In today’s complex business environment, transparency in a company's financial and non-financial reporting is paramount. Both financial and non-financial reports give stakeholders a holistic view of a company’s performance, risks, and opportunities. In this post, we explore the concept of unified disclosure, which aims to streamline these processes to enhance clarity, efficiency, and decision-making.
Why Report Financial and Non-Financial Data Together?
While financial reporting focuses on quantitative or monetary data and business performance, non-financial reporting allows for a more complete understanding of the broader business context.
Financial reporting provides investors, stakeholders, and regulatory bodies with an overview of the company’s financial health and business performance over a specific period. It includes key accounting statements such as the balance sheet, income statement, and cash flow statement.
This provides a clear assessment of a company's financial position, which is essential for external evaluation and investor analysis. However, the picture becomes more complete with non-financial reporting.
This describes the company's impact on its broader ecosystem. While it interests investors and financial analysts, it is directed primarily to a broader group, including customers, NGOs, and policymakers.
Key non-financial aspects include information on environmental impact, social responsibility, corporate governance, and other sustainability metrics. Transparency on these issues is increasingly important to stakeholders mindful of sustainability and ethical considerations.
Explaining the Factors that Drive Performance
Financial and non-financial data refer to the core numbers that companies must disclose, both externally and internally. While this is a crucial part of financial disclosure, the final reports must also include a narrative section, known in regulatory reporting as the Notes to the Financials (or footnotes), which tells the story behind the numbers.
For example, financial data could indicate that the cash balance went down 20% over time, and non-financial data may tell us that headcount increased. The report authors need to analyze company and market behavior to explain in the footnotes why these and other effects occurred.
The CFO’s team can use information from their Financial Planning and Analysis (FP&A), Business Intelligence, and ERP tools, as well as market analyses by specialist media organizations like Bloomberg and Thompson Reuters, to determine the narrative.
Benefits of Unified Reporting
- Enhanced Decision-Making: Unified disclosure allows internal and external stakeholders to make better-informed decisions. Investors, for instance, can assess a company’s potential for sustainable growth, risk exposure, and long-term value creation while tracking their effect on financial performance. Executives can also use this integrated data to fine-tune strategies, improve operational efficiencies, and align their business practices with corporate objectives.
- Increased Transparency and Trust: Reporting these datasets together enhances transparency and builds trust with investors, customers, and regulators. It shows that a company is committed to financial and environmental sustainability.
- Regulatory Compliance: There is a growing global emphasis on sustainability and corporate responsibility, and many jurisdictions are beginning to require more comprehensive reporting that includes non-financial metrics.
- Improved efficiency: Unified disclosure reduces the duplication of efforts in preparing separate reports and streamlines internal processes.
Companies that effectively report financial and non-financial data and properly analyze the implications often gain a competitive edge. They are typically seen as forward-thinking and capable of managing current assets and future challenges, particularly social and environmental issues. This can attract investors who are focused on long-term, sustainable returns.
Key Differences Between Financial and Non-Financial Reporting
The main difference between these two types of reports is that financial reporting is subject to strict standards, regulations, and formats, while the use of non-financial reporting standards is optional. Frameworks like The Global Reporting Initiative (GRI) and The Sustainability Accounting Standards Board (SASB) offer a means of adding structure to non-financial reporting, and companies are increasingly interested in adopting them.
The Global Reporting Initiative (GRI) provides a comprehensive set of standards for organizations to report on their environmental, social, and governance (ESG) initiatives. It is designed to help businesses communicate their impact on critical sustainability issues such as climate change, human rights, governance, and social well-being. The GRI is known for its flexibility, allowing organizations of any size or type to report on these issues.
The Sustainability Accounting Standards Board (SASB) provides a set of industry-specific standards that help companies disclose financially relevant sustainability information to investors, whereas the GRI guidelines are broader in scope. These guidelines help investors and companies assess how sustainability issues can affect a company’s long-term value creation.
Financial statements differ in that they must incorporate detailed monetary information such as the balance sheet, income statement, and cash flow statement.
