Corporate performance: What do investors want to know? Innovate your way to clearer financial reporting

Transcription

1 Corporate performance: What do investors want to know? Innovate yor way to clearer financial reporting October 2014

2 PwC I Innovate yor way to clearer financial reporting t 1

3 Contents Introdction 3 Exective smmary 4 Srvey findings 5 Investment professionals are open to acconting policy innovation 5 Clarity and linkage matter, whatever the financial statement format 6 Conclsion 9 Appendix: Srvey poplation 10 Contacts 11 t 2 PwC I Innovate yor way to clearer financial reporting

4 Introdction In recent years, some companies have begn experimenting with the format and layot of their financial statements. Their innovations inclde changing the ordering of their note disclosres and the location and content of their acconting policies. Althogh many companies retain a more traditional approach to presenting their financial statements, the increasing level of innovation raises an important qestion: do investment professionals find alternative formats more sefl? And if so, how might companies adapt their financial statements and notes so that they become the best commnication tools they can be? We interviewed 85 investment professionals from arond the world to hear their views on what they find sefl, and where companies might improve. We asked for their thoghts on acconting policy notes, the format of financial statements and the linkage between financial reslts and management commentary. This pblication, the third in or three part series focsing on the needs of investment professionals, sets ot or findings. Yo can find the first report in the series, looking at the se of alternative performance measres, and the second, focsing on integrated reporting, here PwC I Innovate yor way to clearer financial reporting t 3

5 Exective smmary Investment professionals are relatively open-minded when it comes to the presentation of acconting policies and notes to the financial statements. However, companies need to ensre that, whatever format or approach they choose, they help the sers of their acconts find information easily and provide clear links between related content. In or recent conversations with investment professionals we heard that: Groping acconting policy notes together is still poplar, bt many investment professionals wold like to see policies presented alongside other relevant notes. Moderate detail on acconting policies is sally sfficient, thogh policies shold be set in the context of the company and any changes clearly explained. Notes can be organised in different ways, bt mst be easy to find. Management teams shold clearly show how the financial reslts relate to the bsiness model, identified risks and the company s strategy. Many investment professionals find it hard to see how a company s income statement, balance sheet and cash flow statement fit together. It is worth making the effort to explain this. Moving management commentary into the financial statements or providing better links cold help investment professionals in analysing company performance. Companies shold be willing to experiment with the way they present elements of their financial statements. Investment professionals will give feedback on whether new approaches tell yor company s performance story more clearly. Action points Make sre yor acconting policies are easy to find. Consider whether combining yor acconting policies with related notes wold make them more accessible and help provide a clearer pictre of yor company s performance. Be clear abot what has changed in yor acconting policies, key jdgements yo have made and choices yo have taken. Set yor acconting policies in the context of yor bsiness, and explain how the policy links to the specific nances of yor bsiness model. Make sre yo have clear linkage between yor financial performance and yor bsiness model, strategy and risk disclosres. Consider whether the layot of the notes to yor financial statements is effectively telling the story of yor performance: cold locating yor management commentary alongside yor primary financial statements help 1? 1 In some jrisdictions, reglatory change wold be reqired for this innovative new format to be allowable. t 4 PwC I Innovate yor way to clearer financial reporting

6 Srvey findings The location isn t important to me; it s abot being able to see the important information easily. This is a really big opportnity to make financial statements easier to nderstand. Combining the policy with the relevant note means I am mch more likely to pay attention to it. Sometimes more detail is sefl; these [the application of acconting policies] are inherently complex things to nderstand. It wold be really helpfl to draw ot what has changed [in the acconting policies] so it is easy to see. Investment professionals are open to acconting policy innovation When companies begin to experiment with financial statement presentation, acconting policies are often at the forefront of innovation. The traditional approach is to grop all the acconting policies together in a single note (typically Note 1), bt some companies now split them p and position them alongside other relevant notes. Which approach do investment professionals find more effective? Or interviews reveal that a small majority (51%) still prefer to see acconting policies as a single note to the financial statements, bt spport for alternative approaches is also strong. A large minority like companies to combine the policies with the related notes. More radically, some think the acconting policies don t need to be contained in the annal report at all: over one in ten (12%) wold be happy to leave acconting policies ot of the annal report altogether, as long as they are easy to find and downloadable from the company s website. Today s acconting standards reqire companies to disclose their acconting policies within their financial statements, so we wold need to see significant change from standard setters and reglators before sch practice cold become the norm. With the investment commnity split as to what the best presentation method might be, we think there is a fantastic opportnity for innovation as more technology-enabled, integrated reporting gains momentm. Where do yo prefer companies to disclose their acconting policies? 37% 12% 51% Downloaded from the company s website All in one place in the financial statements Groped in the relevant notes Asked abot the detail reqired in an acconting policy note, the majority (58%) of investment professionals we spoke to prefer a moderate amont of information. They want to see disclosres that inclde a description of significant acconting policy jdgements and choices, and a brief smmary of individal policies. A significant minority (28%) wold like to see all policies in detail, perhaps to help them to compare policies across companies or to provide a point of reference if needed. How mch detail do yo like companies to disclose in their acconting policy note? 12% 58% 28% 2% Only the significant acconting policy jdgements and choices made and any changes in policy. A moderate amont of information, inclding significant aconting policy jdgements and choices as well as a brief smmary of each policy sed. All policies in detail, inclding where acconting standards offer no choice at all. No preference PwC I Innovate yor way to clearer financial reporting t 5

