Jan McCahey provides some simple changes you can make right now to streamline your 2014 financial report.
Reporting season is upon us, and many directors will feel a sense of déjà vu as they review their company’s annual reports and see the same issues cropping up: complex and detailed notes on minor technical issues, long “shopping lists” of accounting policies, jargon-laden boilerplate disclosures and so on.
And, if you as a director find your own company’s financial report difficult to read, can you imagine how your investors must feel?
The Australian Securities and Investments Commission (ASIC), the Australian Securities Exchange (ASX) and global standard setters certainly see this as a problem and have called for companies to move away from bloated and burdensome reporting and embrace a more straightforward, clear and concise approach.
The good news is that there are some simple changes you can make right now to streamline your 2014 financial report for your readers.
Focus on materiality and relevance
Many companies take a “belt and braces” approach to financial reporting and include all disclosures that could potentially be required by the standards. As a result, financial reports can become largely impenetrable and important information gets lost in the noise.
ASIC has clearly signalled this as a concern and has stressed that it is looking for better, not more, disclosure. The solution is to put yourself in your investors’ shoes: What information do they want to see and what’s necessary to understand the financial position and performance of the company?
Our view is that information that is highly relevant should be easy to find at the front of the report while less relevant information should be moved to the back or to an appendix. Information that is immaterial should be deleted altogether.
The effect can be dramatic. We often see a 40 to 45 per cent reduction in the volume of the main body of financial reports when companies “clean out” immaterial disclosures and move less relevant detail to the back.
Provide a structure
A clear framework for your report helps to tell the story of your company’s performance. Rather than presenting your investors with a series of disconnected disclosures, consider grouping related information in a way that creates a coherent narrative that reflects the circumstances of your company and the particular interests of your investors. This is easier for readers to follow and reduces repetition, further cutting the report’s volume. For example, you may want to bring together all disclosures relating to a significant transaction in one “chapter”. Or you may want to give users a clear picture of your capital management practices in a comprehensive capital management section that brings together scattered notes on risk, earnings per share and hedging.
Review your language
Financial reports are often drafted to reflect the language of accounting standards or adapted from boilerplate text. While some accounting terminology is inevitable, the use of plain English can greatly improve the quality. Remember that most investors are not accountants.
Providing the context for your disclosure can also help drive understanding. For example, the following disclosure may, theoretically, comply with the standard: “The carrying values of property, plant and equipment in the manufacturing division were impaired by $650,000 as a result of a significant event.”
But then, so would this: “A fire at our Maitland factory caused an estimated $650,000 damage.”
Which do you think is the more useful for the investor? And, which would be easier for you to review?
Corporate governance statements
Recent changes to the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations allow companies to post their corporate governance information online instead of in a separate statement in the annual report. This simple step can substantially reduce the volume of your annual report and free the corporate governance statement from the round of annual report reviews. While your corporate governance information will still need to be kept up-to-date, it can be updated in real-time when circumstances change rather than on an annual basis. The new guidance will apply to next year’s financial reports and can be adopted early. However, you will need to adopt the entirety of the new guidance to take advantage of the provisions on online corporate governance statements.
The remuneration report
The complexity of disclosure requirements means remuneration reports take up a disproportionate amount of time and effort. In 2013, the average length of the remuneration report was 21 pages and some were as long as 40 pages. There is clearly an opportunity to make remuneration information more relevant and useful to investors. The government could “cut the red tape”, but companies can also make large improvements even within the existing rules by applying the rules outlined above.
From compliance to communication
The financial report – and the annual report as a whole – are not simply about compliance. They are an opportunity for directors to communicate their company’s value to the market. The simple test for directors to use in assessing their report is: Do I find it easy to read and understand? If not, chances are it could be improved.
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