Understandability is the concept that financial information should be presented so that a reader can easily comprehend it. This concept assumes a reasonable knowledge of business by the reader, but does not require advanced business knowledge to gain a high level of comprehension. Adherence to a reasonable level of understandability would prevent an organization from deliberately obfuscating financial information in order to mislead users of its financial statements.
In order to be understandable, information should be presented using the following guidelines:
- Complete. The text presented should not be missing any key information. For example, a table of future lease payments should include all future periods for which lease payments will be made, so that a reader can understanding the entire scope of future obligations.
- Concise. Do not bury the users of financial information with an excessive amount of detail. This means presenting a sufficient amount of information that is easily scanned for highlights. Also, do not replicate disclosures throughout the financial statements; instead, set forth information in one place, and then insert references to it elsewhere in the financial statements, as needed.
- Clear. Use a presentation methodology that is easiest for the reader to scan. This typically means that charts and tables take the place of text, or are at least the preferred form of presentation.
- Organized. The reader should be able to easily locate cross-referenced information within the financial statements. This means that all supporting schedules should be identified with a footnote number or letter, with this identifier listed in the main financial statements.
The preceding concepts do not mean that complex information should be excluded from the financial statements. For example, the concepts related to pensions and derivatives are not easy to understand. In these situations, apply the understandability concept as much as possible, but still present the required information.