Financial Reporting Brief
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 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.
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.
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
IFRS & Related Developments
Legal and Regulatory Developments
Financial Reporting Brief
- December 2016: 2016 Reporting - The Challenges
- November 2016: Financial Reporting – The Supervisors’ Views
- October 2016: A New Challenge – The Companies Accounting Bill
- Quarterly Financial Reporting Brief: October 2016
- September 2016: Corporate Reporting - Where to now?
- August 2016: Uncertainty – The Accounting and Reporting Challenge
- July 2016: Non-GAAP Measures – Focus of Attention
- Quarterly Financial Reporting Brief: July 2016
- June 2016: The Challenges of a New Leasing Standard
- May 2016: Revenue Standard - Moving Towards Implementation
- April 2016: A Focus on Non-Financial Reporting
- Quarterly Financial Reporting Brief: April 2016
- March 2016: Integrated Reporting – A Way Forward for Corporate Reporting?
- February 2016: Lease Accounting: The New Standard
- January 2016: Transparency of Reporting: Importance to Financial System
- Quarterly Financial Reporting Brief: January 2016
- December 2015: Supervisors Help Response to Reporting Challenge