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.

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Disclosures in First IFRS Financial statements

Disclosures in First IFRS Financial statements – A first-time adopter must apply all of the presentation and disclosure requirements in IFRSs. IFRS Reference: [IFRS 1, paras 20, 23 – 27A, 29 – 31B]

The first-time adopter must also explain how the transition from previous GAAP to IFRSs affected its reported financial position, financial performance and cash flows. As a result, an entity’s first IFRS financial statements must include the following reconciliations:

Note that the dates presented are examples for an entity with a calendar year end (adopting IFRS in 20X3) that presents only one comparative period.

Nature of disclosure

Comparative year ended December 31, 20×2

Opening as at January 1, 20×2

Reconciliation of equity as at:

  • the date of transition
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Accounting Policies to First IFRS FS

Accounting Policies to First IFRS FS – An entity must use the same accounting policies in its opening IFRS statement of financial position and throughout all periods presented in its first IFRS financial statements. Those accounting policies must comply with each IFRSs effective at the end of its first IFRS reporting period, unless there is a mandatory exception to retrospective application or an optional exemption from the requirements of IFRSs.

[IFRS 1, paras 7 – 9]Accounting Policies to First IFRS FS

Note that:

  • An entity may apply a new IFRS that is not yet mandatory if that IFRSs permits early application.
  • The transitional provisions in IFRSs do not apply to a first-time adopter’s transition to IFRSs.

Mandatory Exceptions to Retrospective Application and Optional Exemptions from Read more

Earnings per share

Earnings per share – The objective of IAS 33 Earnings per share is prescribing principles for the determination and presentation of earnings per share, so as to improve performance comparisons between different entities in the same reporting period and between different reporting periods for the same entity.

Earnings per share is mostly used in the consolidated financial statements of a group with a parent:

  1. whose ordinary shares or potential ordinary shares are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets); or
  2. that files, or is in the process of filing, its financial statements with a securities commission or other regulatory organization for the purpose of issuing ordinary shares
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Prudent reporting in high performance periods

Prudent reporting in high performance periods – This is a note on the innovative history of Philips’ financial reporting, see the ‘Introduction to a history of innovation in financial reporting‘.

As a starting point a short history of changes in the Philips’ accounting policies is provided: Prudent reporting in high performance periods

Before 1919

conservative accounting based on historical cost, write-off’s to one guilder, silent reserves, depreciation was treated as a distribution of income

1920 – 1939

a reserve for expansion was created containing money generated by additional paid-in capital (1920), in 1924 patents are capitalized

1930-1939

consolidated balance sheet (since 1931), revaluation reserve created, depreciation of capital expenditures charged to reserves

1940-1949

depreciation based on current fixed

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