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Better Communication in Financial Markets: Sharing Perspectives

 04 April 2017


Recently the IFRS Foundation and the CFA Institute hosted a joint event for investors entitled Better Communication in Financial Markets: Sharing Perspectives, at the Shard in London.

In this article, freelance journalist Adam Jones captures the highlights of the wide-ranging discussion, which covered communication in financial markets and areas where improvements in IFRS Standards, both in terms of presentation of financial statements and better connection to different strands of information, can be mutually beneficial to investors and companies.


By Adam Jones

Since the IFRS Foundation and CFA Institute last hosted a joint evening event for investors, early in 2016, the world has witnessed a series of remarkable occurrences. Brexit, the election of Donald Trump and the continued US bull market were just three of them—all accompanied by the relentless onward march of technology.

Those turbulent months provided a fascinating backdrop for the IFRS Foundation/CFA Institute debate on the 34th floor of London’s Shard tower, held just hours after UK Prime Minister Theresa May served the European Union with divorce papers in the form of the official Article 50 notice letter.

Presentation of financial statements

The discussion on communication in capital markets was led by a panel comprised of: Helena Morrissey, Investment Association chair; Russ Houlden, United Utilities chief financial officer; Gary Baker, managing director of CFA Institute in EMEA; Hans Hoogervorst, chairman of the International Accounting Standards Board; and economist Lena Komileva.

Part of the impetus for the debate was supplied by the IASB’s embryonic plan to tidy up the way in which financial statements are presented by companies that use IFRS Standards.

The standard-setter feels that these statements are not always clear enough, with valuable information drowned out by tick-box disclosures and a profusion of alternative performance measures that can make it difficult to compare one listed business with another.

Over the coming years, its reforms could extend to reorganising the way that income statements, balance sheets and cash flow statements are laid out, while also potentially addressing non-financial information that falls into the category of environmental, social and governance (ESG).

The position of the IASB

During the investor evening, attended by more than 100 people, Mr Hoogervorst gave an insight into the IASB’s developing thinking on financial communication. He made it clear that he did not want to go so far as to get rid of alternative performance measures, also known as non-GAAP measures.

Such a crackdown would have been resisted fiercely by companies, which tend to view non-GAAP numbers as important tools for explaining their underlying performance, which can be difficult to communicate using statutory metrics.

However, Mr Hoogervorst pointed out that IFRS Standards don’t currently standardise much in the income statement outside the headline measures of revenue and profit or loss—a gap that leaves room for differing understandings of common measures such as earnings before interest and tax, or EBIT.

"We should definitely have a go at defining EBIT," he told the audience at the Shard, before outlining how even this seemingly simple task could be complicated by the fact that interest could be calculated in different ways. "Nothing is simple in accounting," he admitted.

The rest of the evening, held under Chatham House rules, provided plenty of evidence to back up this last observation, revealing that the broader question of communication in capital markets is riven with hidden complexities.


The challenges in financial communication

Who exactly is the target audience for financial statements, for one thing? It is not possible to say that they are merely aimed at investors—and even if that were true, investors are not a homogenous group.

For instance, one participant in the debate highlighted the communication difficulties created for companies by the rise of passive funds that mechanically buy into an index rather than selecting individual stocks.

Another participant admitted that they and other active investors were a "demanding lot" who wanted full disclosure from companies but also concision, standardised metrics but no boiler plate. "In lots of ways we are pretty much asking for the impossible."

Another investor expressed frustration with how difficult it can be to figure out how non-GAAP figures were assembled and called for a statement of principles that would nudge some companies into being more transparent about their non-GAAP workings.

There was also a desire among audience members to improve the way that financial data is electronically tagged to allow it to be "sliced and diced" automatically—albeit with some reservations about how much the process of copying across data can be automated reliably.

Time constraints meant that there was little opportunity to discuss some other digital issues, such as how companies might exploit advances in data visualisation techniques and whether social media will ever become a meaningful channel for communication with markets.

Like the Brexit process that began in earnest earlier in the day, the IASB’s latest reform push is still at an early stage—with the prospect of a great deal of friction ahead.

Yet surveys of the CFA Institute’s membership suggest that there is a need to improve the presentation of financial statements to investors and better connect all the different strands of information released by companies, says Gary Baker.

"Much has been achieved in terms of the standardisation of reporting over the past 20 years but there is more work to do in terms of enhancements for the end users", he concludes.


Adam Jones is a former Financial Times accountancy correspondent and senior companies reporter.