7 Srvey findings (contined) Disclosre of new and significant acconting policies is a real potential area for improvement. It sholdn t jst be boilerplate; I need a clear statement on how a new or significant standard will affect the bsiness. It s not so mch abot the order of the notes, it s abot signposting to make it easy to find the information that I want. In fact, if I cold jst click on something and get to the note that wold be a great idea. We are sed to the notes being the way they are, and that is fine. Over many years investment professionals have consistently told s that they want to see policies set in the context of the bsiness, for example, explaining the revene recognition policy in the context of different prodct lines or bsiness nits. Or latest research confirms this preference. Investment professionals also find it particlarly sefl when companies clearly disclose any changes to their acconting policies. I think acconting policies need to explain how a particlar acconting standard is applied in the context of the individal bsiness Strongly agree 40% Agree 32% Neither agree nor disagree 23% Disagree 4% Strongly disagree 1% Clarity and linkage matter, whatever the financial statement format We talked to investment professionals abot the ordering of note disclosres. Do they prefer a particlar order or approach? Notes cold, for example, be groped by topic or area, or presented in the same order as the financial statement line items. We fond that investors and analysts are fairly evenly split on this qestion. What matters most, they tell s, is their ability to find the information they need and to find it easily. Althogh the investment professionals we spoke to vale consistency and comparability over time, this may be another opportnity for technology-enabled reporting to enhance commnication and improve the effectiveness of reporting. Of corse, any new soltions that help sers more easily navigate the financial statements wold need to be applied consistently over time so that sers can become familiar with the methodology and gain maximm benefit. How do yo prefer companies organise the notes to their financial statements? 16% 44% 40% Groped by areas for example all asset and impairment/depreciation related notes together In the order of the financial statement line items No preference Clear signposting to help investment professionals find information easily isn t jst needed for note disclosres. Investors and analysts also call for better linkage across the different elements of the annal report or other eqivalent docment. They want to nderstand how the financial reslts relate to the information provided on the company s bsiness model, the risks it faces and its strategy. t 6 PwC I Innovate yor way to clearer financial reporting

8 Srvey findings (contined) I wold like to see clearer links, bt to do that well companies need to inclde different types of information, particlarly in longer dration bsinesses. Rather than jst ticking the boxes, the annal report shold be sed as a commnication tool. I think the income statement and balance sheet are more intitive. The cash flow statement is mch more difficlt [to nderstand]. I do nderstand [how the financial statements fit together], althogh some companies make it mch harder to figre ot than others. I often jst cannot reconcile the three statements, even with other comprehensive income. I don t think anyone really finds it easy. If yo have ever bilt a model from the beginning then yo know it s difficlt to nderstand the flows and links. I wold like to see clearer links between the financial reslts and the bsiness model, risk and strategy information in the annal report/10-k/20-f Strongly agree 33% Agree 37% Neither agree nor disagree 23% Disagree 6% Strongly disagree 1% This call for linkage may provide a good opportnity for management teams to consider whether their reporting is cohesive: do the constitent parts of the annal report (and other commnication channels) work together to tell the story of the bsiness clearly? Action points Pt yorself in the shoes of yor investors. Thinking abot the qestions they might ask cold help yo identify the main linkages that need explanation. Sch qestions cold inclde: How do the financial reslts relate to yor identified strategic priorities? What impact have key risks had on yor financial performance? How sccessflly have yo mitigated yor risks? How do yor operational key performance indicators relate to yor financial performance? Based on or interviews with investment professionals, it is particlarly worth companies explaining how their income statement, balance sheet and cash flow statement fit together. Only 56% of the investment professionals we spoke to find this cohesiveness easy to see when they review financial statements. Better linkage and signposting cold perhaps help to draw ot these links. Consider how acconting policy choices, or jdgements and estimates, impact each statement. For example, how does the income statement expense relate to the cash otflow? I find it easy to see how the income statement, balance sheet and cash flow statement fit together when I review financial statements Strongly agree 19% Agree 37% Neither agree nor disagree 26% Disagree 10% Strongly disagree 8% PwC I Innovate yor way to clearer financial reporting t 7

