Date posted: 4/03/2020 4 min read

Cutting the clutter: Vik Bhandari CA on meaningful financial reporting

Vik Bhandari CA, IFRS Specialist and co-author of 'Accurri Illustrative Financial Statements' shares his tips for producing meaningful financial reports.

In Brief

  • Accounting and finance professionals must embrace change by decluttering financial statements and reordering them to make them more meaningful
  • The purpose of financial statements is to communicate value to the end user
  • Financial statements can help users plan for the future operations of their organisation
  • Auditors should encourage their clients to adopt the streamlined way of reporting

In a world where accounting standards have become more complex and disconnected from a company's operations, it has become difficult for investors, companies and the market to understand the intricacies of financial reporting.1

Drawing on over three decades of accounting and reporting experience, International Financial Reporting Standards (IFRS) specialist and co-author of the free of charge publication Accurri Illustrative Financial Statements, Vik Bhandari CA believes “decluttering” or “streamlining” the financial statements is essential to providing high quality reports for the end user.

We speak to Vik Bhandari CA to discover how accountants, supported by their auditors, can cut through the jargon and improve financial statements to align with user needs.

Users are more than just the shareholders and investors. They also include financiers, bankers, creditors, employees, unions, competitors, government and even the directors themselves!

Cutting the clutter in financial reports

Reflecting on the current financial landscape, Bhandari says the standards for accounting and finance professionals are changing, becoming even more complex and encourages financial statement preparers to embrace change by reordering and decluttering their financial statements.

"You are creating a narrative to explain the numbers. Remember this narrative gives more insight into the business, and breaks down the accounting jargon to help shareholders understand what is important to the growth of the business."
Vik Bhandari CA, IFRS Specialist and co-author of 'Accurri Illustrative Financial Statements'.

He considers the current standards for preparation of financial statements as, "too academic, complicated and unintuitive," and emphasises that professionals need to rethink their approach moving forward.

"There has been a drive and push to simplify the messaging around reporting, and declutter financial statements," Bhandari says.

"The requirements have changed, and certain things are no longer required. For instance, ASX listed entities no longer need to have a 15 plus page corporate governance statement included in the financial reports," he continues.

To create a clearer and more concise report, Bhandari recommends accounting and finance professionals only include information that adds value to their statements and provides users with the information they need.

Bhandari says there are essentially three parts to the decluttering or streamlining initiative:

1. Organising notes
Sort notes according to importance and nature. Companies will bring forward those they consider to be more relevant and valuable. For example, a mining company with mining tenements may discuss their assets in the first note of the financial statements as this is of great importance to the operations of their business. Rather than the first note being the significant accounting policies.

2. Embedding accounting policies into the relevant notes
Tailor presentation of financial statement notes to provide investors and users with the clearest story of the company’s financial performance and position. For example, it is far easier having the revenue note showing the breakdown of revenue with the revenue accounting policy, rather than having the policy buried in the significant accounting policies elsewhere.

3. Removing disclosures
Remove disclosures that are not essential, significant or critical to the company’s operations. This ensures the focus is on high-value information that will ultimately enable better decision-making.

The importance of accurate and effective communication

The importance of accurate and effective communication When considering the benefits of streamlining financial reporting, Bhandari says preparers will be able to more accurately communicate the financial position of a business at a particular point in time.

Bhandari advises accounting professionals to understand that although financial statements are viewed as a compliance document, the purpose of the information is to communicate value to the end user.

"At the end of the day the financial statements will always be a robust compliance document, but it has a number of uses in communicating the company's business success at a point in time," Bhandari says.

According to Bhandari, financial statements that are more communicative in nature are more meaningful as their purpose is to provide users with information that is useful for making and evaluating resource allocation decisions.

By recognising that effective communication is essential for investors to make informed decisions, Bhandari encourages financial statement preparers to understand that their role goes beyond producing the numbers in the financial statements.

"Focus on understandability, compatibility and clarity, rather than just checking that it is compliant. Historically, accountants have been good with the compliance checklist, but if they lay over a new lens and cut through the noise and clutter, they are able to produce something meaningful with the end user in mind," he says.

"You are creating a narrative to explain the numbers. Remember this narrative gives more insight into the business, and breaks down the accounting jargon to help shareholders understand what is important to the growth of the business."

Streamlining financial statements is not just a preparers role. Auditors can play a vital part to ensure that the decluttered financials still, when overlaid with the concept of materiality, comply with the accounting standards.

Planning for the future with finances

Although financial statements are often used as tools that illustrate the company's business at a point in time and perceived by users as retrospective, Bhandari believes they can be used to help users understand where the business is now in order to plan for the future.

"The real value of financial statements is the forward-looking information. 'What's going to happen in the future?' When you look at a financial statement, and take into isolation the historical document, you are able to tell the story of how you got there, and then explain to your users how they can plan for the future," Bhandari explains.

"Some companies do it fairly well. They spend time looking at their finances, and map out ideas around social and corporate responsibility, environmental impact and sustainability. These are the things that your users of the financial reports want, but it is important to help them break down the information."

Bhandari encourages accounting and finance professionals to adapt to change and embrace the challenges of reporting standards to communicate value to their users.

Change is on the way and there is no stopping it. According to Vik, looking at the horizon we will see:

  • the disappearance of the special purpose financial statements from the Australian reporting framework;2
  • the potential replacement of the reduced disclosure requirements (RDR) framework with simplified disclosure requirements (SDR) framework;3 and
  • a complete change in the layout of the statement of profit or loss.4

"We have the opportunity, as preparers and auditors, to add value to what we do. Now is a good time to check some of the learning paths, and know what the trends are, and know how they can verify in the future."

Sources
1. https://www.afr.com/companies/professional-services/accounting-standards-now-too-complex-cfos-20191107-p538eb
2. https://www.aasb.gov.au/admin/file/content105/c9/ACCED297_08-19.pdf
3. https://www.aasb.gov.au/admin/file/content105/c9/ACCED297_08-19.pdf
4. https://www.aasb.gov.au/admin/file/content105/c9/ACCED298_01-20_PrefaceCombine.pdf

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