Excellence in
Corporate Reporting
The Analyst’s Perspective
Garreth Elston
GIBS 28th March 2006
“The business reporting model is the lens through which investors perceive.
The model will succeed or fail based upon its capacity to communicate these
activities clearly and completely.”
CFA Institute
Alphabet Soup - Complexity Is Here to Stay
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IFRS 1, (AC138) First-Time Adoption of
international Financial Reporting Standards
IFRS 10, Events After the Balance Sheet
Date
IFRS 32, (AC125) Financial Instruments:
Disclosure and Presentation
IFRS 33, Earnings Per Share
IFRS 34, Interim Financial Reporting
IFRS 35, Discontinuing Operations
IFRS 36, (AC128) Impairment of Assets
IFRS 37, Provisions, Contingent Liabilities,
and Contingent Assets
IFRS 38, Intangible Assets
IFRS 39, Financial Instruments: Recognition
and Measurement
IFRS 39, Implementation Guidance:
Questions and Answers
IFRS 40, Investment Property
IFRS 41, Agriculture
IFRS 2 (AC139), Share-Based payments
IFRS 3, (AC 140) Business Combinations
(will replace AC 131)
IFRS 4, (AC 141) Insurance Contracts
IFRS 5 (AC 142) Non-current Assets Held for
Sale and Discontinued Operations
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IAS 1(AC 101) (revised): Presentation of Financial
Statements
IAS 2 (AC 108) (revised): Inventories
IAS 8 (AC 103) (revised): Accounting Policies,
Changes in Accounting Estimates and Errors
IAS 10 (AC 107) (revised): Events after the Balance
Sheet
IAS 16 (AC 123) (revised): Property, Plant and
Equipment
IAS 17 (AC 105) (revised): Leases
IAS 21 (AC 112) (revised): The Effects of Changes
in Foreign Exchange Rates
IAS 24 (AC 126) (revised): Related Party Disclosure
IAS 27 (AC 132) (revised): Consolidated and
Separate Financial Statement
IAS 28 (AC 110) (revised): Investment in Associates
IAS 31 (AC 119) (revised): Interests in Joint
Ventures
IAS 32 (AC 125) (revised): Financial Instruments:
Disclosure and Presentation
IAS 33 (AC 104) (revised): Earnings per Share
IAS 36 (AC 128) (revised): Impairment of Assets
IAS 38 (AC 129) (revised): Intangible Assets
IAS 39 (AC 133) (revised): Financial Instruments:
Recognition and Measurement
IAS 40 (AC 137) (revised): Investment Property
The Users of Corporate Reports Span the Investor
Universe - Equity Analysts, Fund Managers,
Regulators, Credit Analysts, Personal Investors…
Investors' information needs come first
• This concept is the foundation for fair and ethical financial
markets, and a core tenet of the CFA Code of Ethics and
Standards of Professional Conduct.
Financial statements exist to help investors make
informed investment decisions
• Efforts to improve the quality of financial reporting must be
considered first and foremost in light of what benefits those
who use financial statements, not those who prepare them.
Financial statements must be as unbiased and complete
as possible
• No one should be permitted to manage financial-reporting
information to make companies appear more profitable than
they really are. Financial statements must faithfully report
economic reality. They must not be distorted.
Quality And Clarity Are Vital
• Investors’ ability to understand financial information
is a function of how the information is
communicated and not just the information itself.
• Communicating in a way that is understandable to
the investor is a fundamental responsibility of the
managers who use the investor’s capital.
• Information must be presented clearly, described in
a way that is intended to communicate rather than
confuse, and disclosed in sufficient detail to
facilitate understanding by investors.
Top Reporting Principles From
The Global Analyst Community
The company must be viewed from the perspective of
a current investor in the company’s common equity:
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Reasons for Importance: The current common shareowner (CCS) is the
last to receive a share of the company’s net assets (that is, assets in excess
of liabilities) and earnings. This means that the claims of all others must be
fully satisfied before those of the CCS. Consequently, a CCS must have
complete, accurate information about all other claims (including potential risk
exposures and possible returns) to value his or her own investment.
Fair value information is the only information relevant
for financial decision making:
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Reasons for Importance: Decisions about whether to purchase, sell, or hold
investments are based upon the fair values of the investments and
expectations about future changes in their fair values. Financial statements
based on outdated historical costs are less useful for making such
assessments.
