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Communicate beyond numbers - Corporate reporting
 

Communicate beyond numbers - Corporate reporting

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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 ...

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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  • The world is demanding greater corporate transparency. Investors want access to more accurate and relevant information about companies, transactions, markets and risks. Regulators are moving to exert more control. (EY)Against this background of legislative and regulatory change, we believe that global coordination is a necessity, not a luxury. Regulators and standard-setters need to continue to work together, to promote global consistency. (EY)In today's environment, trust and confidence must be earned, with stakeholders demanding more and better information to gauge which companies pass muster. They want reporting to be more transparent, insightful and frank, with a more forward-looking perspective. They want a deeper understanding of how companies make their money and how sustainable that process is. (RY)And with regulators also pushing for greater disclosure, the challenge is to balance compliance and communication. (RY)The ‘business as usual’ perspective provided by financial reporting is unlikely to communicate the full story behind your business on its own. Investors need more in order to understand the complete picture of your business value. (KPMG)
  • In today's environment, trust and confidence must be earned, with stakeholders demanding more and better information to gauge which companies pass muster. They want reporting to be more transparent, insightful and frank, with a more forward-looking perspective. They want a deeper understanding of how companies make their money and how sustainable that process is.And with regulators also pushing for greater disclosure, the challenge is to balance compliance and communication.
  • PwC:Integrated reportingIntegrated reporting is about connecting information about an organisation’s current decisions with its future prospects; connecting information about strategy, risk, remuneration and performance; and recognising that the economy, environment and society are inseparable and therefore information provided to understand an organisation’s performance in each of these areas needs to be viewed as part of a whole. Integrated reporting helps boards of directors to see the issues they face more clearly, and enables them to explain their business rationale to stakeholders with greater clarity and authority.Financial reportingAt the core of the corporate reporting model is the financial reporting model, consisting of financial statements and accompanying notes that comply with generally accepted accounting principles (GAAP).Corporate governanceThe processes by which companies are directed and controlled. Levels of disclosure differ worldwide but might include information on board composition and development, accountability and audit and relations with shareholders.Executive remunerationHow executives are rewarded, both in the short and longer-term, for delivering their company’s strategic objectives.Corporate responsibilityCorporate responsibility includes the communication about how companies understand and manage their impact on people, clients, suppliers, society, and the environment in order to deliver increased value to all their stakeholders.Narrative reportingNarrative reporting is shorthand for the critical contextual and non-financial information that is reported alongside financial information to provide a broader, more meaningful understanding of a company's business, its market position, strategy, performance and future prospects. It includes quantified metrics for these areas.
  • Global Reporting Initiative – non-profit organization that promotes economic, environmental and social sustainability, and helped found the IIRCHaphazard approach with a lot of information included – not explicitly written for the long term investors
  • Integrated reporting seeks to take the material non-financial and sustainability information and put a financial value on it, in the context of the risk and opportunities associated with the company’s operating environment
  • About the and International Integrated Reporting CouncilThe IIRC’s mission is to create the globally accepted International IR Framework that elicits from organizations material information about their strategy, governance, performance and prospects in a clear, concise and comparable format. The International IR Framework will underpin and accelerate the evolution of corporate reporting, reflecting developments in financial, governance, management commentary and sustainability reporting. The IIRC will seek to secure the adoption of IR by report preparers and gain the recognition of standard setters and investors.(http://www.ifrs.org/Alerts/PressRelease/Pages/IASB-and-IIRC-sign-MoU.aspx)The economic crisis was a sharp reminder that financial measurement alone cannot provide sufficient insight into business performance. Investors - and other stakeholders - are now demanding that management teams provide clear, unambiguous information about issues such as external drivers affecting their business, their approach to governance and managing risk, and how the business model really works.So, can you answer their questions? Do you have the necessary data and is it reliable? How do you know that your business can deliver on its strategic aims?To be able to address these issues, some companies are starting to take a more ‘integrated’ approach to the internal and external reporting. They are reporting on their financial and non-financial performance to provide a clearer perspective on their business performance and prospects.
  • Guidance
  • However, convergence efforts alone will not eliminate all differences between US GAAP and IFRS. In fact, differences continue to exist in standards for which convergence efforts already have been completed, and for which no additional convergence work is planned.
  • There are some differences in the frameworks:– FASB: ‘relevance’ is a recognition criterion– Role of “probable” in recognition (IASB) and definition(FASB)However, convergence efforts alone will not eliminate all differences between US GAAP and IFRS. In fact, differences continue to exist in standards for which convergence efforts already have been completed, and for which no additional convergence work is planned.
  • Stakeholders are demanding greater transparency around strategy, business models and risks
  • Stakeholders are demanding greater transparency around strategy, business models and risks
  • Financial statements are regulated
  • ASSESING RISKLong term vision for the futureComparisons with competitorsHelps building the strategythe findings of the reports also show that investors see a responsibility for selective reporting with the companies themselves: 93% of the respondents expressed support for the concept of integrated reporting and believed this could contribute to the usefulness of the information put out by the company. They would, among others, expect the following benefits from integrated reporting:Better ability to understand the long-term outlook of a company Greater information on how long-term risks, such as climate change, will affect the business model Better understanding of all sources of capital, not just financial Greater understanding of key risks and opportunities More robust, less marketing-oriented approach to reporting on non-financial issues More joined-up picture of a company’s prospects (http://www.iasplus.com/en/news/2013/06/acca)
  • In financial reporting, disclosures — initially intended as supplementary addenda to the primary financial statements — have become increasingly central to much corporate reporting. Disclosures have always been important to the understanding of the financial statements as a whole, but is more disclosure better or worse for financial statement users? Numerous bodies, including the Financial Reporting Council (FRC ) and the European Financial Reporting Advisory Group, have used the term “disclosure overload” to describe the increase in disclosure requirements. However, overload is not necessarily just a question of the volume of disclosures; there is also the issue of their readability for usersToo much information?“There is often an accusation that disclosures provide too much information and not enough insight“At the same time, I still feel, from a user standpoint, that there is information that’s missing as well.”In Harding’s view, some basic and fundamental elements of company performance and risk management used in corporate analysis can actually be obscured, or even missed, under the current regime. Through her work with the FRC Lab, Harding and her colleagues have also focused on the conversion of operating income to operating cash flows, noting how difficult it can be to arrive at a definitive figure at times, depending on how the cash flow statement information is presented. “The accounts are getting longer, for sure, but are even the basic questions being answered?” she asks. “It’s far too easy, in my view, for a company not to realize that its accounts haven’t answered fairly basic questions for investors, even with a set of compliant
  • The different dimensions of corporate reporting (short-term versus long-term; backward versus forward; financial versus non-financial; directors’ report versus the financial statements) tend to converge at this point. And this revolves around the question of providing a convincing argument to investors about the sustainability of a company’s business model, based on its strategy, the risks faced and how they are managed. “At the moment, we don’t have a real reporting framework for that,” says Schindler. “In most reporting models there is a chairman’s statement and a directors’ report, but there are no parameters at the moment for there to be a story connecting the dots between strategy, risks and financial performance.” (KPMG)
  • Ey reporting issue no5
  • https://en.wikipedia.org/wiki/Regulatory_complianceSarbanes-Oxley Act 2002
  • “In the US, there’s a lot of discussion about deregulating Sarbanes-Oxley (SOX), but companies did benefit from the stronger internal controls resulting from SOX in the financial crisis. In the UK, we don’t want to see a rules-based system of that nature. We are reviewing the rules around controls, but we are not going to end up with something like SOX,” Haddrill says.(kpmg)1. Section 302: A mandate that requires senior management to certify the accuracy of the reported financial statement 2. Section 404: A requirement that management and auditors establish internal controls and reporting methods on the adequacy of those controls. Section 404 had very costly implications for publicly traded companies as it is expensive to establish and maintain the required internal controls. (investopedia)
  • The International Accounting Standards Board (IASB) is an independent group of 16 experts with an appropriate mix of recent practical experience in setting accounting standards, in preparing, auditing, or using financial reports, and in accounting education. Broad geographical diversity is also required. All meetingsof the IASB are held in public and webcast. In fulfilling its standard-setting duties the IASB follows a thorough, open and transparent due process of which the publication of consultative documents, such as discussion papers and exposure drafts, for public comment is an important component. The IASB engages closely with stakeholders around the world, including investors, analysts, regulators, business leaders, accounting standard-setters and the accountancy profession.
  • The Board identifies financial reporting issues based on requests/recommendations from stakeholders or through other means. The FASB decides whether to add a project to the technical agenda based on a staff-prepared analysis of the issues. The Board deliberates at one or more public meetings the various reporting issues identified and analyzed by the staff. The Board issues an Exposure Draft to solicit broad stakeholder input. (In some projects, the Board may issue a Discussion Paper to obtain input in the early stages of a project.) The Board holds a public roundtable meeting on the Exposure Draft, if necessary. The staff analyzes comment letters, public roundtable discussion, and all other information obtained through due process activities. The Board redeliberates the proposed provisions, carefully considering the stakeholder input received, at one or more public meetings. The Board issues an Accounting Standards Update describing amendments to the Accounting Standards Codification. http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1351027215692

