The International Accounting Standards Board(IASB) has identified three concerns about information in financial statements—not enough relevant information, too much irrelevant information and information communicated ineffectively.
The Board says it wants to contribute especially to making communication of information in companies’ financial statements more effective over the next five years.
In his foreword to a report compiled by the IFRS Foundation, Better Communication in Financial Reporting, IASB chair Hans Hoogervorst says ineffective communication of financial information can lead to investors overlooking relevant information or failing to identify relationships between pieces of information in different parts of a company’s financial statements. This can lead to investors making poor
investment decisions. Ineffective communication also makes financial statements less understandable which can increase uncertainty around what investors perceive are the company’s prospects, leading to a higher cost of capital for companies.
Conversely, effective communication of information in financial statements can contribute to better investment decisions and a lower cost of capital for companies.
By describing a few companies’ journeys towards improving the way they communicate information in their financial statements, the report shows that communicating information more effectively is feasible when applying IFRS Standards. The companies’ experiences demonstrate that relatively small changes can significantly enhance the usefulness of their financial statements.
The companies featured in the report said their external and internal stakeholders value the changes introduced because their financial statements have become easier to read and understand.
The financial statements are easier to read and understand because the companies identified what information is relevant to their investors, prioritised it appropriately and presented it in a clear and simple manner. In some cases, this resulted in companies including additional information that is useful for
investors and, in other cases, removing information that
For many of these companies, the following factors were
key to making the improvements in communication possible:
• senior management supported the changes in communication;
• companies engaged with their investors to identify and understand their information needs;
• departments across the companies participated in the
• the companies’ auditors, regulators and national
standard-setters supported the process and were
willing to discuss the proposed changes.
Principles of effective communication in these case studies were:
- Using simple descriptions and sentence structures without omitting useful information.
Ranking pieces of information to help users of financial statements
understand their importance.
Linking information to help users of financial statements understand the
relationships between pieces of information.
Selecting a suitable format for the type of information companies provide.
Avoiding unnecessary duplication that obscures communication.
Disclosing information in a way that enhances comparability among
companies and across reporting periods without compromising its usefulness.
The report seeks to inspire other companies to improve
communication in their own financial statements and can be read here.