Source: CFA Institute’s Centre for Financial Market Integrity
Top Reporting Principles From
The Global Analyst Community
Recognition and disclosure must be determined by the
relevance of the information to investment decision
making and not based upon measurement reliability
alone.
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Reasons for Importance: Financial information may be completely reliable if it
is easily verifiable according to one or more criteria. But the information may not
be relevant for financial decision making. An example is the purchase by a
company of a major manufacturing facility 30 years ago for which the bill of sale
is available to support the recorded cost.
All economic transactions and events should be
completely and accurately recognised as they occur in
the financial statements.
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Reasons for Importance: The purpose of financial reporting is to convey the
economic position of the company and changes in that position to investors.
Reporting methods that omit or fail to reflect the economic essence of events
and transactions as they occur do not achieve the purpose of financial reporting.
Source: CFA Institute’s Centre for Financial Market Integrity
Top Reporting Principles From
The Global Analyst Community
Financial reporting must be neutral.
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Reasons for Importance: Reporting of economic transactions and events
should not be influenced by the outcomes of the financial reporting or the effects
that the reporting may have on one or more interests. For example, the recent
stock options expensing debate. All costs of production, including employee
compensation, must be reported fairly, completely, and accurately.
Changes affecting each of the financial statements
must be reported and explained on a disaggregated
basis.
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Reasons for Importance: Aggregation of information with different economic
attributes, different measurement bases, different trends, and from very different
operations results in substantial loss of information. Indeed, the information lost
is essential to investors’ understanding of a company’s financial position,
changes in that position, and the implications for valuation of investments.
Source: CFA Institute’s Centre for Financial Market Integrity
Top Reporting Principles From
The Global Analyst Community
• Disclosures must provide all the additional information investors
require to understand the items recognised in the financial
statements, their measurement properties, and risk exposures.
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Reasons for Importance: If investors are to understand the numbers reported
in the financial statements, they must have sufficient supplementary disclosures
to evaluate the numbers. Such disclosures can include, for example:
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Financial reporting methods used,
Models used for estimation and measurement,
Assumptions used,
Sensitivity analyses of point estimates,
Information about risk exposures,
Information explaining why changes in important items have occurred, and a
host of other important items.
In short, the statements are not interpretable without them. Disclosures
should be regarded as being as important to investors’ assessments as
the recognition and measurement in the statements.
Source: CFA Institute’s Centre for Financial Market Integrity
Reporting Changes in Financial Statements
Communication Principles
Communicate Early:
• Communicate the likely impact of any changes prior to the
release of the live data, rather than releasing it for the first
time on the same day. Explain the timetable and what
information can be expected when.
Communicate Directly:
• Keep formal announcements, presentations and
explanatory documents separate from other
announcements so there is no confusion with the underlying
trading position. Running a specific briefing session for
analysts is useful as the feedback will enable you to check
that the communication is clear.
Source: UK Investor Relations Society
Reporting Changes in Financial Statements
Communication Principles
Communicate Comprehensively
• All changes need to be communicated so don’t be afraid to
go into depth. Go through the Income Statement, Cash flow
and Balance Sheet line by line if necessary, explaining the
change and its effect. Full descriptions will still need to be
given in the interims and annual accounts to ensure all
shareholders have been fully briefed. These should include
any relevant underlying assumptions.
Manage Expectations
• Monitor changes in analysts’ forecasts to pick up any
inconsistencies and track the basis for their forecasts.
Some may take different positions, particularly if the
changes in standards are still being firmed up during the
year. This may mean consensus numbers are unreliable for
a period.
Source: UK Investor Relations Society
Further Reading
The CFA Institute’s Centre for Financial Market Integrity has
developed two comprehensive manuals for practitioners
interested in guidelines to assisting in achieving best
practice in Excellence in Corporate Reporting, these are:
• A COMPREHENSIVE BUSINESS REPORTING MODEL:
Financial Reporting for Investors
• THE CORPORATE GOVERNANCE OF LISTED
COMPANIES: A Manual for Investors
Both of these are available on request from: garreth.elston@gmail.com
or from http://www.cfainstitute.org/cfacentre/