FINANCIAL REPORTING AND IR

Stakeholders today are increasingly asking for greater reporting transparency about the company’s strategy, business models, risks, and prospects. IR professionals are increasingly challenged to communicate more clearly, openly and effectively with investors and other stakeholders about their company’s operations and growth plans. The increased complexity in companies’ business models and capital markets have also contributed to a shift in stakeholder needs.

In an effort to respond to this greater appetite for information, regulators and accounting standard setters have continued to introduce incremental disclosure requirements in an attempt to explain such complexities to users.

As a consequence, however, annual reports are becoming ever longer, ever more complex, and more and more difficult to understand – even for experienced professionals. In the resulting disclosure overload in annual reports, key messages risk getting lost among the volume of immaterial disclosures. Users of financial statements are pushing back; they are looking for more company-specific – rather than boilerplate – information that makes the financial statements more relevant and tells a coherent, understandable story specific to that business. Clearly there is appetite for change.

 On the horizon: Clarified accounting standards

The International Accounting Standards Board (IASB) has factored these concerns into its recent ‘disclosure initiative’ to improve presentation and disclosure in financial reporting. One of the first projects is to address some of the perceived problems with current disclosure requirements through clarifications to IAS 1 – Presentation of Financial Statements, effective for years beginning in 2016, to provide more company-specific information and reduce immaterial information (i.e. cut clutter):

• Specific single disclosures that are not material do not need to be presented even if they are a minimum requirement of a standard.
• The order of financial statement notes is no longer prescribed. Companies can choose their own order and also combine accounting policies with notes on related subjects.
• It is explicit that companies should not aggregate line items on the balance sheet and in the statement of profit or loss and other comprehensive income (OCI) if this provides helpful information to users. Additionally, line items on the balance sheet can be aggregated if the line items specified by IAS 1 are immaterial.
• There are specific criteria for presenting subtotals on the balance sheet and in the statement of profit or loss and OCI, with additional reconciliation requirements for the statement of profit or loss and OCI.

Seek feedback and guidance from stakeholders

This is just the first of a number of anticipated projects under the ‘disclosure initiative’. Real progress will only come from a combination of rule changes allowing increased flexibility and a serious effort by financial statement preparers to understand and address the information needs of their stakeholders. IR professionals can contribute significantly to the effort, channeling the voice of the analysts and the insights they seek. Investor presentations are also a relevant starting point for what should be included in the annual report. Thoughtful feedback from users of your financial statements can help in making the judgments on what is ‘material’ to your stakeholders, and to identify ‘clutter,’ as these distinctions need to be assessed from a user’s perspective.

Refine the annual report content strategy

There is clear recognition that the range of issues and opportunities affecting long-term business value is much broader than can reasonably be reflected in a set of historical financial statements. The design and content of the annual report also needs to be strategically reassessed regarding whether it is contributing optimally to addressing changing information needs.

Companies need to define what role the annual report should play in the external communications strategy. A consistent, well-articulated communications strategy, reflected in all elements of the company’s stakeholder communications including its financial statements and annual report, and backed by a strong working relationship between IR and the accounting department, can contribute significantly to the shared objective of improving the overall usefulness of the annual report.

Taking the first step

Stakeholders are asking for more transparency and are expressing increasing concerns about disclosure overload. The rule changes still have a long way to go, but by using the greater flexibility afforded by the newly clarified standard, and listening to their stakeholders, companies have an opportunity to reconsider their financial statement disclosures and take at least a first step toward providing information in their stakeholder reporting that is understandable, relevant and tells a coherent story with respect to their financial performance.

Katie McGarry, CPA, CA is a Senior Manager, and Rob Brouwer, FCA is Canadian Managing Partner, Clients and Markets, for KPMG LLP in Canada.