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FEE agrees with the definition of complexity as described in the Bulletin and with the concept that there is a direct relationship between complexity, the costs to preparers and the benefits to users of financial statements. FEE believes that the main sources of complexity affecting financial reporting are the complex business environment and the divergent needs of users. In some aspects the standard setting process could also add to complexity.
However, FEE considers that attempting to distinguish avoidable and unavoidable complexity is a judgmental exercise and FEE questions whether this is necessary in order to address the issue.
FEE believes that, in itself, complexity should not be considered as a primary factor in establishing the principles underlying accounting standards. The main purpose of the financial statements is to provide relevant and faithful information about the financial position and performance of the reporting entity to the users. The qualitative characteristics of the Conceptual Framework (“CF”) are those which define how the financial information should be presented. In this context, financial statements inevitably incorporate complexity in order to portray complex transactions in a relevant and faithful manner. For that reason, avoiding complexity is not, in itself, considered an appropriate qualitative characteristic to be explicitly included in the CF.
Instead, assessing whether undue complexity was introduced in a standard should be considered as part of the field testing conducted in the standard-setting process and should be taken into account as part of the costs and benefits analysis of that standard. Further, as much as possible, accounting standards should be developed and written with an objective of providing clarity.
Finally, FEE is of the view that the only way to achieve a meaningful reduction in complexity is to use the already existing tools included in the CF, being the qualitative characteristics. In addition, FEE believes that considering the business model as part of the standard setting process would contribute to reducing complexity, as the entity’s objectives and the way that it interprets its transactions would be better aligned with financial reporting requirements. As a result, the understandability and relevance of financial statements would be enhanced.