John Price explains why it is vital that companies review their financial reports so they can address concerns about complexity within financial reporting.
The Australian Securities and Investments Commission (ASIC) is all about ensuring confident and informed markets and investors. This includes the quality of financial reports which provides investors with useful and meaningful information.
While some complexity in financial reports is necessary given the increasing complexity of businesses and the environment in which they operate, important information can be lost in unnecessary clutter. For some years we have emphasised that financial reports and other key statutory information should focus on material disclosures and avoid immaterial disclosures.
ASIC is encouraged by efforts of some larger companies to address complexity of their financial reports. These companies have sought to find a more cohesive order to the notes to their financial reports, use plain English and remove duplicate or immaterial disclosures. They have also provided a better link and flow between the financial report and the operating and financial review.
Taking the challenge
The people who use financial reports are many and varied. It can therefore be a challenge addressing their needs, especially when they have different knowledge, skills and sophistication.
At the same time, flexibility in how to tell the story can be at the expense of comparability with other companies. It can be difficult to achieve the right balance between a format and information tailored to the company and facilitating comparisons with other companies.
Directors may be cautious of criticism or liability if important information is left out or given insufficient prominence or explanation. There can also be difficult judgements on whether information is material to users. Preparers and auditors may struggle with judgements on whether some note disclosures are material to readers.
Streamlining financial reports can increase preparation time, particularly in the first year it is done. It is more difficult to present information in the most meaningful way than simply include all information presented last year in the same format. However, in our view, the time investment to better present financial reports is well worthwhile. Some considerations that may be useful when reviewing annual reports include:
- Ensure the report is clear, concise and effective for its audience.
- Clearly set out the entity’s financial position and performance, including business strategies, risks and prospects.
- Ensure that information in the operating and financial review and other documents links back to the financial report and that they tell a cohesive story.
- Ensure a balance between flexibility in presentation and comparability.
- Remember that unnecessary detail can detract from the really important information.
In recent years, we have produced guidance on providing more useful information in annual reports. Our regulatory guide 247 Effective disclosure in an operating and financial review emphasises the importance of meaningful information on the underlying drivers of results, as well as business models, risks and future prospects. Regulatory guide 230 Disclosing non-IFRS financial information also emphasised providing information in a way that is not misleading.
Some challenges mentioned earlier can be addressed by digital reporting. This can complement the current efforts to better present information in the notes to the financial statements. It facilitates a more flexible presentation while improving comparability between companies and greatly enhances investors’ ability to navigate financial reports.
The latest version of digital financial reporting uses iXBRL (inline extensible business reporting language) and allows digital information to be displayed in a web browser as a normal financial report. This removes the need to prepare and lodge PDF or paper financial reports.
Digital financial reports using iXBRL will allow the use of hyperlinks to better structure the information and allow users to more easily navigate reports. Information is also tagged with a common set of identifiers to facilitate analysis by computers and ready comparison across companies and over time.
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