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CFA Institute issues study on investor views on complexity in corporate financial reporting

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14 May 2015

The CFA Institute, a global association of investment professionals, has published 'Addressing Financial Reporting Complexity: Investor Perspectives' featuring results of a member survey on the topic. The report analyses what investors believe are unavoidable (transactional) and avoidable (accounting) sources of complexity and how current standard-setter initiatives should be refocused to eliminate avoidable complexity to increase transparency and bring about meaningful change.

The paper argues that the current dialogue focuses largely on preparers' concerns regarding financial reporting complexity and its associated compliance costs. The investors' perspectives would be missing in the debate. Main focus of the report is differential financial reporting. The results show that:

  • 82% of respondents (170 members of the CFA Institute responded to the survey) believe the creation of separate private company standards would create comparability issues for those investing across public and private companies;
  • 65% say it would result in the loss of information useful to their financial analyses;
  • 73% believe it may actually increase complexity instead of lessening it.

Among the aspects of differential reporting that aim at lessening the reporting burden for non-listed companies the investors believe the following could increase, rather than reduce, avoidable complexity:

  • delayed recognition of transaction and events;
  • greater use of cost-based rather than fair-value measures;
  • greater earnings smoothing versus recognition of market/economic events;
  • substituting presentation on the face of the financial statements with disclosure; less disaggregation of information; and fewer roll-forwards, reconciliations, tables, and charts;
  • greater optionality and potentially less comparability of financial statements;
  • reduced disclosure requirements.

The balance between the needs of companies to cut their compliance costs and the needs of investors to receive valuable, decision-useful information also formed part of the comprehensive review of the IFRS for SMEs (an amended standard is expected in the second quarter of 2015) and is also part of the discussions in the IASB's principles of disclosure project.

Similar views are also included in the CFA Institute's response to the European Commission's public consultation Building a Capital Markets Union. The response is based on a survey of CFA Institute members in the EU and Switzerland and concludes:

In general, CFA Institute does not support the creation of differential accounting standards for different entities, whether based upon size or legal structure. Separate financial reporting for SMEs reduces comparability between the financial statements of SMEs and larger companies. Comparability is essential to those who invest across companies of all sizes. Creating differences in the financial reporting requirements of such companies hinders investors’ financial analysis and investment decision-making processes. [...] In the case of the EU, we therefore encourage all companies to adopt a single standard – IFRS. Should the European Commission decide to provide relief to SMEs in the EU, we urge the Commission to consider any relief from IFRS both cautiously and in limited circumstances, especially since some SMEs in the EU are public companies. If the Commission were to consider providing relief for SMEs, such relief should only be considered in the areas of disclosure requirements and effective dates of new accounting requirements.

Please click to access the following information on the CFA Institute's website:

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