Mary Mathews:
Starting with thinking about financial statements as a communication tool is key. It's telling users, investors, what's happened for this company in the year and if it's a communication tool, what that means to me is it's all about the audience. Think about what the users need and what's useful for them. What are they looking for, what are their needs and how are they going to use the financial statements?
Narrator:
Welcome to Accounting for the Future, a BDO Canada podcast for financial leaders to navigate, change and achieve business growth. We'll uncover the challenges financial leaders may not have dealt with yesterday but will definitely have to manage for the future.
Anne-Marie Henson:
Hello and welcome to Accounting for the Future. I'm your host, Anne-Marie Henson. On today's episode, I'm joined by Mary Mathews, a partner in our accounting advisory group, who does both accounting advisor work and works on accounting standards. I get the pleasure of working with you pretty closely on an almost daily basis and talking about interesting accounting issues. So, Mary, welcome back to Accounting for the Future.
Mary Mathews:
Thanks. It's good to be back.
Anne-Marie Henson:
Yes. You've been on the show a couple of times now, so I'm really looking forward to this discussion on making financial statements more meaningful and useful, which is a topic that's near and dear to my heart, so looking forward to the chat. And I thought maybe we could just start with going back a little bit in time to the past, to about 12 years ago, 2010, 2011, when there was a really important change to the accounting standards in Canada, being the adoption of International Financial Reporting Standards, IFRS, and the adoption of Canadian Accounting Standards for Private Enterprises, ASPE, which was available for private companies to be able to adopt, so that resulted in significant changes to the accounting landscape and financial reporting landscape. So why don't we start there, and you can give us a bit of a background in terms of what happened during that time and how it impacted financial reporting today.
Mary Mathews:
Yeah. So going back in time, yeah, back to 2010, 11, when we adopted IFRS, disclosure requirements was one of the big changes and I think the number was something around 3,000 new, or not new, but required disclosures came about at least in IFRS and that's really serving the purpose of information is needed. It's useful. Investors want information, and each standard itself covers off the basis for all of that useful information, depending on the types of transactions companies enter into, but of course, that increase in information and disclosure requirements comes at a cost.
I think the average set of financial statements back then was around 38 pages, and with the adoption of IFRS, it increased, almost doubled to 71 pages in an average set of financial statements. And what this does is it makes financial statements long and sometimes difficult to understand with all of that information. If anything, statements have only become longer and difficult to understand with every new disclosure requirement. And many preparers we hear this all the time; Anne-Marie, preparers will ask us, does this provide any useful information to our investors or our lenders? And there's some merit to that. More is not always better because you might miss the forest for the trees if you're stuck knee-deep in disclosure requirements that are onerous and a bit of an information overload.
Anne-Marie Henson:
Right. Yeah. No, I agree. I think more is definitely not always better, and some people would argue that even 40 pages of financial statements was too long, let alone 78 pages of financial statement notes, so definitely something that we can take back and think about in terms of providing information that's really useful for the readers of the financial statements. So why don't you talk us through a little bit some of the presentation issues or complexities that arose as a result of all these new disclosure requirements when we're talking about IFRS?
Mary Mathews:
Yeah. So, what users and preparers are experiencing as a result of all of these disclosure requirements is really a focus that tends to err on the side of compliance rather than what's useful information telling the story of my company this year or this quarter. And I find that it's typically the notes that confuse users the most, and it's because users need to wade through jargon, duplicated content and, which creates for an unpleasant user experience to find information that they're looking for. I do believe that notes provide a treasure trove of valuable details about a company, but sometimes it might be ignored or missed, and that's just because the barrier to entry is a bit high to find the information you might be looking for.
One of my pet peeves is actually I sometimes will see financial statements with pages and pages of information on financial instruments, and it's going back and providing the history from inception, and that might be from over ten years ago, and there is merit to deleting some of that information that's no longer relevant to the financial statements for the two years that you're presenting in your statements. Analysts and lenders they prefer financial statements that tell a story clearly, and that's no different between public or private companies because businesses benefit from financial statements that are easy to use, find information and compare with other companies.
Anne-Marie Henson:
Yeah. No, you bring up a good point about not being afraid to press delete on some information that may have been relevant at the time, but by continuing to include that information that dates from several years ago or that that's not even for a financial instrument or something that's even in existence today, but you want to provide the background, I think the intent sometimes from the preparers of these financial statements is to actually provide as much information as possible, but what we don't realize that we're doing is that we're diluting the more important current information that investors and shareholders could actually use to make decisions, so it's a really good sort of takeaway.
