In their financial statements, companies need to stick to internationally accepted accounting standards. Not just for the investors' sake but also because this leads to better business decisions.

In a speech at the AICPA Conference in Washington DC, US, chairman of the International Accounting Standards Board (IASB), Hans Hoogervorst, said that the organisation's focus in the coming year would veer away from developing further major financial reporting standards. Rather, the IASB intends to focus on “improving what is already there” by focusing on the communication effectiveness of financial statements.

Investors often complain that financial reporting is not a fair or realistic reflection of a company's performance, saying that financial reporting defines revenue and profit or loss – but not too much in between. Investors would like to see more detail in financial reporting. Hoogervorst said: “As a result, there is very little comparability above the bottom line. Investors therefore want more disaggregation, additional line items and possibly subtotals that tell more about the performance of a company.”

Non-GAAP too rosy

However, this goes against the interests of those who prepare financial statements, who frequently complain of the compliance burden. Hoogervorst acknowledges that non-GAAP disclosures (considered an alternative set of standards that differ from both US generally accepted accounting principles/GAAP or International Financial Reporting Standards/IFRS) can be useful and valuable but expressed his concerns that “non-GAAP generally paints a rosier picture of a company’s performance than GAAP”.

Non-GAAP not best for business decisions

This is not in the interest of investors nor of those who have to prepare the financial statements. Standards can help not just investors, but companies themselves, understand their financial positions more clearly. “Non-GAAP measures that consistently flatter a company’s performance are probably not the best basis for sound business decisions. Audit and remuneration committees should also be concerned about the increasing use of non-GAAP, usually developed by management itself.”

Safety in GAAP numbers

In the concluding part of his speech, Hoogervorst noted: "All involved in managing a company should realise that there is safety in the GAAP numbers. They are rigorous and based on sound economic principles." He added that the IASB aims to focus on “better-formatted primary statements, which increase comparability and which should make it easier for regulators to enforce discipline around the presentation of non-GAAP measures”.

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CTMfile take: Hoogervorst noted that GAAP should serve as an anchor, not just in reporting, but also in management decisions. As he said: “You manage correctly what you measure correctly."