Better Communication in Financial Reporting

Better Communication in Financial Reporting

Better Communication in Financial Reporting is an IFRS.org initiative to focus financial reporting on users. There is a general view that financial reports have become too complex and difficult to read and that financial reporting tends to focus more on compliance than communication. See also narrative reporting as a discussion on alternative ways of reporting.

At the same time, users’ tolerance for sifting through information to find what they need continues to decline.

This has implications for the reputation of companies who fail to keep pace. A global study confirmed this trend, with the majority of analysts stating that the quality of reporting directly influenced their opinion of the quality of management.

To demonstrate what companies could do to make their financial report more relevant, there are several suggestions to ‘streamline’ the financial statements to reflect some of the best practices that have been emerging globally over the past few years. In particular:

  • Information is organized to clearly tell the story of financial performance and make critical information more prominent and easier to find.
  • Additional information is included where it is important for an understanding of the performance of the company. For example, we have included a summary of significant transactions and events as the first note to the financial statements even though this is not a required disclosure.

Improving disclosure effectiveness

Terms such as ’disclosure overload’ and ‘cutting the clutter’, and more precisely ‘disclosure effectiveness’, describe a problem in financial reporting that has become a priority issue for the International Accounting Standards Board (IASB or Board), local standard setters, and regulatory bodies. The growth and complexity of financial statement disclosure is also drawing significant attention from financial statement preparers, and more importantly, the users of financial statements.

Considering the purpose of consolidated financial statements, the notes normally largely follow the order in which items are presented in the primary financial statements. Paragraph 113 of IAS 1 Presentation of Financial Statements requires the notes to be presented in a systematic manner and paragraph 114 provides examples of different systematic orderings and groupings that preparers may consider.

An alternative structure that some may find more effective in permitting the users to identify the relevant information more easily, involves reorganizing the notes according to their nature and perceived importance. An illustrative ordering of the alternative structure that is based on seven different notes sections is summarised in the table below:

Notes to the financial statements

Heading

Content

Corporate and Group information

  • Legal name and other identification data
  • Exchange listing symbols
  • Compliance data

Basis of preparation and other significant accounting policies

Better Communication in Financial Reporting

  • Basis of preparation
  • Other significant accounting policies not covered in other sections (below)
  • Changes in accounting policies and disclosures
  • Fair value measurement and related fair value disclosures
  • Impact of standards issued but not yet effective

Group business, operations, and management

Better Communication in Financial Reporting

  • Revenue from contracts with customers
  • Financial instruments risk management objectives and policies
  • Hedging activities and derivatives
  • Capital management
  • Distributions made and proposed
  • Segment information
  • Basis of consolidation and information on material partly-owned subsidiaries
  • Interest in joint ventures and investment in associates
  • Leases

Significant transactions and events

Detailed information on statement of profit or loss and other comprehensive income items

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  • Other operating income and expenses
  • Finance income and costs
  • Depreciation, amortisation, foreign exchange differences and costs of inventories
  • Detailed breakdown of administrative, employee benefits and research and development expenses
  • Share-based payments
  • Components of other comprehensive income
  • Earnings per share

Detailed information on statement of financial position items

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Commitments and contingencies

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  • Other commitments
  • Legal claim contingency
  • Guarantees
  • Other contingent liabilities
Something else -   Narrative reporting the right way

By structuring the notes according to their nature and perceived importance, users may find it easier to extract the relevant information. In addition, the significant accounting policies, judgements, key estimates and assumptions could alternatively be placed within the same note as the related qualitative and quantitative disclosures to provide a more holistic discussion to users of the financial statements.

Entities may find that other structures are better for enhancing disclosure effectiveness, and the approach summarised above is only intended to illustrate that IFRS allows for alternative notes structures.

Entities should carefully assess their specific circumstances and the preferences of the primary users before deciding on notes’ structure. Engagement of key stakeholders will be a critical part of any process to make significant changes to the financial statements.

Other alternative structure

An other way of providing notes to the financial statements is in a more modern way, by adding basic questions to the more formal IFRS denominations.

Notes to the financial statements

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Overview – What has happened in the reporting period?

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Main statements – What are the basic numbers?

  • Segment information – what business units are operated by us?
  • Profit or loss – what did we in total earn in our activities?
  • Financial position – what do we own as assets, what do we have to pay as liabilities and what is the owner’s equity?
  • Cash flows – what do profit or loss and financial position look like in real cash?
  • Equity – what have the shareholders/owners earned, contributed or withdrawn from the business?
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Risk exposures – What are the difficult to manage parts in the accounts?

  • Critical estimates, judgements and errors – what kind of estimates or common sense rather that hard numbers/facts did we include in the accounts, did we make errors in the past and how have we corrected them in this report?
  • Financial risk management – No risk, no glory – how do we keep a balance between too much risk, too high short term profits versus managed risk and managed profit developments?
  • Capital management – Too leverage or not too leverage? – how do we keep our business solvent, can we pay our bills in the longer term, what are the ratio’s?
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Consolidation structure – What is part of this group of companies, what changed during the period and what other investments do we maintain?

  • Business combinations – What new kinds of operational businesses did we purchase in this period (and last year)
  • Discontinued operations – What part(s) of existing operational businesses did we sell in this period (and last year)
  • Interest in other entities – What parties are we interested in (investing in) but did we not (yet) gain control over to fully manage and consolidate them?
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Off-balance sheet items – What items are not included in the financial position/balance sheet and may have to be included depending on user needs?

  • Contingent liabilities and contingent assets – What potential but unrecorded liabilities in the form of payables of claims, warranties and such considered unlikely to become payable, and potential but unrecorded cash inflows/receivables in the form of receivables for claims, warranties and such considered unlikely to become receivable the entity decided not to record in the balance sheet?
  • Commitments – What legal obligations have been entered into as at the reporting date for delivery after the reporting date (purchased raw materials, additions to property plant and equipment)?
  • Events occurring after the reporting period – What events have occurred after the reporting date that have or have not been recorded in the financial statements?

Detailed information – What other types of transactions have been recorded in the reporting period that some users might use?

  • Related party transactions – What transactions have been made with persons or entities that are closely involved with the business?
  • Share-based payments – What transactions have been made using shares (or options on shares) of the entity as a payment?
  • Earnings per share – What are the earnings per share outstanding and what is the effect of outstanding share options i.e. dilution of profit as a result of this?
  • Offsetting financial assets and financial liabilities – What financial instruments have been netted because of a enforceable legal right to offset and there is an intention to settle net?
  • Assets pledged as security – What assets in ownership are pledged as part of certain financing arrangements?
  • Accounting policies – What are not just the explicit elections provided for in some standards, but also other conventions and practices that are adopted in applying principle-based standards?
  • Changes in accounting policies – What changes in the aforementioned accounting policies have been made and how have these been presented?
Something else -   IAS 24 Related parties by definition

 

Annualreporting provides financial reporting narratives using IFRS keywords and terminology for free to students and others interested in financial reporting. The information provided on this website is for general information and educational purposes only and should not be used as a substitute for professional advice. Use at your own risk. Annualreporting is an independent website and it is not affiliated with, endorsed by, or in any other way associated with the IFRS Foundation. For official information concerning IFRS Standards, visit IFRS.org or the local representative in your jurisdiction.

Something else -   The Main Statements of Financial Statements - 1 Updated Reward to

Better Communication in Financial Reporting

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