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FINANCIAL REPORTING
When Norman Lyle FCMA, former CIMA president and group finance director of Jardine Matheson in Hong Kong, revealed the results of a survey that he conducted last year into the financial reporting supply chain, it became clear why the institute was interested in supporting the project. Both the users and the preparers of accounts are keen for more of the information thats actually used to run businesses to be included in published financial reports. That places management accountants firmly at the production end of the financial reporting supply chain (FRSC). It also raises questions for them in all four areas covered by Lyles survey: corporate governance, financial For more articles on management accounting, careers and development, see www.cimaglobal.com/insight.

The financial reports of the future should flow straight from the management accounts, if the responses to an IFAC survey are anything to go by. Richard Young analyses its findings.
reporting, auditing and the usefulness of financial reports. In response to the survey, which had been commissioned by the International Federation of Accountants (IFAC), the institute organised a round-table discussion to debate the findings. Convened by CIMAs chief executive, Charles Tilley, the event took place in January and the participants included senior representatives from a range of organisations, including Deloitte, Tomkins, the Accounting Standards Board, the Financial Reporting Council and Allen & Overy. Narrative arc The survey of 341 members of the FRSC including preparers, auditors and users of financial reports from around the world shows that, despite some fairly heavyhanded regulatory changes over the past five years, most respondents think that the quality of reporting has improved and that the cost/benefit ratio for the process is moving in the right direction. But there are also big concerns. Both preparers and users fear that the increasing complexity of accounting standards particularly international financial reporting standards is damaging ( (see panel, left). left Preparers are having to spend more time producing compliant reports, but users dont really

The burden of complexity


If the point of financial reports is to show how a company is performing and explain its strategy to investors and markets, complexity is a big problem. A chairman or management team shouldnt feel cynical about it, Sir Christopher Hogg, chairman of the Financial Reporting Council, told the round table. He should be determined that he could show [the annual report] to his intelligent 20-year-old son or daughter, who could read through it and say what it is all about. I am very struck still by how few annual reports really read that way. Quite apart from the rigours of changing the international financial reporting standards, many of those concerned with financial reporting are worried that the current requirements are simply too arcane to be understood by even an educated investor. The standard-setters and regulators are crucial players in all this. A lot of people in the reporting supply chain are still nervous about the extent to which regulators such as the US Securities and Exchange Commission allow the use of non-Gaap measures, and how effectively the standardsetters are tackling complexity or even listening to their concerns.

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understand them. And thats where the management accounts start to come in. There is a real desire to convey more of the management information thats behind the financials, Lyle says. People find narrative reporting useful and would like to see more information of the type thats used to run and manage a business. If you have got internal reporting information thats used to run the business, theres a sense that more of that should go out into the marketplace. If users could compare a companys management accounting information to the narrative information in its annual report (they rarely can in practice, as management accounts are, of course, usually deemed too commercially sensitive to be published), the link would be clear. Narrative reporting is a selective summary of the information thats been put in front of the board over the year to help it make decisions (see panel, right). Should companies be concerned that too much information could be revealed by publicising internal metrics and allowing outsiders to slice and dice data for themselves? Lyle thinks not: My experience is that competitive information is often in the marketplace anyway. Companies in a particular industry have got a good sense of what is going on in that industry, he says. The great divide Lyles views were borne out at CIMAs round-table discussion. Narrative reporting and the use of non-Gaap measures is growing because boards believe that these will help the investor to understand how the business goes about creating

Report Leadership: in search of clarity


Report Leadership is a multi-stakeholder group that aims to challenge established thinking about corporate reporting. The contributors are CIMA, PricewaterhouseCoopers and Radley Yeldar, a consultancy specialising in corporate communications. As part of the initiative, Report Leadership seeks to align external reporting more closely with management reporting, recognise the complexities of business and provide reporting that will adapt readily to other media. It focuses on three areas of topical interest: Effective communication through clear messaging and navigation. Modelling the future through the provision of contextual information that allows investors to assess the quality and sustainability of future cash flows. Rethinking the financials to provide more details about revenue costs, segmental information, pensions and debt.

value, said Ken Lever, former CFO of Tomkins and chairman of the Hundred Groups financial reporting committee. The challenge is to ensure that these disclosures are even-handed and actually do reconcile to the required financial information. So the financial accountants and auditors are having to worry more about the technical details as a result of increasing regulation, while management teams and report users want to talk about the business. We are moving towards a disconnect in the financial statements, said Bill Hicks, director of external reporting at AstraZeneca. The auditors are looking at assurance while companies are moving towards non-audited measures to communicate with shareholders. Is that because report preparers are naturally devious and untrustworthy? Or is it because the direction of financial standard-setting has moved in such a way that financial reports are no longer an effective communication tool?

