Companies Simplify, Reorganize Data; Improve Financial Reporting

The Financial Accounting Resource Center™ is a comprehensive research service that provides the full text of standards, the latest news from the Accounting Policy & Practice Report ®,...

By David R. Jones

Fonterra Co-operative Group Ltd and five other companies using international financial reporting standards have made their financial disclosures more useful by improving the presentation of notes in financial statement, the IFRS Foundation said.

The foundation published Better Communication in Financial Reporting—Making Disclosures More Meaningful on Oct. 5 to illustrate how companies using IFRS can bolster their financial reporting through such methods as better organizing and formatting information and eliminating duplication.

The London-based foundation oversees the international standard-setting activities of the International Accounting Standards Board.

The 48-page report comprises case studies that examine the enhanced reporting practices of:

  •  Fonterra Co-operative Group Ltd, a New Zealand dairy cooperative company;
  •  ITV plc, a U.K. media company listed on the London Stock Exchange;
  •  Orange S.A., a French telecommunications company;
  •  Pandora A/S, a Denmark-based jewelry manufacturer and retailer listed on the NASDAQ OMX Copenhagen;
  •  PotashCorp, a fertilizer and chemical company based in Canada; and
  •  Wesfarmers Ltd, an Australian retail conglomerate.
“By identifying what information is relevant, prioritizing appropriately and presenting it in a clear and simple manner, they have made their financial statements easier for investors to read and understand,” the foundation said in an Oct. 5 statement.

Help for Investors

ITV, Orange, PotashCorp, and Wesfarmers reported receiving positive feedback from investors on changes to their financial reporting.

In addition, Wesfarmers said that its auditors now find the company’s financial reports easier to review.

All six companies reported restructuring or reformatting the notes in their financial reports.

ITV, Orange, and Wesfarmers began grouping related notes together. Pandora reformatted its notes to use tables in lieu of a narrative to help investors better grasp the financial risks tied to fluctuations in commodity prices.

Realizing Benefits

Some companies already have seen benefits from revising how they disclose financial information.

For Wesfarmers, the report said, “the process produced clearer and more concise financial statements, which resulted in a reduction in the number of questions addressed to the investor-relations team.”

PotashCorp said it has won praise from investors for making financial statements more clear through the new structure and content of its notes and by dispelling concerns about the reduced amounts of information.

The report shows that companies using IFRS don’t necessarily need to fundamentally overhaul their financial reporting, the report said, to make it more useful to investors, analysts, auditors, and regulators.

Small Changes, Big Differences

“A series of subtle changes throughout the financials can make a huge difference to their understandability as a whole,” the report said.

The six companies reported different experiences in working to improve their financial reporting.

Financial-reporting changes have generated more efficient processes for drafting financial statements, PotashCorp’s senior managers said, such as tracking changes made from previous statements.

Wesfarmers reports its new processes have substantially cut the amount of staff time spent preparing financial statements.

In contrast, Pandora—though believing it now generates statements that are easier to navigate and review—hasn’t found that changing how it communicates financial information saves money.

“Introducing charts and redrafting notes using simpler language has instead increased the time dedicated to the preparation of the company’s financial statements,” according to the report.

Similarly, Orange advised companies to carefully consider the effort required to revamp their financial reporting.

“Drafting disclosures in a simpler and more concise manner can be time-consuming” and requires closer oversight from senior staff, the report said.

How to Improve Disclosures

Companies offered advice on improving disclosures, such as:

  •  winning support from senior managers early in the process;
  •  collaborating with investors to determine what financial information they find most useful; and
  •  considering implementing reporting changes in phases, particularly in small companies with fewer staff resources than their larger counterparts.
Analyzing investor feedback and requests for information paid off for PotashCorp, for example, in highlighting that investors wanted to better understand the company’s asset retirement and environmental restoration obligations.

The report doesn’t constitute best-practice guidance on financial reporting, the foundation said, and the organization doesn’t endorse the changes that the six companies have made.

Instead, the foundation aims to galvanize companies to consider how they can improve their financial statements and to show how changes can be put into practice.

Broad Communication Strategy

The report is part of the foundation’s strategy of promoting better communication in financial reporting.

The findings supplement several current IASB initiatives, including its Principles of Disclosure project.

The project is designed to help IASB craft improved IFRS disclosure requirements and to assist companies in more effectively communicating information to investors, analysts, regulators, and others who use financial statements.

To contact the reporter on this story: David R. Jones in London at correspondents@bna.com

To contact the editor responsible for this story: S. Ali Sartipzadeh at asartipzadeh@bna.com

Copyright © 2017 Tax Management Inc. All Rights Reserved.

Request Financial Accounting