Bringing clarity to financial statements - KPMG US LLP ... · PDF fileAccounting policy and detailed notes so that they better reflect ... • analysts notes • internal management

Bringing clarity to financial

statementsFinancial reports – cutting the clutter

November 2013

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2 | Bringing clarity to financial statements

Corporate reporting has become unwieldy. Investors, regulator and other stakeholders have joined a growing chorus of criticism, arguing that annual reports lack clarity and brevity. Not only that, but the length of time it takes to prepare and verify information contributes to a perception that corporate reporting is unresponsive to stakeholder needs, creating confusion in an age of constantly updated information.

ASIC’s surveillance continues to focus on material disclosures of information useful to investors and other users of financial reports. ASIC does not pursue immaterial disclosures that may add unnecessary clutter to financial reports.

How can management explain the performance of their business in the light of their strategic goals? How can management avoid losing their story amid the mass of financial data usually contained in annual financial statements?

Source: ASIC 13-160MR Focuses for 30 June 2013 financial reports, 2 July 2013 www.asic.gov.au

© 2013 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International Cooperative (“KPMG International”). Liability liited by a scheme approved under Professional Standards Legislation.

Bringing clarity to financial statements | 3


inancial reports have become increasingly lengthy and complex. Even sophisticated readers can find it difficult to understand accounting jargon and identify what disclosures are important. Financial reports have very little in common with the front half of the annual report in terms of reporting key financial measures and messages that are important to the entity and its stakeholders.

Through the influence of domestic and international regulators, there is a view that financial statements should evolve in conjunction with the move towards Integrated Reporting, where financial reports should be seen as ‘communication’ documents rather than just ‘compliance’ documents.

In Australia, the Australian Securities and Investment Commission (ASIC) has issued Regulatory Guide 230 Disclosing non-IFRS financial information and RG 247 Effective disclosure in an Operating and financial review. The Group of 100, a peak body for Australia’s senior finance executives, has issued its Guide to operating and financial reviews. Together, they are aimed at promoting more meaningful communication of financial information to investors and other users of financial reports.

Companies are increasingly looking to de-clutter their financial report, which is entirely consistent with the views of regulators in improving the clarity and relevance of financial reporting.

The end product is a simplified, sharper and more relevant financial report that is easier to understand.

Immaterial or irrelevant disclosures that have built up over time

Accounting policy and detailed notes so that they better reflect the key financial measurers and focus areas of most relevance

Technical wording into plain English, whilst still fully complying with relevant accounting standard and regulatory requirements

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Financial Reporting



Why are financial statements cluttered and unclear?

When first preparing IFRS financial statements, the preparers’ lack of familiarisation with the standards may lead to verbatim reproduction of the language of the relevant standard, such that it becomes a boilerplate.

As new and revised standards are issued, additional notes and incremental disclosures are added piecemeal rather than the relevant note(s) being reconsidered in their entirety.

Executive focus is on the front half of the accounts, which in turn becomes complicated through the use of reconciliations as IFRS data is converted to the financial indicators the company wishes to report.

Both preparers and auditors may be guilty of taking a ‘when in doubt, disclose’ approach.

The traditional structure of the financial report; the separation of the accounting policies, estimations and judgements and the notes themselves, often leads to repetition.

Once a disclosure is considered necessary that decision may not be revisited and non-essential material disclosures may proliferate over time.

A possible lack of interest, or an attitude of ‘it’s all too complicated’ by the end users of financial statements does not produce independent feedback that might lead to clarity and simplification.

The causes of clutter and a lack of clarity in financial statements are varied.

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How can management explain the performance of their business in the light of their strategic goals?

How can management avoid losing their story amid the mass of financial data usually contained in annual financial statements?

KPMG’s audit client in the United Kingdom, Company A, successfully answered these questions in its own 2010 (and subsequent) financial reports with the help of KPMG, which has been recognised as a good example of concise corporate reporting and has equal applicability here in Australia.

Case study

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Drivers of changeAs with many companies, Company A’s 2008 and 2009 financial statements were made complex by enhanced going-concern disclosures and balance sheet impairments.

The focus by the board on specific financial statement disclosures led to a growing recognition that the back half of the accounts lacked clarity.

In addition:

• A new CFO also brought with them a clear idea of the non-statutory KPI’s they wished to report.

• During 2010 a new leadership team launched a new strategy and wanted an uncluttered message in the directors’ report.

• Frustration with the impact of new standards became a recurring theme at Audit Committee meetings, with experienced non-executives acknowledging that they struggled to understand the more complex aspects.

In these circumstances, there was a recognition that the financial statements needed to be both de-cluttered and re-written to aid effective communication.

A streamlined approach1. Find a focus

If a preparer were to start with a blank piece of paper and design financial statements that are relevant, what would they use as references? What would be important to the company and the investor community?

