Readability and Understandability of Notes to Financial Statements

Abstract

Purpose

Our research examined the impact of readability on the understandability of notes to the financial statement and investigated the influence of a glossary on understandability.

Theoretical framework

Previous studies have treated readability and understandability as synonymous, but understandability is a broader concept influenced by contextual complexity, syntax, and individual characteristics.

Design/methodology/approach

We conducted an experiment involving 111 participants in Brazil with a background in accounting. We manipulated components of the Flesch readability metric and assessed their impact on understandability, as measured by the Meaning Identification Test.

Findings

Enhancing the readability of financial statement notes did not improve their understandability. However, participants' overall comprehension abilities and personal characteristics were found to significantly influence understandability. Additionally, the inclusion of a glossary of technical terms had a positive impact on understandability only for users with limited prior knowledge.

Practical & social implications of research

Researchers should consider alternative metrics to assess understandability. Standard setters and regulators should reconsider the effectiveness of presenting a glossary. Investors can advocate for improved text quality measures and the presentation of high quality information.

Originality/value

Most readability studies focus on reports written in English, and they are mainly applied to Anglophone countries. Our study extends this area of research in Brazil to reports written in Portuguese. Additionally, it highlights the need to explore the relationship between readability and understandability, as traditional readability formulas may not fully capture the comprehensibility of a text.

Keywords:
Readability; understandability; notes to the financial statements