And so all of that happened in 2011, and I remember going through that IFRS transition at the time and having to deal with several more pages of note disclosures that were required, and it took us a few years to really feel like, okay, we got the hang of this, we understand what's required and improve disclosures over time and then all of a sudden, you come to, say, 2018-19 and there's a whole bunch of new IFRS standards that come in. So here we are thinking we're now experts in financial reporting in IFRS, and then IFRS 9 and IFRS 15 and then 16 come in. So, could you talk to us a little bit about those newer standards and the impact that they had on financial reporting and financial statements?
Mary Mathews:
Yeah. Well, it brings up something that it's not going to change, right? There's always a new standard or a call for change. Sometimes, with standards, we always know there's amendments or big changes completely to our financial reporting standards and with every new amendment or accounting standard that comes in, IFRS, or Canadian local GAAP, disclosures come with that. So, what's really important here is to think about, well, there's always going to be a need for potential changes, so taking out some of that old information that's no longer serving a purpose, or it's not as relevant anymore, we need to think about that because we know that there's changes coming.
For public companies, they also have to adhere to regulatory requirements, and a few years ago, there was a call for more clarity and transparency with non-GAAP measures, where now, non-GAAP measures need to be reconciled to the closest IFRS number, so all of this is not going to stop. The information that is requested by our users or investors is just going to continue to put a bit more pressure on finance teams at companies to be able to provide those disclosure requirements and the MD&A requirements that need to be met.
Anne-Marie Henson:
Yeah. No, it's true. It's a really good point, and I think the continuing changes to IFRS add a complexity to that important role of being the financial reporting, or the person who prepares the financial statements, because it's important to take those into consideration, but also at the same time, ask yourself, "Well, is there anything we used to disclose that we don't need to anymore," and make that a regular part of your financial reporting process? So maybe we can move on to really the meat of the situation, which is what we think could be beneficial. What can companies or preparers do to make your financial statements say what they mean? And maybe you could give us a little bit of advice there in terms of what people should be thinking about when they're looking at their own financial statements, and they want to be able to prepare a set of financial statements that tells the right story about the company and gives useful information, but at the same time, that respects all the disclosure requirements in the standards. So how can companies sort of marry those two requirements that sometimes seem to be a little bit contradictory?
Mary Mathews:
Mm-hmm. Yeah. So I think what I'll do is I'll start with maybe a first tip of maybe what to think about when you're starting this review process for financial reporting and then maybe some tips about how to go about that, to marry up the compliance with useful information to provide to users, so I guess starting with thinking about financial statements as a communication tool is key. It's telling users, investors, what's happened for this company in the year, and if it's a communication tool, what that means to me is it's all about the audience.
Think about what the users need and what's useful for them, what are they looking for, what are their needs, and how are they going to use the financial statements. If we put ourselves in those users' shoes and we keep that audience in mind, I think all of the other rules and information and top tips will actually flow from this foundational principle. And being entity-specific, they're obviously reading financial statements of a company. They want to know about this particular company, so tailoring information to that one company's circumstances will provide users with the best picture of that company, so I think you always have to put yourself in a user's seat or chair when you're starting this process.
Anne-Marie Henson:
This is a really good point, actually, and I think it goes in line with just really starting with the end, who is going to be reading this and then working your way backwards to be able to provide information that is going to be useful to that group, all while obviously respecting those standards and the disclosure requirements. Is there anything else you can think of that might help us?
Mary Mathews:
Sure. Yeah. So next, of course, I've got a bunch of tips, so I'll start with what I've got next. So, I would start with avoiding disclosure overload and I understand accounting standards are incredibly complex and all of the minimum requirements we talked about and they're only getting longer. Of course, this leads to that focus on compliance, and we, as preparers, we ignore materiality, and this is because we're erring on the side of caution because we're concerned about maybe what our auditors might think or security regulators, but in truth, every financial statement could be shortened in some way. I think in deciding what to keep and what to delete, we as preparers need to get comfortable with our own professional judgment, and preparers need to think about and work out their own formula for their reasoning to keep, include, or delete something so that they can justify that decision later if that question is raised.
I talked about being entity specific and that is not going to go away. Disclosing details and assumptions for a transaction is half the work, and then next comes tailoring that information to your entity's specific circumstances. So, for example, you would want to let users know in your professional judgment, why an accounting decision is important or judgmental, so it is judgmental. It's a significant estimate for this company because X, or it has such a big implication on this big balance on my balance sheet. Users also, of course, should be engaged and when you're looking at disclosure language to include, don't just copy and paste something from the accounting standard because it adds in a lot of jargon when, in fact, you could think about pairing that disclosure language down to save yourself some time and then the next year's person who's preparing this note, it saves them time if they're not wading through all of those tips there.