A review of the following is a good place to start:

• analysts notes

• internal management reports

• the company’s own year end and interim analyst presentations and strategy papers

• the front half of existing financial statements.

These documents can show that a company focuses on two or three key financial indicators, often:

• underlying earnings

• operating assets and liabilities

• financing.

The starting point for Company A was a review of its financial KPIs and the content of the CFO’s 2009 report, followed by a discussion with the CFO on the anticipated content of the 2010 report.

This identified four areas of focus for the company: earnings before interest, taxes and amortisation (EBITA) before exceptional items; adjusted Earnings Per Share; working capital management; and net debt. In each area, the 2009 CFO’s report was cluttered by showing how the KPIs were calculated.

Company A decided to draft the back end of the financial statements around these non-IFRS numbers, effectively giving them equal prominence to IFRS information.

This led to the ‘back end’ having three discrete sections: ‘Results for the year’; ‘Operating assets and liabilities’; and ‘Capital structure and financing costs‘, with other mandatory disclosure grouped in a fourth section, ‘Other notes’.

2. Group notes, assumptions and estimates and accounting policies together

Why does note 1 set out the accounting policy that is only relevant to note 14, which appears twenty pages later? Why do we have a separate section on assumptions and estimates rather than explaining these within the relevant note?

In response, Company A grouped disclosures on accounting policies and estimations around the notes to which they related.

Only general all-pervasive accounting policies were left in a ‘Basis of preparation’ section of two pages. The process of simply grouping existing notes revealed the degree of repetition that resulted from having related disclosures scattered throughout the accounts.

3. Communicate the key points in plain English to the reader and translate accounting speak into the language of business

Companies want to disclose EBITA and Earnings Before Interest, Taxes, Depreciation, and Amortisation (EBITDA) because it reflects the way the business is managed and how the directors assess the performance of the Group.

Exceptional items are excluded in order to understand the Group’s underlying quality of earnings and reflect how the business is managed and measured on a day-to-day basis. So why not explain this to shareholders in the notes to their accounts?

Company A decided to introduce each section with a clear message, written by the group controller, explaining why the contents of that section had been grouped together. Other speech bubbles explained why the non-IFRS indicators were important and what they showed. Company A set out to re-write every sentence in plain English.

4. If in doubt don’t disclose

Auditors use materiality to govern their audit procedures. Why isn’t this then applied to financial statement disclosures? Company A’s materiality level for audit purposes was GBP 8 million (AUD 13.5 million), so why did the company have eight pages of disclosure on items of less than GBP 3 million?




KPMG assisted through challenge, consultation and collaboration• Discussing and agreeing the principles with KPMG’s

technical group (Department of Professional Practice or ‘DPP’), who are fully supportive of this approach.

• Reviewing the proposed structure of each section and discussing how notes might be grouped together.

• Offering a ‘translation service’ that helped Company A’s finance team understand the principles behind the standards to help them draft notes more clearly.

• Consulting on which disclosures could be eliminated on the grounds of materiality.

• Arranging a full review by DPP of the re-written financial statements to ensure they still fully complied with accounting standard requirements.

Market reaction and other benefitsThe final 2010 financial statements were only five pages shorter than 2009. While the process initially removed some 15 pages of disclosure, the improved layout and additional explanations put 10 pages back in.

Entities that undergo a de-cluttering process can expect a reduced length of annual report, saving management time and report production costs.

So far there has been little external reaction from shareholders or analysts; however, Company A didn’t expect an immediate reaction.

The main short-term tangible benefit was internal. The quality of discussion at the Audit Committee improved, the audit ran more smoothly and the quality and flow of the front end of the accounts also improved.

Since Company A’s experience a number of other listed entities have embarked on a similar process of de-cluttering with KPMG, including entities in the financial services, energy and consumer markets sectors.

Our aim is to assist companies report their performance that will give capital markets and the public far greater clarity.



Contact usBernie SzentirmayPartner, Audit+61 3 9288 [email protected]

Emma RocheSenior Manager, Audit+61 2 9455 [email protected]

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© 2013 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International Cooperative (“KPMG International”).

Liability liited by a scheme approved under Professional Standards Legislation.

November 2013. NSW_N11438AUD.

kpmg.com.au

How we can helpKPMG can assist entities in de-cluttering their financial reports in a number of ways (subject to auditor independence requirements if applicable), including providing:

• thought leadership and example de-cluttered disclosures

• feedback on management’s draft de-cluttered financials

• management and Audit Committees with insight as to the way to approach the de-cluttering process based on publicly available examples and participating in project workshops and discussions.

Other areas of assistance for non-audit clients could include project management and more direct assistance with the re-drafting process.

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Bringing clarity to financial statements - KPMG US LLP ... · PDF fileAccounting policy and detailed notes so that they better reflect ... • analysts notes • internal management