Over the past couple of years, there has been a significant take up of organisations ‘cutting the clutter’ in their financial reports. As of the June 2016 reporting season approximately 60% of the ASX 200 had undergone this process.
The process to de-clutter a financial report is not a complex one, and the feedback from executives and directors continues to demonstrate that it is a worthwhile investment. The result is financial reports that are generally shorter and easier to read, navigate and understand.
Report preparers are also commenting that de-cluttered reports are saving them time during the busy year end process, as the removal of immaterial information has resulted in less information needing to be prepared and less information for senior management and directors to review.
How to get started?
A question I have been asked many times over the past couple of years is – how do you go about de-cluttering a financial report? My advice to clients when starting out on this process, is to consider the 3 R’s – Remove, Re-order and Re-write.
The first step is to determine what information needs to be included in the notes to the financial statements to enable the reader to understand the organisations’ financial position and performance. Any remaining immaterial or irrelevant disclosures can then be removed from the financial report.
Traditionally the notes to the financial statements have followed the order of the primary statements. In a de-cluttered set of financial statements, the notes are re-ordered and grouped together into sections that better reflect the key financial measures of the organisation and focus on the areas of most relevance.
The same holds true for significant accounting policies and critical estimates and judgements, rather than having them all together at the start of the notes to the financial statement, organisations are now moving them next to the relevant note. For example the revenue accounting policy and any critical estimates and judgements associated with revenue recognition can be located within the ‘revenue’ note.
Having the accounting policy, critical estimate and judgement information, the account breakdown and any other relevant disclosures together, means the reader of the accounts only has to look in one place to see all relevant information associated with the accounting treatment of the account balance or transaction.
Re-writing the technical wording commonly found in the financial report into plain English, whilst still complying with the relevant accounting standards and regulatory requirements, can help improve the flow, readability, and linkage of information throughout the report.
Many organisations that have already de-cluttered the financial report are now turning their attention to de-cluttering and improving communication across the remainder of the Annual Report. For example the Remuneration Report, and the overall corporate reporting portfolio.
As part of this process, we are also seeing a shift in the focus of the Annual Report. Rather than solely focusing on earnings, organisations are beginning to highlight how they create long term sustainable value, and the value that they have created for their shareholders during the year.
One option for organisations looking to tell a more insightful story is to consider adopting some of the principles of integrated reporting in their Operating and Financial Review, including clearly articulating how they create long term value through their business models and explaining the most important resources and relationships they rely upon to create this value.
Associate Director, KPMG
Kylie specialises in Better Business Reporting, a service designed to assist companies improve their internal and external corporate reporting. Kylie has supported a number of organisations de-clutter their Annual Report and improve other areas of their corporate reporting portfolio, including how to better articulate their value to the capital market.