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RAM0004_CHA_AccHL_1.pdf Page 1 6/07/11, 3:16 PM
have your say
The Institute is actively involved with a number of international accounting bodies who are
looking to address complexity in financial reporting. This includes preparing a submission
(due in late September) to an FRC report in the UK titled Cutting Clutter: Combating
Clutter in Annual Reports which addresses how to remove immaterial disclosures and
unnecessary explanatory information contained in annual reports. The FRC report can
be downloaded from frc.org.uk
The IASB also has a project team looking at practical ways to reduce the volume of IFRS
disclosures. The Institute encourages its members to participate in this worldwide debate.
Feedback on the FRC report can be provided either directly to the FRC or to the Institute
(for possible inclusion in its submission) via firstname.lastname@example.org
For more details visit charteredaccountants.com.au/financialreportingcomplexity
exposure to economic risks such as interest
rates and currency movements is difficult to
assess under the published accounts.
Key rePorTING TooL
The problem, according to Branwhite, is that
the theoretical changes have diminished
the impact of the P&L even though it
remains a key reporting tool. It’s a case of
theory obscuring what the accounts are
actually supposed to be saying. That leaves
investors – the company owners – confused,
perplexed and in the dark.
“We are having a lot of balance sheet
changes booked through the profit and loss
statement,” says Branwhite. “We will no
longer be able to clearly see the operating
performance of the business. We are seeing
a combination of the operating performance
plus changes in balance sheet valuation
some of which are theoretical and volatile.
They might be a positive one year and they
may be reversed in the next report.
“Financial accounts are supposed to
provide investors and stakeholders with an
understanding of the operating performance
of the business. But if you put all that
information into one report, you are mixing
information. There is information about the
asset and liability position of the business
and the actual operating performance. If
you mix all that up into one report, then you
have to spend a lot of time trying to pull
out what is being booked through the P&L
that is actually really nothing to do with the
The additional information is important for
investors. The challenge is finding a way to
communicate it without obscuring the data
in the P&L.
“If there’s a valuation change, for example,
in an asset and liability we need to know that.
But is that the best way to communicate that
change?’’ she asks.
“The P&L supposedly represents the way
we can communicate with stakeholders
about the business performance and how
the business has performed over the last six
to 12 months. The P&L is no less important,
it’s probably more important today than ever.
But as a result of accounting standards,
investors are confronted with a more
complex set of information.
“It is one of the core issues we have
in terms of the direction the accounting
standards have gone, this muddying of
business performance with changes in the
It’s not just the accounting standard-
setters that are driving the changes. The
world is more complex and more integrated
and the trend is creating problems for retail
investors. The trend is clear: it is not getting
easier for them.
“We have to acknowledge we are in a
more complex world,’’ Branwhite says.
“Capital markets are more complex, the
types of instruments available to companies
are more complex and businesses have
become more complex.
“There is unfortunately an issue here for
retail investors as the world is more complex
irrespective of the accounting issue per se. It
has not been helped by the complexity of the
financial accounting and particularly with the
mixing of the operating performance of the
business in the P&L with changes of value in
the balance sheet. That mixing of information
has created undue complexity, particularly for
As a result, many companies have turned
to what is now called shadow reporting.
More are using alternative profit disclosure
methods such as underlying profit and other
forms of non-statutory financial information.
Research by KPMG and Deloitte shows
that during the 2009 financial year, 68 per
cent of S&P/ASX 100 companies disclosed
underlying profit – up from 50 per cent
in the previous year – and 84 per cent of
S&P/ASX 100 companies presented their
performance with some type of non-
conforming financial information.
The Australian Securities and Investments
Commission (ASIC) released a consultation
paper warning listed companies not to
mislead investors by cherry picking earnings
figures. It has also issued provisional
guidelines warning them that financial
information that does not comply with
statutory accounting standards should only
be used in exceptional circumstances.
Branwhite says ASIC has valid concerns
and the issue is to create consistency. “It’s
not to say management would necessarily
look to mislead but there are terms being
used like underlying profit and there is no
accountability as to how that underlying
profit is arrived at or there is no consistency
in how that information is communicated. We
get to a situation where financial information
is provided to the marketplace without any
verification,’’ she says.
“The veracity of that information cannot be
vouched for and what one company says is
underlying profit may not be at all the same
in definitional terms as another company’s
view of underlying profits.”
She says the IASB had made a start
months ago to change the way financial
reports were presented setting out three
streams: operating performance, balance
sheet and any changes identified separately.
“At least if we could see the changes more
clearly identified, that would allow us to go
back to seeing the profit and loss statement
for what it’s supposed to be and that is a
communication of how the business has
gone as opposed to changes in balance
sheet valuations,” she says.
Another way to tackle the problem is
for businesses to set out key performance
indicators such as return on capital, return on
equity, growth in profitability, productivity and
how the business is being funded. These are
areas that investors need to know about.
“I think it’s always important for managers
to set out what their KPIs are and, hopefully,
they will do that through some of the
management briefings and presentations,”
The key for accounting standard-setters
and regulators would be to make accounts
less opaque and more comprehensible. Until
that happens, investors will remain confused
and uncertain and perhaps even take risks
they should avoid.
As a result of accounting standards,
investors are confronted with a more
complex set of information
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