The first of a series reviewing the good and the ‘less good’ in communicating financial information to stakeholders …
Much is written these days about the fact that annual reports and accounts (‘ARA’s), especially under the IFRS regime, can be unnecessarily detailed, confusing and, sadly as a consequence, deflect from the real issues facing an organisation. They can, quite frankly, be packed with jargon, driven by a checklist approach to financial reporting and by a need to satisfy the auditors rather than addressing the needs of stakeholders.
Have the regulators spotted that there is an issue? Undoubtedly the answer is yes. As pointed out last year by Hans Hoogervorst, chairman of the International Accounting Standards Board, “financial statements are meant to be a means of communication, and should not be viewed as a mere compliance exercise. Management needs to take a step back and consider whether they are providing the right level of information in the financial statement and whether it is useful.”
So have we learned when issuing new Standards?
In 2018 and 2019, a further two forests are likely to be sacrificed in the furtherance of disclosure. We have new Standards on Financial Instruments, Revenue from Customers and Leases to implement. All of these are very worthy and improve upon significant failings in their predecessor Standards. However, will they actually improve decision making and understanding by stakeholders?
In my old and cynical mind, I fear the answer is not as much as some people hope. Take for example the new Standard on leases (IFRS 16), heralded as a final resolution of the off-balance finance issue. As someone who has spoken at conferences and training programmes for clients for many years, I have been heralding the arrival of a new leasing Standard for a long time – indeed I have been teased regularly that this was a change in accounting practice that was too difficult to regulate or implement. Well it’s here, but not without issues - it has certainly proved too difficult for there to be a consensus between the IASB and the US FASB about the method of expensing newly capitalised ‘right of use assets’.
Will investment and lending decisions be different as a result of the issue of IFRS 16? The reality is that for at least one type of stakeholder, analysts, they have been taking operating leases into account for many years. So yes, we have saved them some time by doing the work for them but maybe that’s about it.
Is it all doom, despair and despondency?
Is there some light at the end of this depressingly long tunnel? In my view the answer is yes, but perhaps the innovative ideas and guidance are not just from where you might suspect. Here are five, of which three are the traditional sources:
- Unexpected source – HM Treasury. For accounting periods ending 31 March 2016, there will be a new structure to Annual Reports & Accounts – called Simplification and Streamlining of ARAs. Originally introduced to Parliament in July 2014, there will now be a standard structure (happily not standard content) whereby the financial statements are published after two other sections:
If all goes to plan with these two sections, it may not even be necessary to look at the financial statements!
- The performance report – ‘telling the story’ about what has happened in the period, the risks being faced (and managed or mitigated) and future prospects
- The accountability report – the audit report, the governance statement and information about remuneration
Indeed, when I was delivering a training course at a Government department recently, it was interesting to note that this, if anything, has put more pressure on those responsible for putting the ARA together as they have to focus even more than in previous years on the range of who their stakeholders are and then to communicate with them in plain English rather than hide behind formats and disclosure checklists.
- Unknown (to many) source – Integrated Reporting. I have, for many years, had the privilege of delivering training to The Crown Estate. This organisation has an (almost) unique position in terms of its structure and reporting responsibilities. It has led the way on a number of occasions (adopting IFRS earlier than almost all within the wider public sector and, in recent years, adopting the principles of Integrated Reporting). They have won a number of awards for all this effort. I would commend you to review their journey towards true integrated reporting. This approach has an increasing number of supporters – another client, ACCA (they have been in there right from the start) has not only adopted it but also started to embed it within their examination structure.
- Traditional source (1) - IFRS Foundation - The disclosure initiative. Credit where credit is due – this seems to be a sensible start to the process by looking at the structure of the primary statements, reviewing materiality in financial reporting and disclosing accounting policies. The initial amendments are not mandatory until 31 December 2016 year ends with further changes for cash flow statements a year later. Early adoption of both these changes is permitted (the cash flow amendments await EU endorsement).
- Traditional source (2) – The Financial Reporting Council – The FRC published a report in December 2015 entitled Clear & Concise: Developments in Narrative Reporting. The most recent edition of the FRC’s ‘Setting the Standard’ summarises the report thus ‘Many companies have embraced the introduction of the strategic report as an opportunity to rethink how they communicate with investors. We found that annual reports have become more cohesive, with better linkage between related information. Investors tell us that companies are providing more relevant, entity-specific and useful information in their annual reports. Our study found that companies are improving how they communicate and making important information more accessible; but good practice is far from universal’.
- Traditional source (3) – The Institute of Chartered Accountants in England and Wales – Earlier this year, the ICAEW’s Audit Faculty published ‘Audit Insights: Corporate Reporting – Improving Annual Reports of Listed Companies’ in which it identified four ways to improve the quality and clarity of corporate reporting:
- companies should only provide meaningful and relevant information that will produce a coherent business story;
- the Financial Reporting Council (FRC) should provide more examples of good practice and reassess the regulations to reduce disclosures and make them more relevant;
- auditors should help companies by producing an informative audit report; and
- investors should be more active to influence what is disclosed
In future articles I shall explore some of the issues, challenges or just downright strange reporting requirements facing accountants across the accounting spectrum (IFRS, UK GAAP (including small and not for profit entities) and Public Sector Reporting).
Charles Gubbins is Head of Technical Practice and Professional Development.
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