USERS' PERCEPTIONS OF USEFULNESS AND RELEVANCE OF FINANCIAL STATEMENT NOTE DISCLOSURES AND INFORMATION OVERLOAD.

• Author: Henderson, Elsie

INTRODUCTION

Financial statement note disclosures are required in the preparation of financial statements to provide additional, useful, and relevant information to the users of the financial statements for making decisions. Full disclosure is an element of financial statement note disclosure and is the basis of the Efficient Market Hypothesis which requires all relevant information be available to all parties. As equity and debt markets have continued to become more and more complex more disclosure is required to add clarity to the financial statements (Kieso et al., 2016). The increased disclosure has resulted in other consequences. Morunga and Bradbury (2012) reported a concern there is now information overload in financial reporting, including financial statement note disclosures. Anecdotal evidence suggests that financial statement note disclosures are read by very few: exchange commission, accountants, company's lawyers and preparers (Cascino et al., 2013; Radin, 2017).

An important question is whether the increased disclosure has added value to the decision-making of the users of financial statements (Brown & Tarca, 2012; Morunga & Bradbury, 2012). If the notes are not being read by users, for example, then the information is not being used and is therefore not relevant. Useful information would be read, understood, not too long or complex and relevant. Further information on users' perceptions of financial statement note disclosures will inform standard setters as they work toward a new disclosure framework (Brown & Tarca, 2012; Morunga & Bradbury, 2012).

Related to the question on relevance and usefulness is consideration of whether there is information overload in financial statement note disclosures. Not all researchers believe there is information overload in financial statement note disclosures. Barker et al. (2013) indicated there was no information overload because the markets react positively to increased disclosures. However, Brown and Tarca (2012) and Morunga and Bradbury (2012) reported information overload concerns and called for empirical studies to support information overload in financial reporting.

This study looked specifically at financial statements prepared under International Financial Reporting Standards (IFRS). Participants (creditors, investors, financial analyst, and accountants) answered questions pertaining to the notes and were asked to identify notes that were useful and not useful for decision-making. This study examined users' perceptions of financial statement note disclosure (i.e., relevance and use in decision-making) in order to further inform standard setters and extend the theory of information overload to financial statement note disclosure.

LITERATURE REVIEW

There has been an increase in financial statement note disclosure over time (Bloomfield, 2012; Iannaconi, 2012; Radin, 2007), resulting in questions of whether there is a condition of information overload in note disclosures (Morunga & Bradbury, 2012; Radin, 2007). Researchers disagree about whether there is overload (Barker et al., 2013) and how to determine whether disclosure is necessary in the financial statement notes (Bloomfield, 2012; Heffer, 2013). Some researchers indicated overload is an issue and there should be less disclosure (Morunga & Bradbury, 2012; Radin, 2007), while other researchers indicate because markets react positively to increased disclosure there is no information overload (Barker et al., 2013).

Before changes are made to disclosure requirements, there needs to be an understanding of users' perceptions of the disclosures and whether they add value to the user through improved decision-making (Brown & Tarca, 2012; Morunga & Bradbury, 2012). Specifically, information on current disclosures from the perspective of the users is needed. The purpose of this study was to determine financial statement note disclosure users' perceptions about notes (relevance and use in decision-making and differences across users) in order to inform standard setters and extend the theory of information overload to financial statement note disclosure.

Financial statements and Financial Statement Note Disclosures

Financial statements are used to communicate relevant or useful financial information to users or interested parties (Barker et al., 2013; Kieso et al., 2016). Financial statements include statements of financial position, income, cash flows, changes in equity, and financial statement note disclosures (Kieso et al., 2016). Financial statement note disclosures are an integral part of financial statements that provide additional, relevant information about a company's performance and financial position.

The purpose of this additional information is to increase understandability and transparency of financial statements by providing information considered useful for decision-making (Kieso et al., 2016). However, excessive information may result in information overload, a condition whereby information is not processed and therefore not useful to the user (Holton & Chiyi, 2013; Jackson & Farzaneh, 2012). Although, researchers expressed concerns financial statement note disclosures have become excessive, and there is now information overload in financial statement note disclosures, evidence of information overload in financial statement note disclosures is anecdotal (Cascino et al., 2013; Radin, 2007).

Information Overload

Although standard setters assumed information overload, there is no empirical evidence of information overload in financial statement note disclosures (Barker et al., 2013). Using 170 firms listed on the New Zealand stock exchange, Morunga and Bradbury (2012) found annual reports had increased by 29% (primarily in financial statement note disclosures) under IFRS thus resulting in increased load for users and more likelihood of information overload. Other researchers focused on increased length in annual reports, which include financial statement note disclosures, in terms of information overload (Iannaconi, 2012; ICAS, NZICA 2011) or disclosure of immaterial information (Barker et al., 2013; Bloomfield, 2012). In 2007, Radin shared anecdotal evidence financial statement notes are not being read, which would indicate possible information overload. Based on the lack of empirical information to support information overload in financial statement note disclosures, this paper will expand the theory of information overload to financial statement note disclosure.

Information Overload or Efficient Market Hypothesis

Regulators for capital markets and standard setters for financial statements have long purported full disclosure of all relevant information to all users to ensure all relevant information is available for decision-making (Cascino et al., 2013). Capital markets evolved through the concept of requiring transparency and disclosure of all relevant information under the efficient market hypothesis. The efficient market hypothesis stands in contrast to information overload and is based on the premise all parties have access to all information, so there is information symmetry in capital markets (Kieso et al., 2016; Kitson, 2012). Indeed, Barker et al. (2013) indicated markets do react positively to increased disclosure. Although regulators and standard setters required disclosure of all relevant information, there are now concerns there are excessive financial statement note disclosures under IFRS, which may result in information overload for users of the information (Morunga & Bradbury, 2012).

Information overload and the efficient market hypothesis may have conflicting perspectives if information becomes excessive. The efficient market hypothesis promotes the use of full disclosure (Cascino et al., 2013), whereas the theory of information overload suggests users may not be able to process information if it is overly excessive (Blummer & Kenton, 2014; Jackson & Farzaneh, 2012). Under current disclosure practices used in financial statements, there are questions on whether there is information overload in financial statement note disclosures under IFRS (Morunga & Bradbury, 2012; Radin, 2007). However, there is a requirement for full disclosure of all relevant information under both the efficient market hypothesis and under IFRS (Kieso, 2016; Kitson 2012). Regulators and standard setters are ultimately responsible for disclosure requirements and information is needed about the current state of financial statement note disclosures.

Financial Reporting

There are many studies related to financial reporting and information overload based out of the United States and other countries but no studies out of Canada. Most of the studies on financial reporting relate to areas of...