How useful are companies’ financial reports?

There has long been a debate between those who view financial reports as a `tick-a-box’ compliance requirement, and those users who want the financial report to provide useful information in a clear and succinct manner.

As new accounting standards introduce additional disclosures and financial reports get lengthier, the accounting profession is challenging whether there’s a better way of doing things.

Companies that prepare special purpose financial reports routinely eliminate many of the disclosure requirements contained in accounting standards. Similarly, those reporting entities that can adopt the Reduced Disclosure Regime can take advantage of significantly reduced disclosures. The challenge is to make financial reports more useful, especially for those entities preparing full general purpose financial reports.

What’s happening?

During 2014, a series of events were jointly hosted by the International Accounting Standards Board (IASB), and analysts groups in Europe to discuss the future of financial reporting. The roundtables discussed ways of providing high quality financial reporting that is relevant to all users and how this might be achieved.

In August 2014, The UK Financial Reporting Council’s (FRC) Financial Reporting Lab published a report ‘Towards clear and concise reporting’ which considered how to focus content on what is most important to investors, removing immaterial disclosures, and using cross-referencing and layout to improve clarity.

The IASB is responding to this challenge through its Disclosure Initiative - a portfolio of projects that includes targeted actions as well as a broad review of disclosure requirements. The first phase of this project was to amend IAS 1 (which will be replicated by the AASB through amendments to AASB 101) to further encourage companies to apply judgment in determining what information to disclose in their financial statements.

For example, the amendments make clear that materiality applies to the whole of the financial statements and that the inclusion of immaterial information can inhibit the usefulness of the financial disclosures.

Consequently:

• The aggregation or disaggregation of line items presented in the statement of financial performance and statement of comprehensive income, as well as the inclusion of specific disclosure notes is subject to materiality assessments. This means individual disclosures required by the accounting standards need only be included where that information is material to the users’ understanding of the entity’s financial position or performance;
• The entity’s significant accounting policies do not need to be presented in one note, but instead may be included with related information in other notes. This would allow, for example, the revenue accounting policy to be included as part of a revenue disclosure note; and
• As far as practicable, present the notes in a systematic manner. While this means that there must be a system or rationale behind the ordering and grouping of the notes, an entity would be permitted to vary the order and structure of the notes from the present ‘normal’ practice. For example, notes could be ordered by importance or relevance to the entity, which could bring some balance sheet or disclosures notes to the front.

The way forward

During 2015, we expect to see further developments from the IASB aimed at improving financial reporting disclosures involving:

• Cash flow statement disclosures;
• Research on how materiality is being applied in practice in financial statements, whether additional guidance on applying materiality is necessary and developing a set of principles for disclosures; and
• Reviewing the general requirements in IAS 1 Presentation of Financial Statements, IAS 7 Statement of Cash Flows and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors and considering how they might be improved.

Taking a tick-a-box approach to financial statement disclosures can seem the easy way out. Significant accounting policies, financial instruments, income tax and even impairments are areas where boiler-plate disclosures are often made. However, some listed public companies have already started reformatting their financial reports in an attempt to make them more user-friendly and there are a number of examples already in the public domain.

A fresh look at what information is really relevant to an understanding of an entity’s financial position and performance could result in a reduction in the length, time and costs to prepare and an increase in the usefulness of your financial reports.

Martin Olde, Nexia Australia and New Zealand Accounting and Audit Technical Director