9 Srvey findings (contined) The whole point of the notes is to help me nderstand and reconcile the information, so I wold like to see more on what the nmber means and what the reasons for the balance or changes are. This really brings the nmbers to life, and helps me to deconstrct the financial statements; it s an opportnity for innovation, to get investors really engaged. One of the more experimental disclosre innovations is the inclsion of management commentary within the financial statements. This sally appears as a boxed-ot, nadited piece of commentary on the same page as, or on the facing page of, the primary statements. Many (65%) of the investment professionals we spoke to felt this was a good idea and that it wold be helpfl for them in performing their analysis. While there may need to be reglatory change in some jrisdictions to allow this idea to become the norm, this interesting new idea again reflects a demand for more clarity and linkage across the varios elements that play a part in telling a company s performance story. I wold find it helpfl for my analysis to have management commentary explaining what the nmbers mean in the context of the bsiness alongside the notes and the primary statements Strongly agree 29% Agree 36% Neither agree nor disagree 19% Disagree 10% Strongly disagree 6% t 8 PwC I Innovate yor way to clearer financial reporting

10 Conclsion Althogh there is little consenss among investment professionals abot any particlar preference on the presentational format or delivery method for acconting policies, some important themes come throgh strongly be clear, be specific, and link related information. Investment professionals may not all agree on how companies shold lay ot their financial statements in order to commnicate most effectively, bt it is worth experimenting to find the best approach. However yo present yor acconting policies and notes, try to explain yor approach clearly. Management teams need to make sre their disclosres are company-specific rather than boilerplate and provide a sefl level of detail, withot drowning ot key messages. Linking information and signposting between relevant sections of yor report also helps investment professionals to be more efficient and thoghtfl in their analysis. Investment professionals nderstand that improving reporting effectiveness is a jorney. They tell s they are willing to go on that jorney with management teams, giving feedback on how they might improve their reporting. For their part, management teams need to be willing to listen to and act on the feedback received. We therefore encorage yo to step back from yor financial statements and related commentary. Challenge yorself. Is yor reporting to the market as effective as it cold be? Have yo told yor company s performance story in the best possible way? There is almost always room for improvement. Applying some of the ideas highlighted here cold be a sefl next step. PwC I Innovate yor way to clearer financial reporting t 9

11 Appendix: Srvey poplation We condcted interviews with 85 investment professionals from the by side, sell side and ratings agencies. Their roles inclded eqity analysts, fixed income analysts, ratings agencies, portfolio managers, chief investment officers and heads of research. Srvey participants were drawn from key markets across the world. Participants by geography Participants by specialism Participants by type 18% 7% 28% 21% 26% UK North America Rest of Erope Asia Pacific 20% 80% Eqity Fixed income 42% 9% 49% Sell side By side Ratings Other t 10 PwC I Innovate yor way to clearer financial reporting

12 Contacts For frther information please enqire of yor sal PwC contact or the investment commnity engagement team: Hilary Eastman T: + 44 (0) E: hilary.s.eastman@k.pwc.com Jennifer Sisson T: + 44 (0) E: jennifer.sisson@k.pwc.com This pblication has been prepared for general gidance on matters of interest only, and does not constitte professional advice. Yo shold not act pon the information contained in this pblication withot obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accracy or completeness of the information contained in this pblication, and, to the extent permitted by law, PwC does not accept or assme any liability, responsibility or dty of care for any conseqences of yo or anyone else acting, or refraining to act, in reliance on the information contained in this pblication or for any decision based on it PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. PwC I Innovate yor way to clearer financial reporting t 11