By Simon Fermanis
14 April 2018
The decluttering of general purpose financial reports (GPFR) has started to gain momentum in the accounting profession as the question of whether these reports are producing relevant information is being asked. The International Accounting Standards Board (IASB) has specifically stated that financial reports contain too much irrelevant information and have excessive disclosure of immaterial information. Therefore, the challenge is to agree on a way to declutter GPFR and make them more relevant to users.
Recently I reviewed a number of annual reports (which are GPFR) produced by companies to comply with their year-end reporting obligations. Most of them were in excess of a staggering 150 pages and lacking relevance to many readers. For example, most of these reports had tax notes over two pages long which only a tax expert would understand. Others required a one page note to display the movements in their hedge accounting reserve which again only a financial expert would understand. I also noticed that these reports had accounting policies in excess of 10 pages long but they were all generic in nature, as the regulator has already prescribed the accounting policies companies must have.
One of the biggest challenges when reading a GPFR is understanding the difference between Profit or Loss and Other Comprehensive income. Whilst a trained accountant understands the difference the everyday user of the GPFR will not. To overcome this problem, many Australian Banks now report net cash earnings as their preferred measure of performance. Again, another example of the irrelevance of information in the GPFR.
In this forever changing world where we are constantly being challenged to act promptly, virtually on demand – I am not sure who has the time to analyse a 150-page GPFR. A person would need the time to read the detail and be highly skilled and trained in accounting and finance – certainly the everyday shareholder would find it a challenge to extract meaningful information from such a report.
In many respects, the year-end GPFR has become a very expensive compliance exercise for the benefit of the regulators and policy makers who are regularly reviewing these reports for disclosure errors or oversights. Accordingly, significant time and effort is invested in ensuring that any GPFR can pass the exhaustive testing of the regulators. Passing the testing of regulators does not necessarily mean that a particular GPFR has relevant information.
When companies are looking at acquiring businesses or companies from each other their first request is to be provided with detailed information on the target via a secure data room. So, the GPFR is never used to make investment decisions, which of course highlights the potential irrelevance of information in such a report.
I believe there are two reasons why the GPFR lacks relevance. The first is that it is human nature to over analyse and complicate. Unfortunately this behaviour is not something we can resolve. The second reason is the question of who the GPFR is being prepared for, which we understand is for all stakeholders. So how is it possible to produce a GPFR which purports to be all things to all stakeholders, this is simply not possible.
One solution is to prepare a GPFR that focuses on the needs of the everyday shareholder and therefore eliminating the requirement to produce a document for all stakeholders. By focusing the report on the needs of one group it will be possible to understand their requirements and tailor a GPFR to them. The type of information shareholders may be interested in could include growth trends in financial performance, ratio analysis of financial performance and future financial goals and challenges.
Finding a solution will not be easy as it will require the collective agreement of government and industry regulators, stakeholders, policy makers, preparers and of course auditors who have to check the final product and ensure its compliance.