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In today’s uncertain economic times, the most successful organisations recognise that it is crucial to build and maintain the confidence of their stakeholders. By telling their performance story effectively and consistently to the investment community, regulators, commentators and customers, they earn support for growth and change.
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Communicate beyond numbers Corporate reporting
12 August 2013
Page 2
Role and need of corporate and financial reporting
What is corporate reporting: definitions and concepts
Contents
Background
Conceptual framework
Financial reporting language: key performance indicators
Development of corporate and financial reporting
Threats and difficulties
Regulatory requirements
Human touch (involvement): preparers and users
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Background
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Background
In today’s uncertain economic times, the most successful organisations recognise that it is crucial to build and maintain the confidence of their stakeholders.
By telling their performance story effectively and consistently to the investment community, regulators, commentators and customers, they earn support for growth and change.
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Background
► Regulators are pushing for more detailed disclosure
WHILE
THEREFORE
► Stakeholders are demanding more and better information: transparent reports, with a more forward-looking perspective.
► The process to balance compliance and communication represents a real challenge
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What is corporate reporting
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What is corporate reporting?
Corporate reporting comes in a variety of forms, and with a wide range of names:
► Financial reporting► Corporate governance ► Corporate responsibility ► Integrated reporting ► Sustainability reporting► Environmental reporting► Executive remuneration ► Narrative reporting
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Company Users
What is corporate reporting?Financial reportingFinancial reporting provides financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity.
Information
Information
Information
Financial statements
Shareholders
Creditors
Potential investors
Financial reporting
Decision
Decision
Decision
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What is corporate reporting?Sustainability reporting► In addition to financial reporting,
many companies offer sustainability reporting.
► Sustainability reports are written for a much broader range of stakeholders, with some inclusion of different types of capital, such as human and intellectual capital.
Sustainability reporting – framework provided byGlobal Reporting Initiative
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What is corporate reporting?Integrated reporting
► IR will better reflect an organization’s strategy for continued survival and success
► IR shows the full value that an organisation will create in the future – in the short, medium and long term
Integrated reporting seeks to take the material non-financial and sustainability information and put a financial value on it
Information is put in the context of the risk and opportunities associated with company’s operating environment
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What is corporate reporting?Integrated reporting
► Refocusing and redefining financial and non-financial goals
► Building integrated communication, processes and efficiencies throughout the company
► Driving short-, medium- and long-term financial and non-financial value
► Engaging investors and other stakeholders
Integrated reporting can help prepare a company to meet 21st century business challenges by: Integrated reporting can
help a company to develop strategies to manage both financial and non-financial capital.
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Conceptual framework
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Conceptual framework
► Financial Reporting: The Conceptual Framework sets out the concepts that underline the preparation and presentation of financial statements
Two main bodies: ► International Accounting standard Board (IASB)► Financial Accounting Standards Board (FASB).
► Integrated Reporting: The International Integrated Reporting Council (IIRC) will launch by the end of 2013 an Integrated Reporting Framework
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Conceptual framework
► The International Accounting Standards Board (IASB) and International Integrated Reporting Council (IIRC) cooperate on the IIRC’s work to develop an integrated corporate reporting framework.
► The FASB and the IASB have made significant strides toward their stated goal of converging US GAAP and IFRS
Conceptual framework is necessary in order to produce reliable financial statements
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Conceptual framework
Traditional accounting frameworks reflect only a limited element of the value created
by companies
The basic structure of both frameworks FASB and IASB:► Objective of financial reporting ► Qualitative characteristics► Elements of financial statements► Recognition► Measurement► Display and disclosure
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Role and need of corporate and financial reporting
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Role and need of corporate and financial reportingCompanies need to communicate:► Clearly, ► Openly and ► Effectively
to investors and other stakeholders.
Financial statements are designed to meet the needs of users, primarily investors and creditors
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Role and need of corporate and financial reportingThe users of the financial statements and corporate reporting are:► Shareholders► Prospective investors► Financial institutions► Managers► Suppliers► Customers► Employees► Competitors► General public► Governments
Good corporate reporting
has an important role in helping to
restore the trust that has been lost.
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Role and need of corporate and financial reporting► The main focus tends to be on the
financial statements event though they are only one element of the corporate reporting
► Investors obtain key information from many sources
If something significant in a company’s reporting is confusing, or it looks like they aren’t being transparent, doubts can emerge and investment may well go somewhere else, to avoid the real or perceived risk
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Role and need of corporate and financial reporting► In addition to informing the
public, corporate reporting can be most valuable to the company itself, requiring it to bring together information and data that can increase overall understanding of the company's operation
Companies need to
blend their commercial and legal view of their business
with their tax view.
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Role and need of corporate and financial reportingTwo general uses of financial information about profit-oriented entities are: ► Assessing prospects for the
generation of future cash flows► Assessing managements’
stewardship
It is all about
economic decisions and sustainability.
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Financial Reporting language: key performance indicators
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Financial Reporting language: key performance indicators► The target of the corporate
reporting is to be understandable so that users can make economic decisions
► The qualitative characteristics of the financial statements set out in the conceptual framework represent the basic KIPs
How can corporate reporting achieve its targets?
