In a globalised and connected world, financial capital flows can move across continents in search of opportunities to generate profit for investors.
In addition, as more organisations across the world embrace the global business language for financial reporting, known as IFRS (International Financial Reporting Standards), investors can gain insight into an organisation’s financial performance and position.
Therefore, organisations should aim to approach financial reporting from the lens of investors to build trust and attract financial capital. Investors should find financial statements relevant and useful for decision-making. Financial statements should meet the information needs of investors by addressing the following.
Liquidity disclosures are fundamental for investors. While an organisation might be reporting profits in the income statement, liquidity challenges could affect the ability of the organisation to meet its day-to-day cash obligations and make payments to investors.
Organisations should provide information on off-balance sheet transactions such as off-balance sheet financing and supply financing arrangements not on the balance sheet. These arrangements could also impact the organisation’s financial ratios.
Information on debtor provisions and credit risk on financial assets is another critical component investors find particularly useful in financial statements. Investors want to understand the judgments applied and the impact on the organisation’s cash flows.
Investors would also seek information on borrowing covenants, the terms and how the financial ratios are determined. Organisations should ensure alternative performance measures disclosed include information on their appropriateness, relevance, and deviations from previous years.
Investors are also eager to get information on an organisation’s view of the future. Organisations should provide information on the future scenarios they are considering, the variables and judgement in play and the consequences of decisions. These are some of the information investors consider important.
Investors want clarity, honesty, and transparency together with prompt access to information. Organisations should consider the viewpoint of investors when preparing their financial statements.