Financial reports evolving into ‘critical risk management tool’, says BDO
Financial reports have seen a dramatic shift in recent years with companies increasingly relying on them to drive strategy and manage risk, according to the mid-tier firm.
BDO partner Kevin Frohbus said financial reports in recent years have become an important business tool for telling a company’s story to their capital investors.
“In the past it was really just a compliance exercise. Even with some of the big listed companies, they may have used these reports as a way of communicating with their investors but they didn’t necessarily use the financial reports to drive their strategy,” said Mr Frohbus.
“However, this is now happening more and more. With IFRS becoming as advanced as it is, the information in the financials, if used correctly, is actually an important part of risk management and business modelling.”
Mr Frohbus said this trend is being further driven by climate-related disclosures, and also ESG, more generally.
Treasury released a consultation paper on climate-related financial disclosure in June which sets out its plans for implementing mandatory sustainability reporting.
Mr Frohbus said new reporting requirements will require entities to measure the impact of transition and physical climate risks on the one side, and opportunities and risk management on the other, and then translate that into financial information.
“It’s not something that’s just happening outside of financial statements anymore. This is actually integrating how the risks and opportunities impact the income statement, cash flow statement and balance sheet,” he said.
Creating simple and concise financial statements
Providing financial statements that are simple, tell it like it is, and don’t obscure information has also become more important, said Frohbus.
ASIC released a guide on disclosing non-IFRS financial information back in December 2011 aimed at promoting full and clear disclosure for investors and other users of financial information.
It sets out the regulator’s guidance on the use of financial information in financial reports and other corporate documents, such as transaction documents and market announcements, where that information is presented other than in accordance with accounting standards.
Despite the release of the ASIC guidance, Mr Frohbus said there are still many financial statements where non-IFRS information has been used or cajoled in ways or forms to overcomplicate the story in the financials.
BDO referred to a recent example earlier this year where Southern Cross was required to remove a non-IFRS profit measure, following an ASIC review.
ASIC’s review raised concerns about the use of ‘Profit before depreciation, amortisation, interest, impairment, fair value movements on financial derivatives and income tax expenses for the year from continuing operations’ in the company’s statement of profit or loss.
“We want to get back to the financials telling the point quickly and how it is,” said Mr Frohbus.
One way that firms can simplify their financials is by tidying up their accounting policy notes, he said.
“The accounting policy notes suffered for years from boilerplate disclosures. It wasn’t uncommon in years gone past to have the four statements of financial position, income statement and other comprehensive income and cash flow, and then have 17 pages of accounting policy notes and two or three pages of additional notes supporting the balances in the financials,” said Mr Frohbus.
“That wasn’t uncommon and we still have financials like that.”
Mr Frohbus said that a subtle change made in the Australian Accounting Standards from the beginning of this year means that entities are no longer required to disclose all significant accounting policies. Instead, entities only need to provide material accounting policy information.
“Assessing whether something is material is based on the information needs of the user and whether it’s likely to impact their decision making,” he said.
The change was made to encourage simpler, streamlined disclosure and has led to a significant reduction in paper trail and boilerplate disclosures.
“In some cases, we have seen 10 pages come out of a set of financials just by applying the small change to accounting policies,” said Mr Frohbus.
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