Article

Not for profits: Turn your financial statements into an effective communication tool.

Whether you want to communicate your organisation’s purpose and objectives, or to attract new sources of funding, your annual financial statements are a powerful tool for telling your story, but all too often the opportunity for making an impact is lost.

The drive for greater transparency has created innovation in reporting; successful New Zealand Not for Profits are part of a global trend of finding new ways to better tell their stories. These organisations don’t see telling their story as a compliance exercise, but as an opportunity to connect with their stakeholders.

The increasing challenges that the NFP sector faces has created an undeniable gap between “winners and losers” in the struggle for revenue as funders demand more (and better) outcomes for less.

What’s more - as more disclosure requirements are added to financial statements, there is a reluctance to deviate from well-established practices leading to repetition year on year, but financial statements don’t need to be stale documents created only for compliance. When the focus is shifted to the financial statements being a communication tool, many organisations have found they enhance the effectiveness of telling their story.

The Building and Construction Industry Training Organisation’s 2017 annual report is a best practice example of effective use of a financial statement. It’s set out in a clear and concise format, and as a standalone document, the financial statement tells the same story as the rest of the report which is what an organisation should be aiming for. 

Here are four techniques NFPs can use to communicate in an engaging way while still complying with standards and regulations; for more in depth insights download our full report, Telling your story: Making your financial statements an effective communication tool.

1 Comply but communicate

Your financial statements are just one part of your communications with your stakeholders. Depending on jurisdiction requirements, annual reports typically include your financial statements, a management commentary and information about governance, strategy, and operational activity (often including corporate and social responsibility).

There is also a growing trend toward integrated reporting, which explains to investors how an organisation creates value over time. In a nutshell, this method of reporting demonstrates the links between an organisations strategy, governance and business model. In a world where transparency along with business sustainability are becoming more and more important, integrated reporting offers a powerful solution. 

2 Omit the immaterial 

Make effective use of materiality to enhance the clarity and conciseness of your financial statements. The concept of materiality is used throughout financial reporting and auditing. Put simply, information is material if it could influence the decisions made by users which are based on your financial statements. Using materiality when deciding how to account for transactions is familiar. For example, some organisations use a ‘capitalisation threshold’ below which purchase of property, plant and equipment is expensed immediately. But materiality also acts as a ‘filter’ for deciding what non-financial information to disclose – and what to omit. 

3 Re-think the notes 

The disclosure (or notes) will be the largest section of your financial statements. As such, they can have the greatest impact on the effectiveness of your financial statements as a communication tool. Many organisations have been experimenting with the traditional way of organising the notes to better tell their story and emphasise the most important information. Notes can be combined in different ways to achieve a more effective communication outcome. For example, you can combine a note that sub-analyses a balance sheet line item, information about the accounting policy and any critical estimates and judgements affecting that item. While traditional approaches to notes have their merit (and they are required by the External Reporting Board), re-ordering notes can help communicate information in a more powerful way. Re-ordering can be carried out by:

  • grouping notes into categories that cover related areas
  • placing the most critical information more prominently
  • a combination of both.

4 Prioritise the policies 

The financial statements should disclose your significant accounting policies. Your disclosures should be relevant, specific to your organisation and explain how you apply your policies. The disclosure of significant accounting policies is often the longest note in the financial statement. Done well, it helps your investors and other stakeholders to properly understand your financial statements. Done badly, it contributes to clutter without adding value. You should ask whether your accounting policy disclosures:

  • cover the transactions and balances that are significant to your organisation?
  • remain relevant or need updating?
  • are specific to your organisation?
  • are positioned in the financial statements in a way that best meets your users’ needs?
  • capture your key judgements in applying your policies and your major source of estimation uncertainty?

Financial statements give the opportunity to provide insight into your organisation through management’s eyes. Language should be kept simple as some areas of financial statements can prove to be difficult for non-experts to follow and understand. Using plain English will ensure the readers interpretation and understanding of the financial statements.

These four practices are interdependent and can be used to create clear and compelling documents. Each is a ‘tool’ that should be used to a greater or lesser extent to tell the story of your organisation depending on its circumstances.