The balance sheet provides an overview of a company’s assets, liabilities, and shareholders’ equity at a specific time and date. The income statement details the company’s revenues, expenses, net income, and earnings per share over a specific period. The cash flow statement highlights the cash flows of different business cycle components, providing insights into a company's liquidity and financial operations, including cash from operations, investing, and financing activities.
What Are the Established Financial Reporting Frameworks?
Annual reports are crucial for public companies. They provide a comprehensive overview of the company's performance over the past fiscal year.
The two prevalent standards for financial reporting are International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP).
- IFRS is a set of accounting standards developed by the International Accounting Standards Board (IASB). It provides a common language for financial reporting, making it easier to compare companies across different countries.
- GAAP is a set of accounting standards developed by the Financial Accounting Standards Board (FASB). It provides a framework for financial reporting in the United States, ensuring consistency and comparability among companies.
Stock market regulatory bodies—such as the Securities and Exchange Commission (SEC) in the US, SEDAR in Canada, HMRC in the UK, ACRA in Australia, and ESMA in Europe—generally require publicly traded companies to file annual and quarterly financial reports using GAAP.
Why Are Financial Statements So Rigidly Structured?
Since publicly traded companies aim to attract investors and raise capital, it is essential to abide by the rules laid down by the regulatory authorities in each market.
Adhering to these regulations is crucial because it ensures accuracy and transparency in how companies report their financial health and performance. This builds trust and gives them better prospects for attracting investors.
It is particularly helpful that market regulators differentiate their reporting requirements across different industries so that banking and insurance investors, for example, know that the economic complexities of their verticals have been addressed.
Best Practices for Unified Reporting
Failure to comply with stock market regulations can have severe financial and legal implications, potentially impacting a company’s reputation, growth, and survival. Some basic rules for sharing information in this arena include:
Communication and Analysis: Governments require companies to communicate their financial results clearly and concisely. Plain language in a company's financial reporting helps stakeholders understand its financial results and performance. Companies should also provide analysis and insights to help stakeholders understand the implications of the organization’s financial performance.
Accurate and Timely Reporting: Companies should ensure their reports are accurate, complete, and timely. This helps build trust with stakeholders and ensures compliance with regulatory requirements.
Transparency and Disclosure: Companies should provide detailed disclosures about their operations and financial position. This helps stakeholders make informed decisions and evaluate the company’s financial health.
Data Quality and Integrity: Errors or biases can have far-reaching effects on companies’ performance indicators, directly influencing the impression made on investors and analysts. Companies must ensure that their data is reliable and correctly registered.
Practical Aspects of Unified Disclosure
Integrating two traditionally separate reporting systems poses significant technical challenges, such as the need for comprehensive data systems that handle both types of data efficiently. The diversity of reporting frameworks and the lack of standardization on the non-financial side can complicate this integration process.
In this context, companies can ensure the accuracy and reliability of their information by implementing data management systems that automate the collection, validation, and analysis of such diverse data types.
Thankfully, software tools are available to integrate financial and non-financial reporting. These tools allow real-time processing and analytics while also delivering enhanced usability.
The Future of Disclosure and Reporting
As the market and its authorities come to demand ever more stringent business governance criteria, companies will be under increasing pressure to invest in cost-efficient means of achieving those goals.
This trend will extend to companies’ reporting capabilities, with demand for greater automation, real-time disclosures, data-driven decision-making, and the ability to incorporate additional data sources, both internal and external.
Today’s solutions are laying the groundwork for this evolution, emphasizing enhanced accuracy and improved transparency.
Join the Unified Disclosure Trendsetters!
There is a significant trend among Fortune 500 companies to integrate their financial and non-financial reporting. More and more companies are learning to highlight how environmental, social, and governance (ESG) efforts contribute to their financial performance and how integrated reporting can provide a comprehensive view of their ongoing business.
You, too, can streamline the integration of these reports using Fluence Collaborative Disclosure. This cloud-based solution leverages the Microsoft Office 365 user interface to automatically log changes in your company’s performance data.
The system pulls data from all relevant sources, compiling reports in compliance with internal and external reporting parameters. It is compatible with data management systems used by most companies, so request a demo today to learn how easy it is to migrate to Fluence Collaborative Disclosure.
