The financial reporting of listed companies for 2012 shows there is still plenty of room for improvement. Information for investors on the actual state of affairs at companies is not always unambiguous, clear or accurate. Companies and their external auditors need to devote more attention than usual to the quality of their financial reporting for 2013. This is one of the conclusions of the report ‘In Balance 2013’ published by the AFM.
Board member Gerben Everts of the AFM: “The findings of our report show that companies are devoting more attention to the quality of their financial reporting. In order to win back confidence and meet the growing demand from investors, the supply side needs refinement. It is disappointing that the perception that improvement is needed is not yet shared. We have recently again seen various incidents with serious financial consequences. The importance of good and accurate financial information cannot and must not be underestimated. Moreover, it appears that the governance safeguards in place are still not sufficiently effective. The ability of supervisory directors and the external auditor to exercise their duties properly is a focus of our attention. This can and must improve.”
The report presents the collected annual findings of the thematic reviews conducted in 2013, describes the thematic reviews that will be conducted in 2014 and discusses the findings from our ongoing supervision. The collected findings and items of attention will be published in the early autumn each year from now on. This will allow sufficient time for them to be included in the financial reporting for the current financial year.
The AFM conducted four thematic reviews of the financial reporting for 2012 in 2013. These focused specifically on investments and loans with high risk, the cash flow statement and provisions. The AFM also investigated the status of integrated reporting in the Netherlands. The considerations identified from our normal supervision in 2013 concerned mainly impairments of assets, the frequent use of standard texts in disclosures and the explanation of the remuneration of directors. These last two items will be the subject of thematic reviews in 2014, in addition to a similar investigation of the paragraph on risk and the description of pensions.
Disclosure per theme:
Companies are making an effort to provide good information in their cash flow statements, but there is still plenty of room for improvement
Most companies strive to provide good information in their cash flow statements and the reconciliation with other elements in the financial statements, however, there is certainly room for improvement. The reporting requirements include options with respect to the classification of certain items. For the information to be comprehensible, it must be based on an accounting policy that reflects specific features of the company. In most cases, however, this principle is generic in nature (‘boilerplate language’) and contains little company-specific information. This makes it difficult for users to interpret the information in the cash flow statement.
Transparency regarding the credit risks arising from investments and accounts receivable by banks and insurers could be improved
The thematic review of the reporting of credit risks arising from investments and accounts receivables shows that banks and insurers provide extensive information on receivables and investments, but that transparency can be increased by introducing more structure (cohesion and reconciliation) in the disclosure. Important information, for example with respect to non-performing loans, must be more clearly stated.
The AFM also notes that banks disclose that they have restructured loans (forbearance). Apart from one positive exception, however, the banks still provide too little information on their procedure in this respect, and the impairments that arise as a result. In view of the current economic conditions, it is very important that more banks provide relevant information on restructured loans.
Disclosure of provisions have improved
In general, the disclosure requirements pursuant to IAS 37 have been properly applied. There is room for improvement regarding the disclosure of contingent liabilities, which is frequently still too perfunctory.
Many companies acknowledge the importance of integrated reporting
Listed companies have already made a start on non-financial reporting, but they still have some way to go before they will achieve truly integrated reporting. The quality of the reporting can be improved in terms of relevance, conciseness, accessibility and coherence. Companies need to find a format whereby they meet the statutory requirements (directors’ report, financial statements and other information), which traditionally are mostly financially oriented, and at the same time meet today’s demand for more relevant, cohesive and concise financial and non-financial information. We expect the importance of this to increase in future. With the critical eyes of investors upon them, companies would be well advised to approach this process in a transparent manner.
Thematic reviews in 2014: Remuneration of directors, quality and length of the disclosures, the risk paragraph and pensions
The disclosure of the remuneration of managers in key positions, including the remuneration of executive and supervisory directors, is an important and relevant source of information for decisions by users of financial reports. The AFM has devoted extensive attention to this issue in recent years. Nonetheless, in some cases the reporting on remuneration still does not meet the statutory requirements. In 2014, the AFM will therefore check all listed companies to determine whether they have reported remuneration correctly.
Internationally, the length and complexity of the disclosures in the financial statements is a subject receiving much attention. The International Accounting Standards Board published a 10-point plan in 2013 designed to increase the effectiveness of the disclosures. The AFM notes that the financial statements frequently still contain standard texts and that relevant information is not included in all cases. This is reason for the AFM to investigate the quality and length of the disclosures in 2014, also devoting attention to the most important accounting policies.
Other thematic reviews in 2014 will address the risk paragraph and the reporting of pensions. Very often, the risk paragraph is simply a list of all kinds of developments that could possibly occur. For investors, it would be far more interesting to understand the principal risks that have been identified. This could be achieved through the inclusion of a list of top-5 risks that are most likely to occur and which would have the greatest impact.
Pensions are a current topic in the light of the current economic conditions. In 2014, the AFM will investigate whether the changed reporting standard with respect to pension has been applied correctly.
The AFM is committed to promoting fair and transparent financial markets.
As an independent market conduct authority, we contribute to a sustainable financial system and prosperity in the Netherlands.