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Top Tips and Tricks for Disclosure Management

insightsoftware -
June 13, 2022

insightsoftware is the global provider of enterprise software solutions for the Office of the CFO to connect to & make sense of data in real time, driving financial intelligence across […]

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Disclosure management is the last mile in financial reporting. It starts with your company’s core financial statements, but disclosure management adds context, fills in critical details, and ensures that your organization is compliant with statutory reporting requirements.

As new regulations take effect and others appear on the horizon, changes to reporting frameworks like XBRL are implemented, making it increasingly difficult to keep up with the changing landscape surrounding financial disclosures. Government agencies are applying greater scrutiny than ever, so it’s critical to get reporting right. Follow these top tips and tricks to ensure that you issue disclosures quickly, efficiently, and above all, accurately.

1. Automate Your 409A Processes

When offering equity compensation such as stock options or grants to your employees, it’s critical that you pay close attention to IRS regulations, ensuring that you assign the right valuations and report those grants properly. Under US law, this is known as 409A valuation reporting.

The cost of getting your 409A valuations wrong can be significant, in terms of both monetary fines and penalties as well as reputational damage to your company.

US law requires that private companies generate a new 409A valuation at least every 12 months, or whenever anything occurs that could substantially impact the value of the company’s stock. Closing on a new round of investment, for example, or a pending merger, acquisition, or IPO could result in the need for a new 409A valuation report.

If you outsource the entire 409A process, the IRS grants you a “safe harbor” presumption. Even if you do it in-house, though, IRS rules stipulate that you must engage an external auditor to review your 409A valuations for accuracy.

There are several methods for establishing a company’s market value under 409A. The most common are the market valuation approach (also known as the OPM backsolve method), the income approach, and the asset approach. No matter which method you choose, you’ll need to gather certain information in advance to prepare for the process.

The meticulous process of collecting all that information can be especially burdensome. By automating your 409A valuations with industry-leading software, you can reduce the workload associated with the process, while increasing accuracy at the same time. By bringing the process in-house, you can be sure of the quality and correctness of the resulting 409A reports.

6 Key Considerations for your 409A Equity Valuation

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2. Avoid Common XBRL Errors

XBRL tagging is quickly becoming a standard requirement for financial reporting worldwide. In the US, it’s mandatory for publicly traded companies, and Europe has moved swiftly to adopt it as a requirement as well. In the UK, tax authorities are now demanding XBRL financial reports, even for privately held companies.

It’s all too common to introduce errors into your XBRL reports. Over one-third of errors identified by XBRL US, for example, arise from invalid member axis combinations. This happens when a member (such as a parent company or a non-controlling interest) is used in combination with an axis (such as a geography or a legal entity) that simply doesn’t go together. Given the number of axes and members in the US GAAP Taxonomy, there are numerous possibilities for incorrect combinations.

Another common problem arises from invalid negative values. This occurs when a concept reported as a negative value is expected to have a positive value. According to XBRL US, certain concepts should only have negative values in exceptional circumstances.

For example, the repurchase of common stock will always reduce shareholders’ equity. Consequently, the element TreasuryStockValueAcquiredCostMethod has a balance type of “debit” in the US GAAP taxonomy. When this element is used in a financial report without being negated, it results in a negative value error.

Other common XBRL errors occur when required values are missing, or when concepts in an XBRL document are tagged with incorrect dates in relation to the end date of the reporting period.

An XBRL validation tool is a great way to check for these errors. With the right disclosure management software, you can prevent them from happening in the first place.

3. Get Ready for ESG Reporting

ESG reporting is coming soon. ESG stands for “environmental, social and corporate governance.” Regulators, investors, and corporate partners around the world are increasingly demanding that organizations report this information on a regular basis.

Now is the time to prepare for ESG reporting, first by getting to know how the new requirements may apply in your circumstances. Different industries may be affected in various ways, and much of the pressure to adopt ESG is coming from large investors who control access to financial resources, rather than just government regulators. Learn who the stakeholders are in your industry and in your value chain. Find out what will be expected in the near future and in the longer term.

If ESG is indeed on the near horizon, you’ll want to start preparing for it now. Map out where the relevant data is throughout your organization, who is responsible for updating it, and how you might be able to automate the process of collecting, collating, and reporting on it in the future.

Certent Disclosure Management can help you prepare for ESG reporting because it captures real-time changes to your data and automatically updates key elements of your reports. That ensures your numbers are consistent across all reports, and fully up-to-date, reflecting the source data in your systems of record.

Disclosure management is complicated, and many organizations are still reliant on manual methods of collecting, collating, and formatting the information they need for these reports. If that is the case with your organization, streamlining and automating the process with Certent Disclosure Management can save you time and money while also increasing accuracy.

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Create efficiency, eliminate common sources of errors, and prepare for future developments in financial reporting and disclosures.