AuthorHenderson, Elsie


Financial statement note disclosures are an integral part of financial statements and are written to add clarity to the amounts disclosed in the body of the financial statements which should increase transparency. The problem is the readability or understandability of these notes may be low and is increasing information overload. In general, notes are seen as increasingly more complex and difficult to understand. To be readable, the written information must successfully communicate the message. Yet as the complexity and the length of the information increases, the readability decreases (Cheung & Lau, 2016) and transparency also decreases (Lawrence, 2013).

Information overload occurs when the reader cannot process information for various reasons such as the amount, complexity, readability or understandability of the information (Jackson & Farzaneh, 2012). The theory of information overload has been applied to many disciplines: communications (Holton & Chyi, 2012), libraries (Blummer & Kenton, 2014), and media (Hargittai et al., 2012), as examples. Concerns have been expressed there is now information overload in financial statement note disclosures (Morunga & Bradbury, 2012).

Transparency is essential and expected in financial reporting. To be transparent, the information must be understandable (or readable) while presenting the financial position of the entity (Barth & Schipper, 2007). There is a strong link between readability (understandability) and transparency. Lawrence (2013) indicated low readability is viewed as less transparent and of lower quality while other researchers indicated that firms will make reports less readable in efforts to mitigate negative information (Chakrabarty et al., 2018; Li, 2008).

Low readability and understandability are characteristics of information overload (Jackson & Farzaneh, 2012; Rennekamp, 2012). There are concerns of information overload in financial statement note disclosures; however, not all researchers agree on whether there is information overload. There have been mixed discussions of information overload in financial reporting. Barker et al. (2013) indicated the markets reacted positively to increased disclosures supporting there was no overload in financial reporting. Other researchers called for research to assess whether there was a condition of information overload in financial reporting. There has been limited research on information overload specific to financial statement note disclosures.

Standard setters are currently developing a disclosure framework. It is important to understand users' perceptions of note disclosures and whether these notes are meeting the objective of providing useful information (Brown & Tarca, 2012; Morunga & Bradbury; 2012). One aspect of usefulness is readability. If the notes are not read and understood, then the notes are not useful. Further, not being read or understood is indicative of information overload (Brown & Tarca, 2012; Morunga & Bradbury; 2012).

This study looked specifically at the readability and understandability of financial statements prepared under International Financial Reporting Standards (IFRS). Participants (creditors, investors, financial analysts, and accountants) answered questions pertaining to the notes and were asked whether they read the notes and to identify notes that were low in readability. This study serves to further inform standard setters and extend the theory of information overload to financial statement note disclosure.


The increase of information in financial reporting has been receiving attention in recent years (Bloomfield, 2012; Lawrence, 2013; Morunga & Bradbury, 2012). There have been questions specific to financial statement note disclosures (Barker et al., 2013) and concerns about information overload (Morunga & Bradbury, 2012; Radin, 2007). The notes have continued to increase over time and research suggests the notes are not being read (Cascino et al., 2013; Radin, 2007).

Although information overload is a concern, users of financial statements expect transparency. Researchers have focused on transparency and found an increase in the level of disclosure increased transparency (Charitou, Karamanou, & Lambertides, 2015). There is evidence increased transparency results in a lower cost of capital for the firm and reduces information risk for the user (Barth & Schipper, 2008). Although too little disclosure is a concern, disclosure overload is also concerning (Mensah, Nguyen, & Prattippati, 2006).

Theory of Information Overload

The theory of information overload is based on the limited processing ability of the human brain (Eppler & Mengis, 2004; Jackson & Farzaneh, 2012). Although quantity of information has long been the basis of information overload, quality and complexity of information are also key factors. If readers cannot gain an understanding of the information within the time constraints because the information is overly complex, then once again, the user feels perplexed or confused and is in a state of information overload (Jackson & Farzaneh, 2012).

Jackson and Farzaneh (2012) indicated information overload results when users cannot process information for various reasons such as not being able to understand the information because of low readability. Further, Jackson and Farzaneh (2012) identified, there is a problem in that low readability increases information overload for readers. Other researchers indicated there are concerns with readability of the disclosures in annual reports, which includes financial statement note disclosures, meaning users did not understand the information (Lehavy, Li, & Merkley, 2011). It is clear low readability and understandability contribute to information overload and have a negative impact on users of financial information.

The problem is disclosures that are not processed because of low readability or not understood are not useful. The objective of financial reporting is to provide information useful for decision-making and information useful for decision-making is understandable (Kieso et al., 2016). In the case of the global financial crisis, information had been disclosed in financial reports; however, the information was not understood and therefore not processed (Avgouleas, 2009) a condition of information overload (Jackson & Farzaneh, 2012).

As standard setters are focused on the development of a disclosure framework, information is needed on users' perceptions of usefulness of current financial statement note disclosures including the understandability of financial statement note disclosures (Brown & Tarca, 2012; Barker et al., 2013). Similarly, other researchers indicated there is a need to understand users' perceptions of financial statement note disclosures before changes are made to the current disclosure framework (Bloomfield, 2012; Morunga & Bradbury, 2012). Lawrence (2013) and IFRS (2013) both identified a need to understand how users use the financial statement note disclosures.


Readability is the quality of being easy to read (Oxford Dictionaries, 2016) and is affected by characteristics such as the number of syllables per word and the length of sentences (Lehavy, Li, & Merkley, 2011). Low readability results from not being able to understand or interpret information and may be indicative of information overload (Jackson & Farzaneh, 2012). As information becomes less readable, its usefulness decreases. Lawrence (2013) indicated low readability was viewed as being less transparent and thus of lower quality. Other researchers indicated lower readability had a negative effect on users. For example, there was a negative effect on financial analysts when analyzing financial statement note disclosures (Barker et al., 2013) and investors when making investment decisions (Miller, 2010).

Rennekamp (2012) demonstrated the effect of low readability on investors using a sample of individuals from the online labor market which is a pool of participants who are representative of the population. Participants in Rennekamp's study were first given one piece of information and then provided the same disclosure at a different level of readability. Rennekamp (2012) concluded users responded more positively to good news and more negatively to bad news when information was higher in readability. However, more relevant to this study was the finding that low readability prevented readers from retrieving information, regardless of the amount of information.

In other research, the Gunning Fog Index has been used to measure the overall readability of annual reports (Lehavy, Li; & Merkley, 2011). The Index to assess readability was determined as a function of the number of words in a sentence and the percentage of complex words (more than three syllables) times a...

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