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Financial Reporting Brief
Our featured article for September is 'Corporate Reporting – where to now?' with Brendan Sheridan commenting on the challenge for companies in keeping pace with developments in reporting including technology advances.
Corporate Reporting – Where to Now?
Many are concerned with whether financial reporting is developing sufficiently and quickly enough to cope with the evolution in the business landscape and the burgeoning demands of stakeholders, or whether it is time for a more fundamental rethink about corporate reporting.
Global value today is more technology, service and knowledge based than it was many years ago. The nature of the risks and opportunities facing companies has changed over time. Indicative of this is the growing gap between the price and book value of listed entities which has grown hugely over the years with the contribution intangible assets make to the S&P 500 growing from 17 per cent of total assets in 1974 to 84 per cent in 2015.
Business today depends on more than financial capital and manufactured capital to make its money. It relies on a broader set of results and relationships.
Corporate dialogue is moving away from how the world encourages capitalism and growth to how it encourages responsible capitalism and responsible growth.
How a company does business and whether its operating model is sustainable affects its value, both in the short and long term. Investors need information to assess how a company is managing the risks and opportunities associated with changing expectations. The demand for such information was effectively at the root of how Integrated Reporting (IR) took life, aiming to create a process which met the need for such information.
The primary purpose of an integrated report is to explain to providers of financial capital how an organisation creates value over time.
IR aims to:
- Promote a more cohesive and efficient approach to corporate reporting that draws on different reporting strands and communicates the full range of factors that materially affect the ability of an organisation to create value over time;
- Enhance accountability and stewardship for the broad base of capitals (financial, manufactured, intellectual, human, social and relationship, and natural) and promote understanding of their interdependencies;
- Support integrated thinking, decision making and actions that focus on the creation of value over the short, medium and long term.
A fundamental concept within the IR framework is the capitals model, which provides insight about how the resources and relationships used are effected by an organisation.
A recent report by the Association of Chartered Certified Accountants (ACCA) on IR explores how providers of financial capital perceive IR and its potential for providing decision-useful information, based on interviews with senior capital market participants.
The overall perspective on IR is that as a concept and a way forward in providing information useful to a wide range of stakeholders, IR appears to provide a worthwhile solution. However, in practice it is taking time to get a foothold. The level of familiarisation with and discourse surrounding IR is low.
With regard to whether corporate reporting is addressing the need for more quality information, three key areas emerged from the interviews during the research process identifying areas where the drive for improvement could focus, which are:
- The link between reporting and long-term value creation,
- The link between reporting and corporate strategy, and
- The reporting of KPIs relevant to strategy and value creation.
A significant majority of all participants expressed a desire to see greater consistency and comparability of KPI’s linked to corporate strategy and a clear articulation of drivers of corporate value. This was often restricted to financial information and thus not reflective of the broader capitals model envisaged in the IR Framework.
The report makes a number of recommendations regarding how to establish IR more fully in terms of its benefits for keeping market participants informed. Many leading companies are supportive of IR and there is an important role for them to play in demonstrating the usefulness of IR in a real world economic environment.
The Digital Age
Technology is significantly changing the way that data is gathered, aggregated, communicated and analysed. Informal sources are generally quicker to spread news than the more formal sources. The extent of chatter on social media is mind-boggling, it has changed fundamentally how information is shared.
There is a need to respond to this evolution and an example of such significant response is that of the Financial Reporting Council, through its Financial Reporting Lab, which launched in 2014 an initiative to investigate the impact technology might have on corporate reporting communications to the investment community. The second phase of the project, Digital Future: Data, will look at how the use of technology to communicate corporate reporting to the investment community might evolve.
The project will investigate:
- How technology trends might drive future changes in corporate reporting and provide opportunities for improvement in the access to, and analysis of, corporate reporting data, and
- How transformation of reporting formats, potentially driven by regulatory change might be optimised for investors and companies. The FRC expects to publish initial outputs from the research and study by the end of 2016.
The rapid developments in technology have also led to more continuous reporting, with some industries lending themselves to more such reporting on matters such as aircraft loading rates, store-by-store sales and others. Matters that need to be addressed in relation to continuous reporting include the need to reduce the costs of providing such information and enhancing the quality of such information. Standard setters need to consider whether financial reporting standards need to better cater for measures that are conducive to continuous reporting. The question of providing assurance over such reporting also needs to be addressed. Investors are being blessed, or swamped, with data in a variety of formats. There is a need to ensure core data is organised into information which can tell an entity’s story in a way that is meaningful and appropriate to the primary users of the corporate information.
The Annual Report
Some question whether a company’s Annual Report continues to serve a purpose in this rapidly changing environment.
Annual reports have stood the test of time with particular qualities that make them an essential part of the corporate reporting framework, including:
- They summarise a myriad of transactions into a digestible picture of the financial performance and position of the business;
- They provide management with an opportunity to emphasise the matters they consider to be important to the business, within a framework of globally accepted standards; and
- They are audited, with the level of assurance that provides.
Companies need to keep pace with advances in the reporting developments including technologies and the new opportunities and challenges they present with regard to generation of meaningful information for reporting to stakeholders.
Those who make the effort and commit the resources are likely to be rewarded with continuing stakeholder loyalty and similar benefits.
The Deloitte publication ‘Thinking Allowed - The Future of Corporate Reporting’ explores the issues and offers comments and observations.
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- July 2016: Non-GAAP Measures – Focus of Attention
- 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
- November 2015: CORE & MORE
- October 2015: Corporate Reporting – Future Expectations
- Quarterly Financial Reporting Brief: October 2015
- September 2015: Conceptual Framework – A New Foundation
- August 2015: IFRS 9 - Moving forward