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Assessing financial literacy

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What does financial literacy mean? According to the Canadian Securities Administrators, financial literacy includes “the ability to read and understand a set of financial statements that present a breadth and level of complexity of accounting issues that are reasonably comparable to the breadth and complexity of the issues that can reasonably be expected to be raised by the issuer’s financial statements.” 

Deloitte’s assessment questionnaire is focused on the general elements of financial literacy including an understanding of: 

  • The basic principles of financial accounting and reporting practices under current Canadian GAAP
  • The important elements of IFRS
  • The internal controls over the processes used in constructing quarterly and annual financial statements and in preparing other disclosed financial information 
  • The perspective of users of financial statements, including an understanding of investment analysis and corporate finance

Since this assessment does not address specialized accounting principles unique to specific industries, entities or situations, it may not be a complete test of audit committee literacy. For example, even under the principles-based IFRS framework, there is still specific guidance for extractive industries, biological assets, insurance activities, and long-term contracts. The intent is to assess an individual’s degree of comfort with the general elements of financial literacy, which are the foundation for industry- and entity-specific literacy. 

We believe there is no magic cut-off score for general financial literacy. In part, the determination of adequate financial literacy depends on the role and experience of the individual. In our view, the value of this assessment is that it provides an independent assessment of one’s comprehension of current financial reporting issues, and identifies areas where further development may be focused.