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Financial Reporting language: key performance indicators
“If you cannot measure it,
you cannot manage it”
1 Set clear goals
2 Don’t be afraid of bad news
Defining clear goals for a company helps it to prioritize its daily tasks and organize its work efficiently. It also helps when explaining the strategy to investors
If something bad happens is better to report it than to let shareholders/ investor to find it out from news
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Financial Reporting language: key performance indicators
Keep investors close and report to them
The more often all sides report to each other, the quicker and easier the workflow is organized
3 Explain complex technology simply
4 Keep valuation steady
5 Report often – is less work
Dealing with complex technology on a daily basis, you forget how difficult it is for outsiders to understand
Try to make sure that valuations stay stable and consistent, even if methodologies change
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Effective corporate reporting
An effective communication should include the following elements:► Link to strategy► Definition and calculation► Purpose► Source, assumptions and
limitations► Future targets► Reconciliation to GAAP► Trend data► Segmental► Changes in KPIs► Performance benchmarking
Corporate reporting is a mix of financial and non financial information.
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Development of corporate and financial reporting
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Development of corporate and financial reporting► Professional accounting bodies
and standard-setters have recently issued papers exploring ways to reduce the volume of financial statement disclosures
► The disclosure provide too much information and not enough insight
Information overload
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Development of corporate and financial reporting► Present corporate reporting has
different viewpoints:► short-term <> long-term ► backward <> forward► financial <> non-financial► directors’ report <> financial
statements
► The future corporate reporting seeks to converge all the dimensions and link the information
Information, especially key points should be connected throughout reports
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Development of corporate and financial reporting► The integrated reporting is the
future of corporate reporting and combines:► Strategy► Governance► Performance► Long term prospect
ESG Matters:EnvironmentalSocialGovernance
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Development of corporate and financial reporting
We need to report in concise and comprehensible language.
► The current whishes of investors are:► No change to be made for change’s
sake► The top posts should be split► Simplify accounting procedures► Maintain liquidity► Build on communications
improvements
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Development of corporate and financial reporting
Standard reporting versusrelevant reporting
► The general trend is that financial statements and reports to be more comparable as a result of global companies and global capital markets
► The corporate reporting is influenced by information technology
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Threats and difficulties
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Threats and difficulties
Information should be complete and comprehensible
► There will always be a debate on how much to report
► The opportunity cost of information is hard to measure
► Companies may want to hide some information from public - competitors
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Threats and difficulties
Things are going too complicated
► Is the information reaching its target?
► Do the information disclosed help the users to understand the company’s current financial position and performance?
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Threats and difficulties
Elements of company performance and risk management used in corporate analysis can actually be obscured, or even missed, under the current regime
There is often an accusation that disclosures provide too much information and
not enough insight
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Threats and difficulties SWOT analysis Future corporate reporting
INTERNAL
EXTERNAL
HELPFUL HARMFUL
► Increased cost► The Co does not make any
difference between material disclosure and not material
► Increased legal requirements► Tight deadlines► Different disclosures for local
authorities, banks, SEC
► IT development► Not significant information is
not disclosed
► Experienced staff► Efficient control system► Links between information
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Regulatory requirements
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Regulatory requirements
► Government is one of the financial statements user, direct interested in the company’s wellbeing
► Taxes are collected based on tax computations, mostly starting from accounting data
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Regulatory requirements
► The governments issues laws that require companies to submit financial statements to local authorities
► Special law and regulations are applied to companies in different business sectors or to listed companies
Setting the tone – the language of norms
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Regulatory requirements
► Corporate scandals and breakdowns have highlighted the need for stronger compliance and regulations for publicly listed companies
► Responsibility is on the top management for the accuracy of reported financial statements
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Regulatory requirements
► Sarbanes – Oxley (SOX) is a mandatory act for all public companies in US
► It protects investors from the possibility of fraudulent accounting activities
► Companies implemented stronger internal controls as a result of this act
Management and auditors establish internal controls and reporting methods on the adequacy of those controls.
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Human touch (involvement): preparers and users
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Human touch
► Preparers should know the needs of the users and report them accordingly
► Prepares should have the mind set on doing the right thing and to publish the available information regarding risks
Preparers look in the past while users in the future
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Human touch
► Preparers can do a lot to increase the readability of corporate reports
► Communication between the board and investors should be stronger
► Narrative reporting is valuable to investors
Communication is the key to success
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► Large International companies have Annual reports that had around 80 pages ten years ago and now they are heading to 400 – 500 pages.
► We may see different reports for tax/ regulatory purposes and for shareholders
Human touch
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Human touch<IASB – regulatory involvement>► IASB is an independent group of
16 experts
► All meetings of the IASB are held in public and webcast
► Consultative documents are published for public comments
The development of IFRS is an open and transparent process
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Human touch<FASB - regulatory involvement>► The FASB accomplishes its
mission through a comprehensive and independent process that encourages broad participation, objectively considers all stakeholder views, and is subject to oversight by the Financial Accounting Foundation’s Board of Trustees.
The starting point in changing, improving standards are the stakeholders requests, recommendations
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Human touch
► We have ahead a long process of changing the corporate reporting
► It is necessary the input from experts from different domains, with different specialities and different viewpoints
► All the knowledge should be blended together
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Thank you!