Of course, analysts and investors need more than mere anecdotes from the management and a few key performance indicators. But neither are they happy solely with the numbers churned out to ensure that the company complies with the stock exchange disclosure requirements and accounting standards. Theres clearly a need for more qualitative information, said Michael McKersie, assistant director for capital markets at the Association of British Insurers. If the true and fair view which I emphasise is of utmost importance to investors requires further disclosure on something, we should have it. Joining the dots Companies spend a significant time aggregating and recalculating data from internal sources to construct the information demanded by regulatory reporting. This is often followed by considerable effort from the users of the reports to deconstruct this information to suit their own requirements. The average length of a FTSE-100 companys annual report this year is 150 pages, according to research by Radley Yeldar. The longest is 458 pages. Its clear that such communications need to be more accessible, therefore, and both the US Securities and Exchange Commission and the UK Financial Reporting Council are now

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There is a real desire to convey more of the management information thats behind the nancials
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assessing the issue of complexity. Better aligned statutory and management reports and improved narrative reporting would help in this respect. As a result, the whole process would become more relevant to the investment community and also reduce complexity in the audit process a useful by-product. Id expect a presentation to analysts to be based on how the management runs the business and Id expect that data, in the very foreseeable future, to be part of the audited financial statements, said Ian Wright, director of corporate reporting at the Financial Reporting Council, at the round table. The most logical approach to satisfying demands for both enhanced and tailored information is to create a kind of self-service financial report. The preparers would format management and financial information in such a way that different readerships retail investors, analysts, fund managers, regulators, customers or suppliers could interrogate the information to find whatever it is that will help them to reach a decision about the business. But, although preparers have embraced online technology, the IFAC survey shows that many users are less enamoured with the digital revolution. Its surprising to me that people still want paper financial reports, Lyle told the round table. He added that, although eXtensible Business Reporting Language (XBRL) a technology designed to tag financial information to make it easier to search and analyse had great potential, he had a sense that there isnt a great degree of understanding about exactly what XBRL means and how it could be used.

The use of non-Gaap measures is growing because boards believe these will help investors
Thats a shame, because XBRL ought to mean that the same data can be interrogated by different users. For example, some analysts like fair value accounting, while others believe its an ambiguous term or that it creates undue volatility in the accounts. If you had a tool like XBRL, people could get out more of the information they wanted from reports, Lyle said. Better yet, a company could use the same tagging system internally to make it easier for the finance function to crunch numbers, further reducing the need for translations between the management and financial accounts. Wheres the focus? The IFAC survey findings also suggest that both users and preparers are concerned that boards spend too much time worrying about compliance particularly in areas such as corporate governance, where they might be held individually responsible for any transgressions. In other words, instead of spending time with the management accounts to run the business better, they are poring over the financial accounts to avoid being prosecuted. One external auditor told the IFAC survey: Directors are spending more and more time on compliance issues and losing sight of operational issues. Another respondent recommended that boards should review their agendas to see how much time they spend on compliance versus strategy, and then find a balance. Fortunately, the regulatory environment could now be helping to redress the balance. Fear of liability is still a big factor in reporting. The government has made concessions here in the shape of safe-harbour provisions, said Richard Slynn, corporate partner at Allen & Overy. They now apply to the directors report and indeed their remuneration report. Thats good news: one of the big criticisms of the current regime in the IFAC survey is that a check-box mentality has emerged among report preparers. Far from explaining the business to the wider market, this simply encourages companies to issue boilerplate statements around governance publications that are proven to be acceptable to the regulators, perhaps, but no more than that and to avoid any discussion of metrics that arent covered by tightly drawn standards. This encompasses much of the strategic information and narrative reporting that the market demands. Richard Young, former editor of Real Finance, is a freelance writer.

Further information

The ndings of IFACs nancial reporting supply chain survey are available to download from www.ifac.org/frsc. For more details about the Report Leadership project, visit www.reportleadership.com.

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