Anne-Marie Henson:
Yeah. I love what you said, and like any good podcast host, I'm going to reference a previous podcast on non-GAAP measures with Armand and Anthony Scilipoti, where he said something that really stuck with me, and it was when you're preparing information and I think in his case, it was explaining the reconciliation of non-GAAP measures to GAAP and he was explaining the importance of simple language and challenged people to do the exercise of asking a non-accountant to read the notes. So, whether it be your significant other, or a friend, or someone who doesn't necessarily have a background in accounting, or finance, or financial reporting to read that note and see if they understand it and typically, it's a good test to see if it's useful information. So anyway, that just reminded me of that conversation because there are times where we want to provide the most amount of information possible, but by doing that, it actually confuses the message rather than clarifies it.
So that brings up a really good point, and I think on your comment on being entity-specific, we're lucky that we have access to every financial statement of a public company because they're all filed publicly, and we have access to them, and they're a great tool for companies to say, "Okay. Well, I want to go look at this company because they're in the same industry as me to see how they've worded a note." And it's great to do that, but then just make sure you're not just doing copy-paste, that you're actually taking what's relevant and what's useful, but then you're actually tailoring it to your specific needs, and you're not just copying that information, because again, it's no longer specific to the entity. It becomes a bit more boilerplate.
So, all really good points, and I think what I'm taking away from this process, and if I look even at the clients that I've worked with who've had to prepare financial statements, one really important item is to stay organized in the process, right. To be able to first make sense of all the different transactions or the things that happened in the year that need to be reported on and organizing them in a manner that makes a lot of sense. So, can you give us any tips or things that you've seen that could help people and preparers in that process?
Mary Mathews:
I think what I like to think about is organizing that information, understanding what's happened for the year and then figuring out how to best tell that story of the year's results, and that really is important, because, as a preparer, we might know and understand the background of every line item and change in the P&L this year, but a reader may only understand and know what they see, so helping them assimilate the information and give it context is going to be key here. So, to begin with, you can communicate the relative importance of something or a transaction by the placement in the financial statement notes. Some examples of this is implicit ranking. If your company purchased another business and that's the big change for the year, consider moving that note disclosure to the top of the financial statements and maybe pushing something down that's not as relevant, just as important as how you group information.
Often, information might be scattered between paragraphs and different sections of the financial statements, but consider consolidating them into one section. I love organized information with headings and subheadings so that I can easily find any information I'm looking for and also creating consistent hierarchy of topics. And that really helps the user go through the financial statements for the year, and also, it helps the company not bury any relevant and important information for the year because something big is not obscured between other maybe less relevant information for the year, but it's still there, because it's required and it's a material number, but maybe not the big story for the year.
Anne-Marie Henson:
Right. Yeah. No, it's a good takeaway, and I think we've seen that done quite well in certain circumstances where that's it. It could be a big acquisition or something that happened in the year that really it's so pervasive to the company that it just needs to be highlighted first, even though it happened really late in the year, or it's not alphabetical or doesn't go in the chronology of the balance sheet. If you may have a material acquisition, that's probably the most significant thing that happened to your business during that year, so definitely some good take takeaways. Are there any other things that you could think of that might be helpful?
Mary Mathews:
Yeah. I think financial statements suffer from long, complex words, but it is possible to pare that down, use simple descriptions use simple sentences without emitting useful information. We could all find ourselves regurgitating rules and information from standards, and there's nothing wrong with repurposing some technical terms and information, but trying to communicate some of this information in plain language is really helpful. It keeps things simple, direct, concise. It also helps shorten the length of the note disclosure, and it creates the white space and the amount of time we all spend on our computers and in front of screens.
We all could use that visual rest, let's say, in that white space. Another pitfall that could be worked on or remediated is that preparers sometimes duplicate sections for several reasons. A disclosure might show up in two different standards that relates to one transaction, but what we could do is just cross-reference and connect that information between two note disclosures to help users understand the relationship between two balances or one transaction that affects many line items. It may be legitimately necessary to mention a topic in more than one place, but in that scenario, what I would recommend is deleting the second instance and just referring back to the first time it's been disclosed in the financial statements.
Anne-Marie Henson:
Yeah. I like that a lot, actually. I've seen it sometimes. I've seen it done quite well, actually more recently, when it comes to, for example, subsequent events, so you'll have a subsequent event relating to, let's say, the renegotiation of a debt or issuance of common shares. I've seen some companies put it in two sections being, one, the common share, the capital stock note, as well as subsequent events, but you could technically just leave it in one of those two places and even just completely remove the subsequent event note, as long as the information is really well disclosed in other areas.
