Financial reports serve a variety of reasons and one of which is to serve the interests of investors and corporate executives. Financial statements are supposed to inform investors of the periodic performance of the business and its real financial health. They are also meant to allow investors to monitor the capabilities of managers.
What this means is for financial reports to contribute to the optimization of investors, capital market efficiency, and their decisions on fund allocations. Sadly, financial statements fall short of achieving these goals today.
When talking to accountants or finance decision-makers about financial reporting, many express a resigned tone as they sigh that their financial reporting has reduced to a tedious and hellish compliance exercise more than serving its primary goal of informing the stakeholders.
Many are aware of the fact that financial reports are gradually losing its relevance even at the time when the length of the reports has doubled, more controls are in place, and more data are supposedly available for reporting.
How has it come to this?
There are, of course, several theories on why financial reporting´s relevance has degenerated depending on whom you ask. However, two reasons might be worth taking a more in-depth look at.
First, balance sheets are now favored in place of the traditional income statement matching model.
Why does this matter?
It is because both the balance sheet and income statements express different views. The balance sheet assumes earnings are a byproduct of valuation of assets and liabilities, which may or may not be related to current business performance.
The income statement, on the other hand, springs from the process of matching revenues recognized over a certain period with all costs incurred. This then reflects the current and real performance of the business, which can then be used to make robust forecasts for the future.
Second, the failure to adjust asset recognition rules in the fundamental shift in corporate value-creating resources from tangible to intangible assets.
Why does this matter?
The investments of businesses in intangible assets like software/ technological solutions, digital systems, patents, unique processes, HR investments, and the like have risen dramatically in comparison to the downward spiral of investments intangible assets such as plants, machinery, equipment, etc.
This matters because it fundamentally changes the economy of intangibles, which are seen as value-creators of the business. This means that the way financial reports handle intangibles today decreases the relevance and usefulness of reported earnings as a measure of business performance and value creation.
As they say, everyone always has something to complain about – weather, food, traffic, politics, so why not complain about financial reporting too, right?
While it may be easy to dismiss it as such, the reality is that intense feeling of financial reporting descending into nothing more than a compliance exercise is one that is widely felt and acknowledged. Instead of it providing the most accurate, reliable, and real-time information to those that need to make decisions, it somehow manages to be just that – reports for reporting´s sake.
How is your financial reporting today?
Is it tedious?
Is it hellish?
Is it serving its real purpose beyond just compliance?
Epicor Financial Planner is a complete CPM solution. It streamlines, optimizes, and automates your financial reporting, budgeting & planning, and fiscal consolidation. We don´t know if it will improve your financial reporting´s relevance. Still, it certainly is an excellent place to start as implementing it forces you to pierce through the entire business across departments to have a look at what truly is needed, why they are required, and how they should be effectively executed.
Try EFP for free for 30 days and see if it can help your business.