CPA Canada and the Canadian Investor Relations Institute recently issued Interim Reporting Strategies, a discussion brief.
The document sums up the interim reporting landscape like this:
- “The content for interim reporting is less fully defined than that for annual reporting. Although both IFRSs and Canadian securities law contain specific requirements for the content of interim financial statements and MD&A respectively, these requirements are not as extensive as those applying to annual reporting, and leave more room for judgment. For example, entities differ greatly in the extent to which they choose to repeat aspects of the most recent annual disclosure in their interim filings, even if the information is essentially unchanged from what it previously reported.”
It notes that the optimum approach to interim reporting may vary from one entity to the next – for example:
- “For a long-standing and relatively stable industrial entity, subject to largely predictable operating cycles and with well-defined relationships with its investors, the emphasis may be on updating rather than on repetition, on highlighting matters that may have differed from investors’ expectations, and on reporting against established key performance indicators.
- In contrast, an entity in the development stage, and still working on establishing credibility and relationships with investors, might detect greater value in reporting in detail each period on specific areas crucial to its success, even if this entails some degree of repetition from previous reporting.”
Likewise, entities may have good reasons to differ in some aspects of the periods they choose to report on (for example, whether to provide separate fourth quarter results), on whether to provide a statement of cash flows for the current period (IAS 34 only requires a cumulative one for the year to date, along with a comparative), or on how soon after the end of the reporting period they seek to issue the interim report, among much else. The key point in the document is this:
- “We believe management should regard the kinds of choices summarized above as a strategic matter. In our view, an entity’s interim reporting is most effective when it is based in and responds to a specific understanding of its stakeholders’ needs. These needs vary between entities, in line with variations in their objectives and strategies. In all cases, management should consider what approach to interim reporting will maximize the credibility of and stakeholder confidence in its interim communications.”
This applies to all aspects of interim reporting – such as the approach to the conference call and to what’s made available on the website – in addition to the formal interim report. The document makes the following observations about auditor review:
- “Some researchers have found that the volatility of quarterly net income is lower in the first three quarters than in the fourth quarter, suggesting in some cases the possibility of earnings management and/or of insufficient care. The potential incremental benefits of engaging the auditor to carry out a review of an interim financial report include a reduced likelihood that material issues will arise only after the end of the year, to be reflected either in fourth-quarter adjustments or in retrospective adjustments, and a corresponding increase in confidence on the part of stakeholders. The benefits for some smaller issuers may be less certain, however, when the accounting issues are relatively simple and investors perhaps place less emphasis on the entity’s formal interim reporting than on its news releases or technical reports or other aspects of its disclosure. The decision not to engage an auditor for this purpose should be considered as an application of the entity’s overall philosophy and strategy toward identifying and mitigating risks.”
The document concludes by observing that “the board and management should continue to review the effectiveness of an entity’s interim reporting practices, and initiate changes whenever required. Such changes should be balanced against stakeholders’ interests in comparability and consistency of financial reporting. Whenever an entity’s major objectives or strategies change, the assessment of consequences should include the potential consequences for disclosure policies and procedures, both for interim reporting and more generally.” Perhaps this all sounds fairly obvious. It’s still a worthwhile document though, if only because it’s rather rare to see financial reporting discussed in such strategic terms. Of course, we may all have our own views of what would be “good” versus “bad” disclosure and practice for a certain item, based on some mix of analysis and intuition, but we might not spend much time thinking about the positive reasons for actually accepting the “bad” (or at least, the minimally acceptable) in some situations.
On the other hand, evaluating something as “good communication” in the world at large depends entirely on the context in which it’s being evaluated, including not least the interests and capacities of those who are being communicated with. Preparers might sometimes think in resignation that the concept barely applies to financial statements – that they’re compliance-oriented documents that barely have any active audience. But look at it this way – it takes a lot of time and money even to produce crummily compliant financial statements. If a possibility exists of generating more effective ones just by tweaking the elements of that investment a little, why wouldn’t you take it?
The opinions expressed are solely those of the author