So there's definitely some ways to do that, that continue to provide the relevant information with the users and not have to duplicate that, because the risk obviously becomes if there is a change to that note before the financial statements are finalized or issued, not only could it be just a lot of information and a bit onerous from a disclosure perspective, but you risk making a mistake, because you can change it in one spot, not change it another and all of a sudden end up with financial statements that are misstated, or that are not correct, so definitely a good takeaway for that.
One thing I've seen with certain companies, I want to know what you thought about it, was in some situations, companies have begun to have their notes where they disclose the accounting policy in the note and then have the actual note, so one of the balance sheet areas I can think of that I've seen this done is capital assets, or property, plant and equipment, where instead of having an accounting policy and then a separate note with a continuity table, you end up, in that one note, having your accounting policy with your depreciation and when you do impairment tests and then you have the continuity table right after. So, is that one area you've seen that could also help in terms of reducing the number of pages of disclosures?
Mary Mathews:
Yeah. And I think it's helpful with reducing the amount of pages, but also just gives the user all the information they need in the one section, or as much as possible in one section. It gives you what the accounting policy is and how this applies to this company, so that's a great way to organize the information with the acquisition note or the capital asset note, starting with the policy. Here's the effect for the year on my financial statements and cross-reference to any subsequent events or other areas that might need to be linked, so that definitely is a great way we're seeing that information be organized in a really helpful and useful manner for users.
Anne-Marie Henson:
Yeah. No, that's really great and yeah, it reduces you having to flip back and forth between pages to remind yourself what the policy was. So good tips, and I guess if we're looking forward a little bit, because, like you mentioned, there are always changes happening in the world of accounting standards and financial reporting, and I think the next few years are going to be subject to even further changes. So, what do you see coming that may help preparers of financial statements or things that they might need to just be conscious or careful of in the future that might impact what they do?
Mary Mathews:
Well, it's timely to bring that up, actually, because there was some amendments that are actually currently in effect, that just came about at the beginning of 2023, and that's for those who apply IFRS, and the amendments are really about helping preparers determine what should be included in their accounting policy notes. Previously, they've been called significant accounting policy notes, but now it's material accounting policies that should be disclosed, and therefore, that is a different judgment, so that is what preparers should be thinking about. And accounting policies may be material by nature, even if they're not quantitatively material, or even if they are quantitatively immaterial, or let's say one accounting policy relates to something else that's material that should be disclosed.
And also, this new amendment is actually, I think, quite interesting because it adds in the requirement that accounting policies should not obscure any material accounting policies, which is a different way to think about it, that the idea of obscuring material information is no longer allowed going forward. So that's the current change for the year, but there are amendments and expected big changes to financial statement presentation that are still being developed. The standards are not finalized, but there'll be more to come on that when we get to a finalized standard there. So, I'm just going to leave it with there's always a need to clean up before more changes come because I don't think accounting standards are going to stop developing and being worked on that preparers need to be conscious of.
Anne-Marie Henson:
Right. No, those are all good points and things to make sure that we continue to think about. I'll be interested to see how that new amendment impacts the structure of accounting policies because we tend to do them in a manner that sometimes just follows the balance sheet and the income statement line items, which isn't always the most material or important disclosures, so that'll be really good to watch out for as these changes start being implemented. I guess there's another impact in the future that we don't necessarily know what it's going to be right away, but for some people to start considering and it won't make financial reporting any easier, but with these proposed climate-related disclosures that we're expecting to be released at some point in the near future, in the next few months and are going to be impacting companies likely starting next year, it's not going to be easy to try to conclude on what's material and what is enough disclosures on ESG and scope one, two and three emissions and what's not enough and what's sufficient for the users and what's accurate as well.
It is going to add a layer of complexity to financial statements that we haven't really seen before, so definitely some things to watch out for and maybe once all of those standards have been issued and completed, we can have you back to talk about the impact on financial reporting.
Mary Mathews:
I would enjoy that very much. Thank you.
Anne-Marie Henson:
Well, thank you so much, Mary, for your time today and your input. I hope our audience appreciated this discussion. I'd also like to thank you, our listeners, for tuning in today and to all our episodes. I'm Anne-Marie Henson, and this has been BDO's Accounting for the Future. Please let us know if you found the topic interesting and useful, and remember to subscribe if you liked it. We'll see you next time.
Narrator:
Thank you for listening to BDO Canada's Accounting for the Future. Past episodes and related insights are available at www.bdo.ca/accountingforthefuture, or you can go to Apple Podcasts, Spotify, or Google Podcasts to subscribe. For more information on BDO Canada, visit bdo.ca.