Enough is enough: why companies are streamlining their financial statements

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Enough is enough: why companies are streamlining their financial statements

Alex Astolfi
Partner and Assurance Leader, PwC Switzerland

Streamlined financial reporting is the right idea at the right time. With concerns of non-compliance prompting companies to include more and more information, readers are finding it harder and harder to find what they need and get a clear picture of companies’ performance. In this article, we look at the principles of streamlined financial reporting and why, applied intelligently, they can help transform corporate storytelling into something more meaningful and rewarding for all concerned.

Too much information! The urgent need for streamlined financial reporting

In recent years, the financial reports produced by companies across the spectrum have been mushrooming in both size and complexity. In an attempt to meet the increasingly stringent demands placed by reporting standards, entities are putting absolutely everything into their reports that might be relevant for compliance.

But a major consequence of including more information is that financial reports lack structure, and readers often find it hard to get to the relevant information. To make matters worse, there’s frequently no clear thread or common style of presentation linking the financial section to the rest of the annual report. A direct result of this checklist mentality – where financial reporting and compliance rules are more or less the sole driver of what’s disclosed – is that the length of the average financial report published by large companies has increased by around 50% in the last ten years. Figure 1 summarises the main factors leading to this disclosure overload.

The trend is exacerbated by the growing complexity of business reality. On the back of digital technology, we’re also seeing entirely new forms of communication. The upshot is a great deal of uncertainty and frustration, not just among the recipients of financial reports, but also among the executives and directors of the companies that publish them. But now the tide is changing: a growing number of companies are saying enough is enough, and have started looking for ways of addressing the challenges.

Less is more: the principles of streamlined financial reporting

The logical response to these developments is streamlining. The idea is to address the information needs of readers by giving the report a clearer structure and focusing on the relevant information. Streamlined financial reporting revolves around a few common-sense principles:

Create a framework and focus on the needs of your audience: You can streamline your report to structure the available information according to how relevant and important it is rather than simply giving investors more information. Your financial report should be geared to your readers. You have to find out which information they expect to get, tell them a clear story, and avoid the temptation of treating streamlining as a “one-size-fits-all” solution.
Consider materiality: Rather than including all disclosures that could potentially be required by the standards, focus on those that are material to understanding your company’s performance over the course of the year and draw readers’ attention to the important figures and developments. A streamlined report rejects the checklist mentality, focusing instead on information that is key to understanding the company’s performance.
Use clear language: Use plain explanations and avoid jargon.
Highlight important information: Emphasise the most critical information by making it more prominent. For example, you can highlight calls of judgement graphically to draw readers’ attention to their relevance.
Better design: Use colour, headings, graphs and charts to help readers navigate through the report and improve readability. Simple tables and graphics will make your report easier to read and understand.

Figure 2 summarises the principles of streamlining and what they are designed to achieve.

Isn’t there a risk of non-compliance if we reduce the information we’re disclosing?

The good news is that the regulators recognise the problem and are firmly on the side of companies that declutter their financial reports intelligently. The IASB (International Accounting Standards Board) has acknowledged the need. In the foreword to an October 2017 brochure, “Better Communication in Financial Reporting”, IASB chairman Hans Hoogervorst states the case unambiguously: “Ineffective communication of financial information can lead to investors overlooking relevant information or failing to identify relationships between pieces of information in different parts of a company’s financial statements […]. Conversely, effective communication of information in financial statements can contribute to better investment decisions and a lower cost of capital for companies.”

When embarking on streamlining, it’s crucial to ensure that the focus is on improving disclosure, not reducing disclosure for the sake of reduction. Hans Hoogervorst’s emphasis on communication is important: intelligent streamlining is about formulating, structuring and presenting a clear story that actually communicates more, not less, about the company and its financial situation. A good storyteller always has their listener or reader front of mind. The fact that your company will have a different story and a different readership from other companies means that you have to think carefully about how to present it. Get this right and you not only give your investors the information they need, but you build your reputation as an organisation that takes its responsibilities towards its stakeholders seriously.

How is streamlined reporting being received? Is it something for us?

The success of companies in Australia hasn’t escaped Europe’s notice, and listed companies in Germany and Switzerland have already embarked on an overhaul of their financial reporting. The IASB has recently initiated projects reflecting the need to modernise, and includes the principles of clearer communication in its Disclosure Initiative. For example, IAS 1 has been amended to address the relevance, materiality and structure of financial statements. Last but not least, the SIX Swiss Exchange has also acknowledged the benefits of clearer disclosure and the potential of streamlining financial reports to achieve this.

PwC in Switzerland has taken up the trend and has launched a number of streamlining projects with listed companies of various sizes in different industries. The concept has been very well received by executives and directors in this country. They, too, realise that in a world where information is being generated at an exponential rate, it’s important for companies to continue innovating to make sure their information finds its mark. Because if you’re not able to tell your story in a way that resonates with your shareholders, then someone else might do it for you.

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