The pace of regulatory developments in financial reporting has accelerated significantly. Standard setters and regulators have transformed both accounting standards and the format of financial reporting, resulting in vast changes to not only how accounting is recorded, but also how financial results are reported. Proper handling of these accounting and reporting changes is a key factor in the effectiveness of a company’s external financial reporting function.
What has changed?
The reason regulators and standard setters have made the reporting changes is to better communicate financial results to consumers of the information. The changes have been significant, frequent and ever-evolving. Key changes include the following items, from multiple authoritative bodies.
- The SEC has recently passed several substantial rules and provided guidance related to many disclosure topics. These include direction on cybersecurity disclosures, a mandate to use Inline XBRL for periodic reporting, guidance on non-GAAP measures, and the inclusion of IFRS companies in the digital reporting requirement.
- The IASB and the FASB have overhauled many accounting standards and implemented new standards that require changes to the way transactions are recorded. In addition, both the IFRS Foundation and FASB have included updates to the digital financial reporting taxonomies in their processes of publishing new accounting standards – something that wasn’t even contemplated ten years ago.
- Starting in 2020, the European Transparency Directive will require digital reporting using a single electronic format. To fulfill this requirement, all issuers on European Union regulated markets will need to submit their annual IFRS consolidated financials using Inline XBRL, a digital format which will supersede the traditional paper-based format.
- And European regulators such as the European Banking Authority and the European Insurance and Occupational Pensions Authority have completely transformed the way financial information is reported to them. Registrants must now create financial reports using a structured data format, resulting in a more standardized and efficient way to communicate data to the regulator.
How do companies keep up with the changes?
In some companies, keeping up with the changes results in the formation of project teams that assess and implement the changes. In other companies, one or two individuals are charged with the entirety of the compliance task. Regardless of the internal structure, it requires persistence to assess, understand and properly manage the ever-changing regulatory environment.
For the digital reporting requirements, external financial reporting individuals must be aware of the importance of the tagged data due to the increasing use by analysts and investors. And filers should be knowledgeable about exactly what the tagged data they provide is communicating (i.e., the computer-readable tagged data should be prepared such that it properly communicates the same information as what is disclosed in the human-readable paper-based financials.)
Key tools to keep up-to-date on these changes include external seminars and webinars; publications on regulatory topics; hands-on training sessions; news alerts from regulators and standard setters; direct assistance from service providers and advisors; and inquiries of regulators about company-specific situations.
Navigating the changes
To navigate the changes in digital reporting and structured data, understanding the new requirements is a key factor, but properly executing the requirements is just as important. I have seen too many companies submit errors in their XBRL filings, of which they are unaware, due to not properly applying the new rules to their financial statements.
At Toppan Merrill we help companies overcome these challenges. We have the right people in the right places to do this exacting work the right way. Our unparalleled team of experts continually amazes me by providing companies with the tools and knowledge to understand and properly execute the complex regulatory requirements.
Effective external financial reporting consists of awareness, understanding and proper implementation of the new regulatory developments…and those in the future. Make sure you have the right resources to navigate the changes, the right way.