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Global Perspectives on Business Reporting
by Vincent Tophoff, Senior Technical Manager, IFAC | October 30, 2013 |
The 25 prominent business leaders from across the globe who were interviewed for IFAC’s Integrating the Business Reporting Supply Chain project provided the following perspectives with regard to business reporting:
- It Is Critical That Financial Reporting Becomes More Relevant and Understandable. To make financial reports more accessible, organizations should provide simple building blocks of business information ―grouped around topics that stakeholders really want to understand, such as how an organization is funded or how it is performing―in which all pieces of information about that issue are brought together.
- The Cash Flow Statement Is Useful to Show Financial Performance. The cash flow statement provides information essential to the analysis of the financial performance of an organization. The use of a direct cash flow statement should therefore be encouraged, so that the wider investor community will see more clearly the operating performance, the investing decisions being made, as well as how the organization is being financed and any changes in the value of the assets and liabilities.
- Additional Support for Retail Investors Is Required. Specific consideration should be given to simplifying financial reporting for retail investors. In addition, stock exchanges or other parties could provide retail investors with more information, such as analyst reports, to facilitate their investment decisions.
- Financial Reporting Standards Should Be Simplified. Improving the understandability of financial reporting standards should be at the top of the financial reporting standard setters’ priority list. They should ensure that their standards are not only comprehensive but also as simple as possible, so that stakeholders can understand and implement them properly. Standard setters should undertake a cost-benefit analysis to take into account the economics, the relevance, and the value of such changes.
- Financial Reporting Burden for Smaller and Non-Listed Entities Should Be Limited. As financial reporting standards become more complex, standard setters and regulators should consider how they can reduce the burden of financial reporting for non-listed private entities that do not seek public investment. In particular, they should consider whether or not they should provide a limited set of financial reporting standards for smaller and non-listed entities.
- Fair Value Accounting Can Produce Useful Information for Investors. The use of fair values in financial reporting was the one topic on which interviewees’ opinions most diverged, although there was general agreement that fair value accounting produces useful information for investors. However, the financial crisis has made apparent that preparers, auditors, and all stakeholders need much clearer guidance and advice to understand the inherent risk before they can put a fair value on an asset.
- Application of Financial Reporting Standards Should Be More Principles-Based. To capture the true economic substance of a transaction, a more principles-based application of financial reporting standards is recommended. However, the global trend in standard setting is, worryingly, becoming rules-based.
- Global Capital Markets Would Be Best Served by One Set of Principles-Based, High-Quality Financial Reporting Standards. A converged set of clear and concise financial reporting standards would enhance comparability and analysis of investment opportunities globally, and ultimately increase investor confidence.
- A Minimum Level of Qualification Should Be Required for Preparers of Financial Information. As financial reports are only as strong as the weakest link in the financial reporting supply chain, a minimum level of professional qualification and behavior should be required for preparers of financial statements.
- Expand toward Integrated Business Reporting. To take into account social, environmental, and economic factors, organizations should take a broader view of business reporting and expand their current financial report to an integrated model that will communicate their social, environmental, and economic performance to a broad range of stakeholders.
- A Wider Stakeholder Perspective Drives Improved Business Reporting. Organizations should be more receptive to the information needs of their investors and other stakeholders, to establish what information is relevant to their needs and to adjust their business reporting accordingly.
- Management Commentary Should Put the Reported Numbers into Context. To improve their management commentary, organizations should be more open, transparent, and forward-looking, trying to provide better insights into what drives their business, and the risks and opportunities they are dealing with.
- An Integrated Business Reporting Framework Should Be Developed. The current format of a narrowly focused financial report should be expanded to a more connected and holistic business report that integrates the various social, environmental, and economic aspects of an organization into one cohesive explanation of the business. Currently, the IIRC is developing such a framework.
The Role of Accountants and the Profession
Flowing from their responsibilities in providing financial leadership, recording financial and non-financial transactions, and measuring performance professional accountants in business support organizational reporting by:
- facilitating the identification of the organization’s stakeholder groups, such as investors, and determining how to effectively engage with each of them;
- providing detailed knowledge of financial and non-financial reporting standards and guidance to ensure that these are correctly applied and used to guide the evolution of internal management systems and processes;
- planning, executing, and controlling the preparation of financial and business reports and other relevant communications that meet the information needs of the various stakeholders and are in compliance with standards and regulatory requirements; and
- managing and monitoring the efficiency, integrity, and effectiveness of the organization’s financial and non-financial reporting processes, systems, and controls.
Professional accountants in business also support their organization by improving engagement with stakeholders, including communication and reporting processes and systems that respond to changing information demands and implementing new communication and engagement techniques, such as short form reports, XBRL (eXtensible Business Reporting Language), video streams, social media, and integrated reporting.
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