Digital Financial Reporting

Accountants and others have been talking about improving financial disclosure practices my entire career as an accountant.  But few things really seem to change.  Here are some of the proposals to improve financial disclosure that I am aware of: (in no particular order)

• A Comprehensive Business Reporting Model (CBRM) (CFA Institute 2007)
• Improving business reporting-- a customer focus (AICPA 1994)
• Principles of Disclosure (IFRS Foundation 2017)
• Better Communication in Financial Reporting (IFRS Foundation 2017)
• A Matter of Principles, Future of Corporate Reporting (FRC 2020)
• FASB sees flexibility, relevance as cures to disclosure overload (FASB 2012)
• Will Simpler Also be Better (Journal of Accountancy 2012)

There are plenty of other reports.

If you have not noticed, I am big on frameworks.  The CFA institute paper makes the following statement on page 2:

A conceptual framework for business reporting must provide a sound foundation for every accounting standard, proposal, and interpretation. We believe, however, that a properly conceived and executed framework should serve also as a benchmark by which the quality of a proposed standard may be judged. The framework should guide standard setters in their deliberations on the development of new reporting pronouncements, but it should also provide a template for assessing whether the standard-setting work is finished or remains deficient in one or more material aspects.

I agree that a conceptual framework and principles are important.  Both the IFRS Foundation and FASB have conceptual frameworks for financial reporting. But those conceptual frameworks need to be refined and tuned for digital.

The CFA Institute paper makes very specific observations.  For example from page 5:

The extreme degree and inconsistent pattern of aggregation and netting of items in the statements—along with the obscured, even opaque, articulation of the financial statements—make such analysis ineffective or impossible.

Do reporting entities play games with their financial disclosures?  What do you think?

The CFA Instutute paper goes on to list and explain the following 12 concepts (or principles): 

1. The primary financial statements must provide the information needed by equity investors, creditors, and other suppliers of risk capital.
2. In financial reporting, standard-setting, as well as statement preparation, the entity must be viewed from the perspective of an investor in the common equity issued by the company.
3. Fair value information is the most relevant information for financial decision making.
4. Recognition and disclosure must be determined by the relevance of the information to investment decision making and not based upon measurement reliability alone.
5. All transactions and events must be recognized as they occur in the financial statements.
6. Investors’ information requirements must determine the materiality threshold.
7. Financial reporting must be neutral.
8. All changes in net assets, including changes in fair values, must be recorded in a single financial statement, the Statement of Changes in Net Assets Available to Common Shareowners.
9. The cash flow statement provides information essential to the analysis of a company and should be prepared using the direct method only.
10. Changes affecting each of the financial statements should be reported and explained on a disaggregated basis.
11. Individual line items should be reported based upon the nature of the items rather than by the function for which they are used.
12. Disclosures must provide the additional information investors require to understand the items recognized in the financial statements, their measurement properties, and their risk exposures.

In my view, those concepts (or principles) are a little bit in favor of the needs if investors.  Not a lot and perhaps not without a little bit of justification because investors are one of the primary use cases for financial reports.  In my blog post Understanding the Role of XBRL I provide this excellent graph created by Deloitte: (click the image for a larger view, or click here to go to Deloitte's paper)

What I can say is the following: Prudence dictates that using financial information from a general purpose financial report should not be a guessing game.

More to come so stay tuned.