Communicating effectively with investors is beset with difficulties. The International Accounting Standards Board (IASB) says the top three challenges in financial statements are: not enough relevant information, too much irrelevant information and information communicated ineffectively. But the good news according to a report by the IASB's sister organisation, the International Financial Reporting Standards (IFRS) Foundation, is that relatively small changes can significantly enhance the usefulness of financial statements.
In the report – Better Communication in Financial Reporting: Making disclosures more meaningful – a series of corporate case studies aim to inspire other companies to improve communication in their own financial statements. Several factors that are important in improving communication through financial disclosures our outlined, including:
- senior management support for the changes in communication;
- companies engaging with their investors to identify and understand their information needs;
- departments across the companies participating in the process; and
- the companies’ auditors, regulators and national standard-setters supporting the process and being willing to discuss the proposed changes.
Committing to better financial communication
The six case studies (the organisations studied were: Fonterra, Wesfarmers, PotashCorp, ITV, Orange and Pandora) show how those companies took different approaches to making changes in the way they communicate in their financial statements. The report explains: “Some companies made dramatic changes during a single reporting period. Other companies have been improving the way they communicate information for a few years. What is important though is that all of these companies have committed to making continuous improvements within the context of existing IFRS Standards.”
The changes consisted of ensuring that only information relevant to investors is included and that the data is presented clearly, simply and is prioritised, while irrelevant data is excluded. This made financial statements easier to read and understand.
The report outlines seven principles for effective communication:
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