How firms can improve financial reporting to attract investments

Financial reporting is one of the most critical business processes that companies must understand and appreciate.

It is the comprehensive review of monthly, quarterly, or yearly financial data to drive better business performance and results.

According to the Financial Reporting Council (FRC) of Nigeria, financial reports are expected to be credible, accurate, and reliable for investors to make informed decisions for investment based on proper valuation standards.

However, some financial experts have highlighted seven things firms should look for to improve their financial reports and attract investors within and outside Nigeria.

“There is a firm connection between valuation and global connectedness in business and credible valuation standards are critical in achieving the goal of the N1 trillion economy in 2030,” Gboyega Fatimilehin, founding partner of Diya Fatimilehin & Co., said.

He said proper asset valuation and accurate financial reporting are important for attracting investment both domestic and international into the Nigerian economy to ensure credibility of reporting.

“Consistent application of asset valuation standards help stakeholders to make better-informed decisions by providing a more transparent and reliable view of the company’s assets and their impact on the financial statement,” he added.

Here are the seven things

Transparency

Transparency signifies openness, clarity, and accountability. It refers to the absence of hidden information or secrets and a willingness to share relevant details.

Companies must ensure transparency in their financial statements. It spotlights clear and accurate information investors need to make the right decisions.

Wrong investment decisions will affect whatever asset they are taking from the financial reports, however, all items listed in the report must be transparent.

Adherence to valuation standards

A valuation standard is a set of guidelines or principles established to ensure consistency, transparency, and objectivity in the process of determining the fair value of an asset or liability.

Proper asset valuation and accurate financial reporting are important for attracting investments — both domestic and international — into the Nigerian economy to ensure the credibility of reporting.

It is also essential for preparing financial statements that truly represent the financial position and performance of a business. It affects key financial metrics such as asset values, depreciation expenses, profitability ratios, and so on.

Consistent application of asset valuation standards helps stakeholders to make better-informed decisions.

Understand the market structure

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Market structure defines the competitive landscape. By understanding the structure, companies can compare their financial performance against relevant benchmarks. It allows them to see if their profitability, margins, or growth rates are keeping pace with competitors in a concentrated market.

However, understanding the market structure helps investors understand the level of risk associated with the company. They can better interpret the financial health presented in the reports.

Risk management

Risk management is the process of identifying, analysing, and controlling potential negative events that could impact businesses. It is about proactively preparing for the unexpected to minimise harm and maximise success.

Having a frequent revaluation is vital to understanding and measuring the risks in the market. In the banking sector, bank regulators have to follow common standards by monitoring bank values regularly.

However, there is rapid change in the market so the risks around it must be properly understood.

Implement strong corporate governance policies

Corporate governance policies are essentially the rulebook that defines how a company is directed and controlled. They establish the framework for transparent, accountable, and ethical decision-making.

Implementing strong governance policies demonstrates a company’s commitment to transparency and accountability which can attract investors and improve access to capital.

Nigeria has taken steps toward stronger governance for the financial reporting of firms through the FRC and International Financial Reporting Standards.

Strong corporate governance policies are essential for creating a strong foundation for sustainable business success. However, a well-functioning governance framework promotes sound decision-making of investors by ensuring all relevant perspectives are considered.

Disclose fair values and tangible assets

Fair values represent the estimated price at which an asset or liability is bought or sold in the market. It provides an accurate picture of a company’s financial health, reflecting the current market value of its assets and liabilities.

The users of financial statements are concerned about certain disclosures like fair value and tangible assets in a report.

Tangible assets that are valued can be classified into property, plant, and equipment which include land, buildings, and vehicles that can be seen. If this has been chosen to be disclosed at fair value, it should be done frequently. It can also be classified as an investment property which can only be land, building or both owned for capital appreciation or rental purposes.

For the purpose of recording and disclosure, these fair values are necessary and it has to be done at the end of every reporting period.

Accuracy

Accuracy means that something is factual and it aligns with necessary guidelines. Valuers of financial statements need to be accurate by indicating the kind of method of input used to arrive at each item highlighted in the statement.

Valuers need to give enough information to their clients by explaining what category each item falls into. Their consent is attained to any reference or disclosure of that valuation in the report to make sure that it’s not presented in a misleading way.