Cut through the financial reporting clutter

What can be done to make reports easier for everyone to understand?

There have been several attempts over the years to make financial reports more user-friendly.

But thanks to the proliferation of notes to the accounts, and detailed disclosures about how accounting standards have been applied in a report, it can be extremely difficult for lay people to get a clear picture of an entity’s financial position.

So how do financial reports need to change to help people who use them understand exactly what’s going on in a business?

Recently retired EY partner Lynda Tomkins says there are three things that companies need to focus on in their reports to improve their usability:

  • Tailoring information according to what the business does
  • Ensuring material information is front and centre and not obscured by detail
  • Making the format of reports more intuitive.

To illustrate why information should be tailored, Tomkins points to problems with revenue recognition.

Investors and others rely on financial reports to paint a picture of a business' health,  but the level of detail included often obscure the important numbers.

Investors and others rely on financial reports to paint a picture of a

business' health, but the level of detail included often obscure the

important numbers.

He believes a standard report does not give enough information about the point at which the risks associated with a sale have passed from a company to a customer.

As an example, some sales made by a business might be done on a “bill and hold” basis, which means the customer is billed on the day the sale is made, but the goods are not delivered and installed until a later date.

So although the accounts state revenue is recognised, it’s not clear at what point any risk attached to such sales pass to the customer.

“Many accounts need more detail about different revenue streams. Users can get a broad understanding, but there needs to be more detail about the different types of payments,” she says.

But, equally, including too much detail is also a problem, as it’s easy for readers to miss the key points.

“Thought needs to go into what should be taken out so that the key messages in the report are not hidden,” Tomkins observes.

She says there needs to be more focus on using simple language.

“The purpose of financial statements is to communicate to shareholders. But they have become an exercise in compliance rather than effective communication tools.”

One way to make financial statements a better communication tool might be to put financial information and any notes that relate to a disclosure in the same place.

Another idea is to put important information such as big transactions, issues and risks at the front of the document.

Tomkins says a number of companies in Australia have changed their approach to reporting this year to make their financial information more useful for shareholders, and cites the reformatted annual reports from Flight Centre and Stockland.

Both these companies have included an index in their reports that describes how they have been laid out.

“Ultimately, financial reporting should tell the story of a company’s performance in a "meaningful way for investors.” – Regina Fikkers, PricewaterhouseCoopers 

The accounting policy discussion has also been integrated with the quantitative details disclosed in the report.

“But the needs of stakeholders should be considered before any changes are made,” Tomkins says.

Anne-Maree Keane, a partner at McGrathNicol in Brisbane, is involved in buying and selling businesses. She spends many hours each week going through financial statements to help her determine a company’s true financial position.

She says the main problem with financial reports is that so many adjustments are needed to come up with an entity’s underlying earnings it’s hard to get a true picture of the company’s actual financial position.

“People need to know what the real performance of a business is. There needs to be more explanation about how numbers have been adjusted.”

Bernie Szentirmay, KPMG audit partner, agrees that reports need to be simplified.

“We believe de-cluttering reports is important. Even sophisticated readers can find it difficult to understand accounting jargon and identify important disclosures, including whether key financial measures have even been reported.”

He says removing non-essential material and irrelevant disclosures would be a step forward.

“Re-ordering and re-labelling accounting policy and including detailed notes to better reflect key financial measures would help report readers. Using plain English while still fully complying with relevant accounting standards and regulatory requirements would also be an improvement.”

Regina Fikkers, accounting consulting partner at PricewaterhouseCoopers, says the firm was delighted to work with Wesfarmers this year in redesigning its report and shifting the focus from compliance to good communication.

“The impact has been dramatic. While the report was reduced in length by almost half, it is arguably much more user friendly in terms of design and the use of plain English rather than accounting jargon.”

She says it’s important that the Wesfarmers’ segment note, which tells investors how each of Wesfarmers’ businesses is performing, is front and centre.

“Information that is less critical, such as miscellaneous accounting policies, has been moved to the back. An effective part of Stockland’s new streamlined report is pop-up boxes with simple explanations of complex accounting issues, again making the investor’s task of understanding the report so much easier,” Fikkers explains.

Ultimately, financial reporting should tell the story of a company’s performance in a meaningful way for investors, she concludes.

This article is from the November 2014 issue of INTHEBLACK. 

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