Insights

Financial Reporting Brief 

January 2017 

Our featured article for January is The Future of Financial Reporting – with Brendan Sheridan commenting on continuing developments which will lead to changes in reporting.

The Future of Financial Reporting

Seen by investors and the marketplace in general as a cornerstone of corporate reporting, is the Annual Report actually achieving its primary objective of effective communication with stakeholders or is it in some ways short of that.

The IASB Chairman recently commented that ‘preparers sometimes experience financial reporting as too much of a compliance exercise and investors sometimes believe that the financial statements depict performance in an insufficiently clear manner, with ‘tick the box’ disclosures and voluminous, but poorly organised and presented financial data’. 

To help investors understand what investors are actually saying, is more work needed to increase the communication effectiveness of financial statements.   

Over the years many things have changed. The structure of the economy has moved from an industrial base to one driven more by technology and information. There have been major changes in social and behavioural expectations, with corporates expected to provide a clear picture of their strategy and business plan and how that fits within the challenges and demands of the communities within which they operate. There have been constantly developing advances in technology and we should expect other disruptive methodologies to emerge. Our ability to access and process data has been transformed. 

Improve the Annual Report

Even with the constant momentum of change, many believe that a periodic report provides a summary of the business as “a whole” and will continue to be a cornerstone of financial reporting to investors – what should be included in such a report and how it is presented or delivered needs to evolve with the changing landscape.

The accounting profession needs to take a lead in helping investors filter through the noise of the growing masses of data to get the right signals, by providing assurance or developing standards for broader and more dynamic information.
The IASB currently has a number of projects ongoing in this area with the Chairman drawing attention in his comments to those on primary financial statements, the disclosure initiative and the project on financial instruments with characteristics of equity. The IASB will also focus on such areas as digital reporting and non-financial reporting.

There has been an increase in demand from investors calling on them to produce an annual statement revealing how their strategy would deliver long-term value. Societal expectations also change over time, matters such as where taxes are paid, how commodities are sourced and general behavioural patterns in the community take on an increasing importance.

Integrated Reporting

Integrated reporting provides information to meet these broader demands, dealing with a broader range of capitals, activities and risks. Integrated reporting has the concept of six different forms of capital – financial, manufactured, intellectual, human, social and relationship, and natural.

Many consider the primary audience for integrated reports should be providers of financial capital in order to support their financial capital allocation assessments. It is important to identify a primary user to serve as a lens through which those matters critical to an understanding of the organisation are identified and assessed.

However, it is more and more apparent that business these days depends on more than financial capital and manufactured capital to make its money. It relies on a broader set of resources and relationships.

Society in the 21st century expects business to participate in resolving society’s needs and desires. How a business makes money today must be aligned and integrated with those of society. In part the corporate dialogue has moved away from how the world encourages capitalism and growth to how it encourages responsible capitalism and responsible growth.

A recent public position statement from the Investment Association is consistent with this, calling for companies to cease quarterly reporting and refocus reporting on a broad range of strategic issues with the emphasis being on assessing the health of the business, its growth potential and the long-term sustainability of its earnings.

Technology Advances

Rapid technology changes and social media innovation have revolutionised how information is generated and disseminated. Investors access a wide range of information sources of both a formal and informal nature to access how well a business is doing.

Techniques and processes in use can range from data mining which will provide granular information about key factors within a company and cost relatively little, to filings of information with regulators and stock exchanges. Technology may be expected to change how investors, and others, access and consume corporate information.

More sophisticated investors with greater information demands may be expected to lead to a greater number of sources of information. It is also likely that companies will provide non-financial information more continuously and in a variety of forms and layouts.

The Financial Reporting Lab, which is part of the UK Financial Reporting Council, is currently undertaking a project - Digital Future: Data - to investigate:

  • How technology trends might drive future change in corporate reporting and provide opportunities for improvements in the access to, and analysis of, corporate reporting data; and
  • How transformation of reporting formats, potentially driven by regulatory change (such as the expected implementation of a European Single Electronic Format for corporate reporting by 2020), might be optimised for investors and companies.

Developments in technology and social media mean that more information is being fed by, and about, companies. And the flow of information is continuous. Developments are needed to both financial reporting standards and auditing standards to cater for measures that are conducive to continuous reporting.

Continuing Value of Annual Reports

Despite all the new sources of information, there is little evidence to suggest but that the annual report continues to:

  • Provide incremental information to which market prices may react
  • Enable audited annual reports to help improve credibility and overall integrity of information
  • Allow those responsible for running the business to present their assessment of the risks and opportunities the company had faced and will face
  • Provide balance reports giving both the good news and the not so good
  • Present the picture of the overall value creation process
  • Bring together information that taken as a whole should provide a fair presentation of the activities of a company over the year.

Conclusion

The environment is one of uncertainty with such developments as Brexit and changes in the US Administration, and corporate reporting will need to be able to deal with the challenges of presenting the consequent messages to investors and other stakeholders while also dealing with the implementation of significant new standards and legislation. The challenge of continuously developing and improving on previous standards of annual reporting must be taken on board.

What's New - Monthly Reporting Pack

Irish GAAP & Related Developments

FRC’s 2017/18 thematic reviews expected to prompt improvements

FRC publishes new technical actuarial standards

Business Model reporting – top tips for disclosure

Name change for CARB - Professional Standards

FRC Amendments to FRS 101 and 102

FRC issues FRED 66 – Amendments to FRS 101

FRC review of alternative performance measures

FRC’s Financial Reporting Lab - dividend disclosures

Investment Association calls on companies to cease quarterly reporting

IFRS & Related Developments

IASB updates work plan

IOSCO statement on the implementation of new accounting standards

Recent sustainability and integrated reporting developments

FEE becomes Accountancy Europe

TCFD launches consultation on climate-related financial disclosures

IASB finalises amendments to IAS 40 regarding transfers of investment property

IASB concludes the 2014-2016 annual improvements cycle

New Interpretation on foreign currency transactions and advance consideration

ESMA publishes feedback statement on ESEF consultation

Legal and Regulatory Developments

Pensions Authority publications

EIOPA guidelines

UK Regulations implementing EU Non-Financial Reporting Directive published

Publications

IFRS in Focus — Closing out 2016

IFRS in Focus —Climate-related Financial Disclosures

IFRS on point

Financial Markets Regulatory Outlook 2017 - UK

Managing risk in an uncertain world

The Deloitte Finance Benchmark

IFRS Reporting - Lessons learned from the European Experience

Integrated Reporting

Governance in brief

European CFO Survey Q3 2016

Did you find this useful?