Communicate beyond numbers - Corporate reporting Communicate beyond numbers - Corporate reporting Presentation Transcript

  • 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
  • Page 3 Background
  • Page 4 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.
  • Page 5 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
  • Page 6 What is corporate reporting
  • Page 7 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
  • Page 8 Company Users What is corporate reporting? Financial reporting Financial 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
  • Page 9 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 by Global Reporting Initiative
  • Page 10 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
  • Page 11 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.
  • Page 12 Conceptual framework
  • Page 13 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
  • Page 14 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
  • Page 15 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
  • Page 16 Role and need of corporate and financial reporting
  • Page 17 Role and need of corporate and financial reporting Companies 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
  • Page 18 Role and need of corporate and financial reporting The 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.
  • Page 19 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
  • Page 20 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.
  • Page 21 Role and need of corporate and financial reporting Two 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.
  • Page 22 Financial Reporting language: key performance indicators
  • Page 23 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?
  • Page 24 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
  • Page 25 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
  • Page 26 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.
  • Page 27 Development of corporate and financial reporting
  • Page 28 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
  • Page 29 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, especiall y key points should be connected throughout reports
  • Page 30 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: Environmental Social Governance
  • Page 31 Development of corporate and financial reporting We need to report in concise and comprehensib le 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
  • Page 32 Development of corporate and financial reporting Standard reporting versus relevant 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
  • Page 33 Threats and difficulties
  • Page 34 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
  • Page 35 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?
  • Page 36 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
  • Page 37 Threats and difficulties SWOT analysis Future corporate reporting I N T E R N A L E X T E R N A L 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
  • Page 38 Regulatory requirements
  • Page 39 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
  • Page 40 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
  • Page 41 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
  • Page 42 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.
  • Page 43 Human touch (involvement): preparers and users
  • Page 44 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
  • Page 45 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
  • Page 46 ► 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
  • Page 47 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
  • Page 48 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, recommendat ions
  • Page 49 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
  • Page 50 Thank you!