank of Australia (CBA) and National Australia bank (NAB). For the purpose of evaluation of financial position of both the banking organizations, I have reviewed and evaluated the annual report of both organizations in respect of the disclosures they are made regarding their financial data and information. I have come to known with some of the areas where the disclosure is lacking on different aspects such as comparability and transparency and have thought of submitting my response towards such disclosure evaluation. Financial information disclosure presented by company in the annual reports as perceived by the accounting standard are often faced with some of the issues such as disclosure of insufficient information in the notes that do not provide users with accurate picture of financial position of company (Abernathy et al., 2016). Furthermore, there might be presence of irrelevant information in the disclosed notes that might not be beneficial for investors to make financial decision.

While going through the disclosure initiatives as a part of principles of disclosure that is proposed by International accounting standard, I have come across seven principles that would help in reducing the difficulties while judging the financial statements. It is believed by the board that such principles of disclosure would encourage entities for communicating the information in an effective way and application of better judgment by financial statement users. The seven principles that I have become acquainted with for increasing the effectiveness of financial information as proposed by board are clear and simple, comparable, entity specific, organized for highlighting important matters, information should be in an appropriate format, it should be well organized for highlighting the important matters, information should be linked to related matters and disclosed information should be free from any unnecessary duplication. Disclosing the information in an appropriate manner would involve use of table, charts, lists and graphs (Klychova et al., 2017).

Providing IASB with the feedback on the disclosure principles would have much valued by the board as it would help in contributing to the well grounded and robust discussion on the disclosure principles. From the analysis of the annual report of both organizations, it can be inferred that NAB as well as CBA lacks on disclosure fronts in several aspects as there are no sufficient and appropriate disclosures of information that are depicted in the financial statements. There are no separate presentations of the disclosures that are made in the financial statements. It has been ascertained from the analysis that organization has not used any segmental approach and has not adopted any consistent segment definition in light of some disclosed matters. Moreover, there is no proper presentation of information as the users will not be able to create any relationship and thereby it is required by organization to improve the navigation (Trucco, 2015). In addition to this, the information on credit and liquidity risks has been presented separately. Nevertheless, the information presented in the table format by both the organization are capable of being compared from year to year and determine the trend of increasing or decreasing financial information. Therefore, investors are capable of analyzing the trend that forms an essential part of investment decision process.

In addition to the disclosures that have been identified above from reviewing of annual report, it is a known fact that for banking institutions that disclosure for banking requirement is of utmost importance. This is so because Basel is the measures or the reforms that are undertaken for strengthening the regulations of banking industry. From the annual report analysis of both the banks, it can be seen that disclosure about requirement of Basel are disclosed adequately in the notes to financial statements. Another important factor that has been identified in the presentation of financial information is usage of an appropriate format (Schipper et al., 2017). It has been identified that there is a difference in presentation of data using an appropriate format. From the annual report of CBA, it can be seen that financial information has been presented by making a very restricted use of charts, graphs and tables. NAB on other hand, have not made any disclosure of financial information using graphs or charts. In addition to this, the divisional performance of NAB is presented only in the table format and there is no detailed explanation of the same in the annual report. On other hand, CBA have made appropriate disclosure of the divisional performance in the notes to financial statements in addition to the table format.

For improving the communication effectiveness of the presented financial information in the report, I would like to make some recommendations after ascertaining the area where the organizations are lacking on disclosure front. The data presentation should be specific to nature and business of reporting entities as entity specific information’s are regarded as valuable to investors because general information can be accessed from several sources. For disclosing the relevant information that is considered essential for decision making of investors, organization should make use of appropriate format. Some common form of formatting should be used by organization depending upon the circumstance in which entity operates and their operating conditions. In addition to this, I would recommend organizations to incorporate use of charts and graphs for presentation of financial data pertaining to their financial conditions. This is so because users find it suitable to analyze the financial performance of company by using such format as it is less time consuming (Jiang et al., 2015). In addition to this, they are able to view the trend of performance of company over a considerable time periods.

The information presented in the annual report should be linked to other information and thereby improving navigation so that relationship between pieces of information’s are highlighted properly. Usefulness of presented information can be increased by easing the comparability across the reporting period and among the entities. Therefore, as an investor, I would recommend to the board to make improvement in the disclosures of the financial information by reporting entity. The recommended principles for enhancing the effectiveness of communication of financial information are easing comparability, using an appropriate format, creating linkage to related information, information should be organization specific. It is essential for board to address the disclosure issues by recommending on using the effective disclosure principles so that investors can have proper understanding of the financial information (Barth, 2015).

Therefore, it is essential for reporting entities to take into account all the issues pertaining to lack of disclosure of financial information’s. Banking institutions such as CBA and NAB should improve their effectiveness of disclosed information by adopting the principles of disclosure initiatives as recommended by the board.

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