Annual financial statements will always be a critical communication to investors and other stakeholders. But how effective will they be in explaining to your stakeholders how the global COVID-19 pandemic has affected your organisation?
While the focus over the last three years has been on explaining the introduction of new International Financial Reporting Standards (IFRS) dealing with revenue, financial instruments and leasing, readers of the financial statements will want to know how the global pandemic changed the business.
No matter what situation exists, preparers of financial statements need to get the content right. When drafting the financial statements that will be issued, management should be mindful of what others have done – particularly businesses in the same industry sector – when they tell their own COVID-19 story and they should never lose sight of what makes their business unique. This will take time and effort because the recognition, measurement and disclosure requirements set out in IFRS issued by the International Accounting Standards Board (IASB) can be complex and demanding.
Unfortunately, many users complain that IFRS generates financial statements that are cluttered, and important information is often hard to find.
Telling the COVID-19 story is not only about reflecting what the financial reporting standards require disclosure on. It is also about correctly applying the materiality concept to disclosure and not being fearful of regulatory and stakeholder challenge. A reluctance to deviate from well-established practices by adopting a ‘safety first’ mindset often results in duplication, irrelevance and many ‘boilerplate’ disclosures which is not what users, including many securities and audit regulators, want to see.
In light of COVID-19, those charged with the governance of reporting entities, particularly those that are listed, have another opportunity to reflect on how they want to tell their story of their business activities throughout 2020 and how they are responding to the pandemic. The art, rather than the science, of issuing high-quality financial statements in 2021 is to prepare those that will not only comply with all the technical requirements set out in IFRS, but also effectively communicate how the entity has adapted and reacted to the environment it has been operating in.
Telling the COVID-19 story effectively not only requires entities to comply with applicable accounting standards and regulations, their financial statements should also become an effective part of the wider communication to their stakeholders.
Be mindful that the financial statements are just one ‘piece of the puzzle’ when communicating with stakeholders. Make them more effective by considering the following:
Make effective use of materiality to enhance the clarity and conciseness of the financial statements.
Incorrectly applying the concept of materiality is perceived to be one of the main drivers for overloaded financial statements. Information should only be disclosed if it is material. It is material if it could influence users’ decisions which are based on the financial statements.
The materiality assessment is the ‘filter’ in deciding what information to disclose and what to omit. Once it has been determined which specific line items require disclosure, entities should assess what to disclose about these items, including how much detail to provide and how best to organise the information in the financial statements. This can be done using a two-stage filtering process as follows:
Re-evaluate how the notes to the financial statements are organised to improve their effectiveness as a communication tool.
Being the largest section of the financial statements, the notes can have the greatest impact on the effectiveness of the financial statements as a communication tool. Improve the effectiveness of the notes by:
The financial statements need only disclose the most significant accounting policies. The disclosures made should be relevant, specific to the reporting entity and in light of COVID-19 explain how the accounting policies have been applied throughout the reporting period.
The aim of accounting policy disclosures is to help users properly understand how the amounts included the financial statements were determined. To make accounting policy disclosures effective preparers should:
We can help you get up to date with current trends in financial reporting by providing:
In making these changes, one thing does not change. Financial reporting is a regulated activity and compliance with these requirements is essential. Getting the content of the financial statements right, particularly in light of the COVID-19 pandemic will require the application of professional judgement, care and attention to detail, proper planning and project management, and making sure fit-for-purpose systems and controls support the amounts included in the financial statements.
Whatever stage you are at in making improvements to the content and presentation of your annual reports, our specialists offer pragmatic solutions, whilst still complying with IFRS.
The requirements set out in IFRS are often very detailed and technical. To the untrained eye, they can appear hard to navigate. But at Grant Thornton, we have people who are well versed in their intricacies and can translate them into language that you can understand and apply to your financial statements.
We hope you found this publication useful when thinking about how to tell your COVID-19 story. If you would like to discuss any of the points raised, talk to your Grant Thornton contact now, or connect to a specialist in your country.
