08 Apr 2014
Improving the usefulness of financial reporting is on the minds of many right now. Standard setters are looking at ways to reduce complexity; the new Integrated Reporting framework is focusing attention on the effectiveness of reporting in general; and governments around the world are mandating clearer approaches to financial reports.
In a competitive global market, it is timely for boards to review their organisation’s financial reporting and find ways to make their accounts more meaningful for investors; and investors are calling for better information. They want to be able to find important data more easily, and they want better explanations of important changes.
The days of using the same template year after year, and having an important note to the accounts buried in the back pages, are over. The report needs to be simpler and have a well-written narrative.
There are significant ‘reporting’ wins available for companies with the foresight to eliminate jargon, unnecessary information, and poorly structured information.
It’s true that many companies are struggling to find a workable approach, and feel bogged down by the weight and complexity of disclosures required by the accounting standards. But there are some practical steps that can be taken right now.
To demonstrate, we took a fictitious financial report and ‘streamlined’ it, doing as much as we could to make it less complex and more accessible.
The first step is to move away from boilerplate, ‘belt and braces’ disclosure and focus on the information that is both material and relevant to an understanding of your company. Management and the board should consider their users:
In some cases, a user focus might lead you to add further information where it is important for an understanding of performance. For example, we included a net debt reconciliation, as many users say this is information they rely on in their decision-making.
Fig. 1: Including information that might not be required but that is key for an understanding of performance
A clear framework for your report makes it possible to group related information together, and makes it easier for users to find the information they want. That framework needs to reflect the circumstances of your company and particular needs of your users. In our streamlined report, we focused on grouping information by the subject matter – how the numbers were calculated, risks, group structure and unrecognised items. Other companies we’ve worked with have developed different approaches.
Fig. 2: Grouping the information meaningfully
Notes are often drafted to reflect the language of the accounting standards, or adapted from boilerplate text. Consider why users need to know about a particular point. What context would be required for them to understand its significance? For example, the following disclosure may, theoretically, comply with the standard:
The carrying values of property, plant and equipment in the manufacturing division were impaired by $650,000 as a result of a significant event.But then, so would this:
A fire at our Maitland factory caused an estimated $650,000 damage.
Similarly, related disclosures should be presented as a coherent narrative wherever possible. By scattering them about, you risk muddying the waters for investors.
Fig. 3: Explain areas of controversy simply
Most investors are not accountants. While some accounting terminology is appropriate, be careful to avoid jargon and use plain English where possible, and provide the context that gives the disclosure meaning. Take the following example:
In accordance with AASB112 Income Taxes, deferred tax liabilities have to be recognised for the potential Capital Gains Tax at current tax rates on the unrealised gain in the investment portfolio.
A more ‘user-friendly’ version might be:
The accounting standards require us to recognise a deferred tax liability for the potential capital gains tax we would incur if we sold our investments. However, we do not intend to sell the investment portfolio, so the obligation to make this payment to the Tax Office is unlikely to arise.
Most financial reports don’t take advantage of the new possibilities offered by desktop publishing and digital functionality.
In particular, the use of hyperlinks within your document to cross-reference related material can make reports significantly easier to navigate. Colour, graphics and other design elements can also help to draw attention to key points and provide a consistent look-and-feel with other parts of the annual report –but it’s important to make sure that style isn’t overwhelming substance.
Fig. 4: Using information ‘widgets’ and pop-ups to direct your readers to related disclosures