The curious case of digital financial reporting

by: Denise Michel and Andreas Ong

Caseware’s Head of Development, Andreas Ong, and Training Manager, Denise Michel, recently joined the Digital Financial Reporting (DFR) session hosted by the Australian Accounting Standards Board (AASB) in the beautiful Shangri-La in Sydney. AASB’s first face-to-face meeting in Sydney brings together the practitioners, academics and preparers to discuss the way forward for DFR in Australia. Subject matter experts discussed the opportunities financial reporting could benefit from through digitalisation.

Here are the key takeaways from the session:

Professor Ann Tarca, an IASB board member, highlighted the benefits DFR offers based on her meetings with different jurisdictions internationally:

  • More information is becoming available to investors, including the upcoming sustainability-related financial information
  • It enables the investors to perform a comprehensive analysis of the company and helps them allocate their investment funds efficiently
  • Investors increasingly rely on digital information to make their decision
  • Over 90% of the global market has adopted DFR, including the US, EU, China, UK, India, Japan and South Korea.

The IASB has been developing the IFRS taxonomy for over fifteen years, starting with the accounting standards to include all disclosures and adding the commonly used taxonomy based on feedback. For example, the Operating Profit is not in the Accounting Standards but is critical for the financial report users. The taxonomy reflects what we have in the Accounting Standards but does not dictate what we need to disclose.

There will be a strong push for DFR in the future when the IFRS Sustainability-related Reporting Standards are released. The IASB also acknowledges the need to change the reporting standards for the digital world because DFR has different requirements than paper-based reporting standards.

Amir Ghandar FCA, Chartered Accountants Reporting and Assurance Leader, explores how the DFR can help address the challenges in corporate reporting, from preparing the report and how the user consumes the financial reporting. Based on the research performed by the Chartered Accountants, more than 70% of the retail and mum and dad investors need help understanding the financial reporting, with the top 13% finding it very difficult to understand. Investors need comprehensive information as they work through and assess investment opportunities. The lack of available information may hold them back from making investment decisions. More than 70% of the respondents believe that having access to customised digital financial reporting will improve their ability to access information and help them make better decisions. And finally, around 90% of the respondents strongly support the mandate to move corporate reporting to DFR.

The challenges in corporate reporting that we are trying to solve are:

  • Complexity. The financial report is complex due to different industry types, regulations and disclosure requirements
  • Diversity. The users of the financial report range from simple mum-and-dad investors to sophisticated fund managers
  • Conservative vs informative approach when choosing what information the company wants to disclose in the financial report
  • Accountability vs. hindsight. Companies and auditors are held accountable for the information in the financial report and how to deal with judgement and hindsight when the market requirement is changing rapidly.

A bucket full of Lego

Treating the financial report information like a bucket of Lego pieces is time-consuming, with most of the time spent searching for the needed part. Sorting the Lego pieces based on the colours and shapes allows for building the Lego in a shorter time. Similarly, organising data within the DFR will enable the following benefits:

  • Investors can build information dashboards to read a financial report
  • The reporting consistency allows companies and users to compare the data quickly
  • Regulatory and academics can focus on improving focus areas of financial reporting.
  • Access to investors globally
  • It opens up ways to tackle the complexity of estimates and judgements.
  • Better disclosures without the complexity.
  • Artificial intelligence, how can it consume the data?

Amir believes that DFR will open up more opportunities for Australia and looks forward to working with everyone on this.

GPT Group’s Journey

Rebekah Morgan, GPT Group Head of Finance, shares the GPT journey from the manual steps of preparing the financial statement to DFR. The GPT group wants to implement DFR beyond electronic lodgement to help address the challenges within the financial report preparation process. The current process, where data is organised in Excel and laid out in Word, has many challenges, including the need to manually verify every change from the system and reach Excel’s data processing limits.

The GPT group migrates the Excel calculation worksheets to a budgeting and forecasting tool, Anaplan and builds a robust calculation worksheet with data validations with the help of their in-house technical experts. It is then migrated to Workiva to tag the data in XBRL and generate the financial report they can send to the publisher to produce the glossy financial report. The tool guides the team in properly tagging the data and performing checks to ensure the numbers are valid. For example, the Operating Profit tag equals the Revenue – Expenses tag.

One benefit of DFR is dealing with investors’ queries. At the moment, investors are paying analysts to manually convert the data from PDF into an internal data lake before reviewing it. By providing the data in XBRL format, the data ingestion is automatic, allowing the investors more time to analyse the data. The global GPT group has access to digital financial reporting, allowing them to share data with investors worldwide. This practice opens up the opportunity for international investors to invest in GPT. Finally, the new IFRS sustainability reporting requirements also highlight the need to prepare the financial report digitally.

The most accessed document within ASIC

Doug Niven, ASIC Chief Accountant, stated that the most accessed document in the ASIC database is the financial report database. Since 2010, ASIC has been accepting voluntary DFR lodgement, and to date, they have not received any. They have also been sharing research and recommendations to the Australian government to mandate digital financial reporting since 2015 and are still waiting to see movement from their recommendations.

Doug agrees with the rest of the panel about the benefit the DFR will offer everyone, such as:

  • Using standardised tagging allows for comparing the data between companies in prior years.
  • It also can improve the readability of the financials, which is better than just the PDF.
  • It helps to maintain internal linkage consistency and enhance the quality of the data presented in the financial report.

One thing that ASIC has decided to adopt is the IFRS taxonomy provided by the IFRS Board. ASIC then adds supplemental taxonomy to meet the AASB reporting requirements, such as translating the IFRS into the Australian equivalent IFRS reporting standards. The ASIC taxonomy also supports hyperlinks, embedded images and videos to help the companies tell the investors a complete story. It allows the investor to compare the data against other companies quickly. This approach enables Australian companies to reduce the cost of capital by allowing investors comprehensive access to information that builds confidence in investing in Australian companies.

The chicken or the egg?

ASIC is currently facing a chicken and egg problem. Who needs to take the first step? Why must they invest in DFR when no one is producing one? The companies are asking why they should invest in generating the DFR that no one can digest, and at the same time, the software companies are asking why they should invest in building a solution that no one will use. The only way to remove this impasse is for the government to intervene and release a mandate.

ASIC will continue to work with the preparers, users and regulators to keep this moving, especially with the upcoming sustainability reporting standard.

Dr Keith Kendall, AASB Chair, believes implementing the DFR will benefit the community; however, there needs to be a clearer understanding of DFR contrary to the common belief that DFR is about digitally generating the financial report in PDF format. AASB will continue their effort to conduct research and rollout education campaigns advocating DFR to ensure better understanding and encourage everyone to start the journey. Also, since other countries have implemented DFR, there are a lot of lessons we can learn from early adopters when implementing DFR in Australia.

At Caseware, we are excited about the future of DFR in Australia and how it can help our customers compete globally. Leveraging the available data will help create better tools to assist customers towards their journey to DFR and allow them a broader vantage point as they make critical business decisions. Caseware will continue to work with content providers, Chartered Accountants, AASB, ASIC and, more importantly, our customers towards our shared DFR journey.

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