Views on improving the integrity of global capital markets
18 June 2014

Financial Reporting: Making It More Effective for Investors

Posted In: Financial Reporting

Corporate financial statements and their related disclosures are fundamental to sound investment decision making. The well-being of global financial markets, and of the investors who entrust their financial present and future to those markets, depends directly on the information financial statements and disclosures provide. The following framework is intended to enhance effectiveness in financial reporting.

Guiding 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.

Criteria for Development of Effective Disclosures

  1. Disclosure is not a substitute for recognition and measurement, and recognition and measurement do not eliminate the need for disclosure.
  2. Standards for recognition and measurement of financial statement items and their related disclosures must be developed concurrently.
  3. Policy choices, assumptions, judgments, and methods must be fully and clearly disclosed.
  4. Disclosures should provide sufficient disaggregated information for investors to be able to fully understand and interpret the summary information in the financial statements.
  5. Investors require clear and complete disclosure of a company’s risk exposures, its strategies for managing risks, and the effectiveness of those strategies.
  6. Investors must have clear and complete disclosure of all off-balance sheet assets, liabilities, and other financial arrangements and commitments.
  7. Investors require clear and complete information about intangible assets held by a company.
  8. Investors require clear and complete information about a company’s contingencies and commitments.

A Better Model

We propose that standard setters provide investors with a revised set of four financial statements. All statements are of equal importance.

  1. Comparative Balance Sheets — Minimum of three years (three balance sheets and two income and cash flow statements provide two full years of data), with accounts listed in order of decreasing liquidity within each category.
  2. Comparative Cash Flow Statements — Minimum of two years, prepared using the direct method, with a supplemental schedule of significant noncash financing and investing activities.
  3. (New) Comparative Statements of Changes in Net Assets Available to Common Shareowners — Minimum of two years, that:
    1. Identify and distinguish among:
      1. Current-period cash and accrual transactions;
      2. Estimates; and
      3. Changes in the fair values of balance sheet accounts.
    2. Provide information by nature of each resource consumed rather than the function for which it is consumed; and
    3. Display transactions with owners that affect net assets, such as dividends and new share issuances.
  1. Reconciliation of Financial Position — Reconciles the comparative balance sheets by further disaggregating the amounts in the statements mentioned previously and by clearly showing how the statements articulate.

Access the complete Comprehensive Business Reporting Model.

You can also download a print-friendly version of A Framework for More Effective Financial Reporting


Photo credit: iStockphoto/retrorocket

About the Author(s)
Mohini Singh, ACA

Mohini Singh was director of financial reporting policy at CFA Institute. She represented membership interests regarding financial reporting and disclosure proposals issued by the FASB, the IASB, and others. Singh holds the Associate Chartered Accountant (ACA) designation.

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