Comment: Insights on How Decision Context Influences Investor Use of Financial Statements


The European Financial Reporting Advisory Group
(EFRAG), in collaboration with the Institute of
Chartered Accountants of Scotland (ICAS), has
recently issued a report containing some thought-
provoking insights on how the context of an
investor’s decision – i.e. valuation versus
management stewardship assessment – influences
the priority assigned to and use of financial
statements. The conclusions of the study are based
on inferences made from a sample of 81
institutional investors and analysts reviewing a
hypothetical European manufacturing firm’s
financial statements. The results show that the
context of an investor’s decision influences the
relative importance which investors attach to the
primary financial statements (income statement and
balance sheet) and to the line items within these

The EFRAG-ICAS study is timely given the general
acknowledgement that financial statement
information is the lifeblood of the capital markets,
and that it is an integral input into the analysis of
performance, risk and future prospects of reporting
companies by investors. Indeed, the accounting
conceptual framework recognises investors as the
primary users of financial statements information.
That said, participants involved in the formulation
of requirements for, supply and quality assurance
of financial information (i.e. accounting standard
setters, auditors, securities regulators and CFOs)
often encounter a diversity of investor articulated
preferences; this creates a puzzle which requires
evidence to help substantiate the specific
application of financial statements by different
capital market participants.

Another factor which increases the relevance of the
general line of enquiry undertaken by the EFRAG-
ICAS study is that there are several ongoing trends
within the corporate reporting landscape that have
challenged the primacy of mandated financial
statement information in its relevance as an input
for valuation and performance assessment
purposes. These include the proliferation of
alternative performance measures – also described
as non-GAAP measures – as well as the increase
in the weight being assigned by investors to other
non-financial information, such as Corporate Social
Responsibility Reporting. These developments
have increased the need for an enhanced
understanding of specific application of both
financial and non-financial information.

The EFRAG-ICAS study conclusions were
predicated on findings related to questions aimed
at unpacking what influences investors’ judgements
on, and preference for, financial reporting
How does the purpose of acquiring financial
accounting information (valuation or stewardship),
affect judgements on the relevance of such
Does the use of accounting information in
compensation contracts affect assessments of the
representational faithfulness of financial accounting
Do investors consider information presented in the
income statement and statement of financial
position to be equally relevant and faithfully
represented for the purposes of valuation and
Does the information evaluation objective influence
the importance of financial reporting information
relative to other information sources?
Does the investor’s assessment of corporate
governance mechanisms influence their
judgements of the usefulness of financial reporting
information and, if so, how?

The report highlights three specific conclusions
which have implications for accounting policy
makers. Firstly, the research finds that the
information objective of financial statement users
clearly matters for the design of financial
accounting standards. When investors have the
objective of assessing managerial performance,
they focus on information which reflects
managerial effort and tend to discard information
that may be relevant for the value of a firm but is
beyond the control of current management, such
as valuation gains and losses on financial
instruments or changes in pension liabilities due to
macro-economic changes. This implies that
standard setters need to make explicit statements
about potentially conflicting information objectives.
One size does not fit all and differing objectives
appear to require different measurement
Second, professional investors focus heavily on the
income statement when making both valuation and
stewardship decisions. They have strong
reservations about the representational faithfulness
of bottom line figures being negatively affected by
managerial estimates and judgments, triggered by
re-valuations that relate to balance sheet line
Third, the finding that investors view the corporate
governance of a firm as being highly influential on
the representational faithfulness of financial
reporting information. Hence, enhancing corporate
governance ought to be considered when
designing accounting standards to ensure a
mutually complementary relationship between the
corporate governance and quality of financial
reporting information.

Taking these three conclusions into account, the
study certainly illuminates on the questions of
application which it set out to resolve, and it
makes a useful contribution to the mosaic of
existing knowledge therein. It should also enrich
the ongoing accounting standard setting
considerations and debates within the conceptual
framework around the objectives of financial
statements, and a suitable measurement
The spectrum of investor perspectives on different
financial statement elements and on the priority of
financial statements information, cited throughout,
are quite insightful. The paper also includes
interesting findings around non-GAAP measures
and notes that the general focus on the non-GAAP
measure EBITDA, combined with concerns about
its lack of standardisation and comparability, calls
for the development of a standardised set of
performance measures for the income statement.

There are, however, questions on how far to
generalise the conclusions which have been
drawn. These questions arise due to the following
parameters of the study: the focus on sector
specific financial statements, such as
manufacturing, and the focus on evaluating
investor perspectives based mainly on the balance
sheet and income statement. There is scope to
extend the insights presented in the paper through
an approach which explicitly tests, and thereafter
draws conclusions from investor perspectives on
the Other Comprehensive Income (OCI).
Overall, this is a timely and thought provoking
study on factors that influence investors’
perspectives on and application of financial
statement information. However, there is likely a
need to further extend the study with a purpose of
providing a comprehensive stakeholder
understanding of investors’ financial reporting
information preferences across different sectors
and across all the main financial statements. Such
an extended study could help guide accounting
standard setters and would be particularly useful
for the International Accounting Standard Board
(IASB) considerations for enhancing its
performance reporting requirements.


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