Five Steps to Effective Disclosuresby
Calls for more streamlined, meaningful, and effective financial reporting continue to reverberate in the financial world, leaving some preparers feeling like they are participating in a burdensome exercise of little relevance.
Simply put, many financial statements these days are too long, confuse rather than inform, obscure important information, and result in undue cost to preparers. However, the path to better reporting is not straightforward. There are compliance risks, complexities in the business environment, and the widespread use of new technologies that are rapidly changing the way investors consume financial information.
Disclosure Ineffectiveness: Working Through it, One Step at a Time
Standard-setters, regulators, and leaders in best-practice reporting are all fully aware of the challenges associated with current reporting practices and are working to enhance the effectiveness of financial statements. But, that takes time.
Here in Canada, for example, to help our practitioners and management navigate immediate challenges, CPA Canada has developed five steps to simplifying financial statements. The steps are in the context of IFRS but can be applied equally to financial statements prepared under other accounting standards. These best practices help management, auditors working with management, and practitioners advising management to create easy-to-read, useful financial statements.
Here's an overview of the approach:
Step 1:Make financial reporting strategic. Good financial reporting considers your user's needs first and is based on your business objectives and strategies. Identifying why you are reporting and who you are reporting for will allow you to decide what you need to include and how.
Step 2: Focus on materiality. Reporting should be done within the context of materiality and relevance. Talk to the stakeholders who will be using the statements and ask them specifically what's relevant to and beneficial for their decision-making. Materiality also applies to how much you describe in your notes.
Step 3: Refine formatting and presentation. The key here is to think about who your reader is, what they would like to read, and how to make it easy for them to find it. In many cases, less is more. Be organized. Use headings, subheadings, and tables. Divide the website into downloadable portions. Group connected information together. Cross-reference between statements and notes.
Step 4: Apply a truly condensed approach to interim reporting. Interim reporting under IFRS gives you an option: You can produce a complete interim report (similar to a year-end report) or you can do a condensed report, focusing on what's new and/or different. Condensed means condensed. You are allowed and encouraged to put less in the interim report. Most companies do too much.
Step 5: Keep looking ahead. You're not alone in wanting to simplify reporting. Regulators, standard-setters, and auditors, to name a few, are investigating how they can make financial reporting more meaningful. With that in mind, keep your ears to the ground and monitor how standards are changing. Change is coming. The IASB already has a number of initiatives on streamlining disclosures under IFRS.
Successful companies work on getting their story out in a useful, understandable, and reliable way, especially in today's challenging operating environment. They want to cut through all the noise and be heard. Clearly explaining and demonstrating how the company is generating value leads to stronger relationships with its varied stakeholders. Management has the greatest ability to act immediately and help deliver information that is relevant, clear, and easily understood.
For more information, you can download a free copy of Five Steps to Simplifying Financial Statementshere, which includes practical examples and tools, including 20 questions preparers should ask themselves on how to simplify financial statements.