PwC recently carried out a great survey, conducting in-depth interviews with 30 investors and analysts in Europe. Investors have been asked about their needs and expectations with regards to financial reporting on 5 critical topics: International Accounting Standards Board (IASB) agenda, Convergence of accounting standards, Usefulness of financial statements, Accounting for joint ventures, and Relevance of fair value measurements.
The survey findings show that investors are mainly concerned about the way companies report their performance whether globally in their financial statements or in their segment information.
International Financial Reporting Standards (IFRSs) do not provide clear definition of performance measures such as operating profit, which is not incidentally a mandatory line item under IAS 1 ‘Presentation of Financial Statements’. This lack of clarity within the standards forces many companies reporting under IFRS to use non-GAAP measures in management communication of performance. If almost all investors interviewed for the survey agree that non-GAAP measures are essential for understanding enterprise performance, they regret the lack of comparability as the definition of such indicators varies from a company to another. Investors also point out that non-GAAP measures are not always reconciled with financial statements.
As for the Segment Information, 67% of the interviewed investors are judging that segmental information does not meet their needs. In their opinion, IASB’s post-implementation review currently carried out is therefore a necessity. And when asked about the main areas in which segmental information falls short, investors point out 3 main reasons:
- Insufficient number of lines reported (53%)
- Disaggregation of segments (40%), meaning that two much is left in corporate centers
- Reconciliation with IFRS data (37%)
Investors would like additional performance indicators to be disclosed, the main ones being Operating Cash Flows, Capital Employed and Working Capital.
The other areas for improvement mentioned by the investors mainly regard disclosures (too much information, too little relevant), other comprehensive income (need for a framework defining clear principles of what goes in or out and what is recycled) and deferred taxes.
It should be noticed that investors do not perceive convergence with US GAAP as a priority. Even if a majority of investors would appreciate a single set of global standards, they fear too many compromises would have to be made thus impairing the quality of standards.
The comprehensive survey is available on PwC website.
How SAP addresses reporting standards
SAP strategy is to leverage our core competency in solving business problems to make the world run better and improve people’s lives addressing the world’s most pressing challenges of regulatory complexity. Compliance with International Financial Reporting Standards (IFRS) is one of the most challenging topics for our customers. For more information about SAP process to support this financial regulation, a comprehensive paper is available here.