Truth or dare in finance storyboard

Tom Ravlic
Rationalising the many reporting frameworks into one consistent narrative disclosure framework is the best thing for global capital markets, with Australian banks soon to be tested with half-year and annual reports otherwise bound to invite deep doubt around provisioning and expected credit losses.

Australian banks, and companies generally, are being reminded by ASIC about critical legal requirements they must keep in mind while they wrestle with the consequences of the coronavirus pandemic.

The pandemic has seen businesses asked to stop trading and people to stay at home, and has resulted in companies laying off staff. These are not the only aspects of the coronavirus pandemic that impact on individual businesses, but they are indicative of the pressures that businesses are under.

ASIC's reminder is timely as it relates to Corporations Act responsibilities but the article published on the corporate regulator's website over the past week doesn't address what a company may need to do in telling the story of the period in which it was forced to scale down or completely cease its operations due to a pandemic. This will matter to various stakeholders including banks  and other financial institutions or advisory firms that need to understand how the pandemic has affected a specific company.

This becomes the role of disclosures mandated by accounting standards and also voluntary narrative disclosures that have been pushed by a range of thought leaders across the globe, which includes Mervyn King, the man who has contributed to the debate on integrated reporting.

Integrated reporting is one of several different reporting frameworks that have sprung up like toadstools at the edge of a forest over the years as professionals such as accountants, investment analysts, company executives, shareholders and corporate regulators grappled with the fact that statutory financial statements did not tell a company's entire story.

Saying that financial statements don't tell a company's entire story sounds obvious but that is what advocates for expanded forms of reporting have been saying for years. The one thing for which they can be admired if nothing else is their persistence, consistency and occasional annoyance in this regard.

Financial statements were never meant to deal with every single aspect of a company's operations. They were always meant to measure and report financial activities in a manner that was agreed by either accounting professionals within their own associations or standard setting bodies at a specific point in time.

There are aspects of disclosure and presentation that have been refined over the years, but financial reporting has and always will have limitations, which is why stating the obvious is rather pointless.

Some will remember a period in the 1990s when it was deviant to account for goodwill in any way other than amortising it on a straight line basis over a period not exceeding 20 years. Does that reflect an economic reality of goodwill? No.

Was it an effective anti-avoidance measure because some companies were perceived to be window dressing their goodwill numbers so that the bottom line would be hit less with goodwill write downs in early years and greater expenses hitting the income statement later? Definitely.

The consensus in accounting terms at that point in time in Australia was that there needed to be a single method of amortising goodwill because the risk of accountants in companies or accounting firms drifting off the reservation in terms of proper application of principles was far too great.

Was it a mistake to restrict the accounting for goodwill to one method of amortisation? It depends on your perspective, but one this is for sure - if you regard it as a mistake then everybody would be making the same one.

We are seeing the same debates arise with analysts warning of thumping great expenses that may come as a result of expected credit losses.

The new rules will be truly tested in a climate where banks are faced with the potential of clients not being able to get back to business.

 Expect to see small business bleeding red because they are unable to return even if banks, government agencies and other entities have extended every possible assistance. What happens after this will depend on the specific circumstances of each entity.

The fate of an organisation like Virgin Australia will be faced by other entities that have had operations brought to a halt by government edicts introduced and enforced to minimise however possible the spread of a virus for which any sense of proper treatment or vaccine is some time off.

What we are yet to see in the current circumstances is a proper, more detailed debate on the nature of narrative disclosure that will be needed to explain the problems companies have faced.

Listed companies and other entities will need to explain this period in a clear and truthful tone. Shareholders and other stakeholders will need an unparalleled degree of frankness over several reporting periods.

Banks as consumers of information from various companies will also be looking for how businesses explain their current dilemmas.

Narrative disclosures will assist in getting an understanding about the steps a business is taking to get itself up from the mat.

Companies will need to decide whether the method they are using to report to the market on these developments is adequate.

There are a range of frameworks including integrating reporting they can choose to use as their basis for storytelling if they are uncomfortable with the way they are doing things at the present time.

It points to another challenge that global regulators, finance professionals, shareholders, investment analysts and other stakeholders will need to confront.

There will ultimately need to be a single set of narrative disclosure and reporting principles for use across the globe in the same manner as accounting standards. It is a nonsense to have multiple disclosure frameworks in an environment where global investment remains important and a common language in accounting has been agreed.

Rationalising the many frameworks to one consistent narrative disclosure framework is the best thing for global capital markets.

There is one sobering reality in all of this, however, that people tend to forget.

Accounting standards and company law prescribe the minimum required of companies.

The push to develop frameworks for disclosure over the years is not merely an acknowledgement of the benefit of non-financial reporting. It is also in its own way a condemnation of the failure of people in companies for not necessarily going beyond what was required by law in the first place.

Embracing the development of narrative frameworks as a good idea is also by definition a not-so-subtle admission that people want to be regulated rather than innovate themselves.