Academic journal article Journal of Accountancy

Will Simpler Also Be Better? 7 Ways Reduced Complexity Will Affect the Financial Reporting World

Academic journal article Journal of Accountancy

Will Simpler Also Be Better? 7 Ways Reduced Complexity Will Affect the Financial Reporting World

Article excerpt

EXECUTIVE SUMMARY

* Standard setters and regulators recognize that complexity in accounting standards is leading to confusion among financial statement users while unnecessarily burdening financial statement preparers. Various initiatives aimed at simplifying accounting standards and financial reporting have been designed to reduce this complexity.

* Simplification efforts may benefit financial statement preparers. These changes will reduce costs for private companies, lead to more effective disclosures for public companies, and allow for a redeployment of finance resources to areas that can add value to organizations.

* The changes are coming quickly from multiple sources. Preparers and auditors need to stay informed to take advantage of opportunities for simplification that can help them and their clients.

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It should be no surprise that accounting standards have become more complex over the years. Transactions have become increasingly challenging as new products and services emerge and financial instruments become more complicated in a global economy Meanwhile, financial statement users' demands for more information in a more timely fashion have caused standard setters to create more disclosure requirements to provide additional transparency. As the amount of information in financial statements has grown, "simplification" and "reducing complexity" have become themes in recent years for regulators and accounting standard setters.

Standard setters and regulators are acutely aware that investors can be confused and preparers overwhelmed by the complexity of accounting standards and by the content and volume of information presented in financial statements. FASB, the International Accounting Standards Board, and the SEC all have ongoing projects related to simplification and reducing disclosure overload (see the sidebar "The Pursuit of Simplification"). The Financial Accounting Foundation's Private Company Council (PCC) has been working to modify GAAP for private companies to reduce unnecessary complexity, and the AICPA's Financial Reporting Framework for Small--and Medium-Sized Entities (FRF for SMEs) has been designed to give preparers a simple, cost-effective way to present non-GAAP financial statements.

"Complexity in accounting is costly for both investors and companies," FASB Chairman Russell Golden said in December at the AICPA Conference on Current SEC and PCAOB Developments. "For investors, overly complex financial reports often obscure important information they need to make sound capital allocation decisions. For preparers, a complicated, unclear, hard-to-understand standard obscures its meaning. And even when an accounting treatment is clear, applying it can be lengthy, difficult, and expensive."

Any relief from complexity can make a difference. Company executives and finance teams often complain about regulatory overload. Sixty percent of CPA executives participating in an AICPA Business and Industry Economic Outlook Survey in 2013 said their current employees had been required to produce more or work more hours over the previous five years as a result of increased regulatory pressures. Simplified accounting standards can help lessen the burden on finance staffs that are busy with reporting, strategic, and compliance responsibilities.

The effort to reduce complexity is not without challenges, though. In some cases, organizational resistance to change can make any significant alteration to application of accounting standards a difficult proposition. The time and cost required to make changes, including implementation efforts and educating staff, management, and boards, may not be perceived to be worth the benefit (see the sidebar "Be Ready to Simplify"). In circumstances where, for instance, FASB has given private companies optional GAAP alternatives, companies and their CPAs may need to clearly explore the benefits and costs of each option. …

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