Financial Reporting

Jumping on the Disclosure Effectiveness Bandwagon: Is it All About Word Count or the Words That Count?

The growth and complexity of financial disclosures continues to expand worrying regulators that the current U.S. financial disclosure regime has lost its ability effectively communicate critical information.

In addition to their required annual and quarterly regulatory filings, companies are increasingly communicating with users through a variety of other channels, including company websites, earnings calls, and investor and analyst presentations.

The U.S. Securities and Exchange Commission (SEC) is currently reviewing disclosure requirements and reaching out to companies, investors, and other market participants for ideas about how to make disclosures more effective and less burdensome for companies to prepare and for investors to read.In addition to the SEC, both the FASB and the IASB continue to revisit their respective approaches to financial statements disclosures. While the SEC is looking for ways to update and modernize its disclosure requirements, the SEC Chair and other senior officials have recently stated that companies can do much to improve the focus, clarity and navigability of disclosures. Some companies have already accepted this call to action and have made efforts to enhance their disclosure documents ina variety of ways, including streamlining the data they report. Others may be in the process of considering the most effective ways to communicate with their stakeholders.

Word Counts Dip in 2014 for the Fortune 50?  

As the focus on disclosure effectiveness intensifies, word counts in certain recent financial disclosures have decreased. According to information obtained from LogixData, word counts for the Fortune 50 companies 10Ks (MD&A and footnotes sections) have decreased in 2014 compared to 2013 after growing in 2012. However, whether reduced word counts are an indication of disclosure improvement efforts – and are ultimately effective at communicating financials performance – remains to be seen.

For a description of how word counts in tables above have been calculated, please click here

Challenges to Improving Disclosure Effectiveness

Several factors add complexity or confusion to disclosure requirements and make it difficult for companies to enhance their disclosures. These obstacles were recently shared at a working dinner sponsored by EY and summarized in their whitepaper Disclosure Effectiveness, What Investors, Company Executives, and other Stakeholders are saying. One reason provided was due to Legal, competitive and compliance risk. Participants indicated that they include “defensive disclosures.” These types of disclosures overload the financials without communicating meaningful information.

Another factor cited was materiality. Many participants noted that it was very difficult to remove immaterial disclosures.  Where there may be opportunity to remove immaterial disclosures, companies feel that the additional effort outweighs the benefits because of the scrutiny from both their auditors and the SEC.  Participants welcomed additional guidance about the application of materiality in the context of disclosures.

FERF/EY Research Report on Disclosure Effectiveness Initiatives

Partnering with EY, FERF has initiated a new research report to better understand some of the initiatives that have taken place within organizations and to identify many of the benefits and impediments in moving forward with this important process. The report will identify recent trends and practices to help others with their disclosure effectiveness initiatives.

To help us with this critical research, please take 10-15 minutes to complete the survey. We value your input and appreciate your to help us better understand what, if any, actions you have taken or plan to take to improve your financial reports.