Footnote links improve financial statement usability

Always read the footnotes to financial statements. A majority of the truth of the company’s health is buried here; the numbers alone rarely tell the full story.

That advice comes from the CFA Institute, the international organization that educates the vast majority of portfolio managers and analysts. It is contained in their tip sheet for financial journalists and investors called Seven Habits For Financial Statement Analysis and Business News Reporting. (PDF 57KB, 6 pages)

In the guide, the institute’s authors explain how a professional financial analyst reads a company’s annual and quarterly reports and they urge investors and business journalists to do the same.

The truth, however, is that few individual investors and business journalists will follow the advice because it’s just too much work.

But there is one simple technique that companies can use that could vastly increase the number of people who will dip into their footnotes. And that is the practice of providing hypertext links from line items in the financial statements to their relevant footnotes.

An example from gases and engineering group Linde AG’s 2006 online Annual Report is shown below. By clicking on the hyperlinked “8” in the Notes column on the Sales line, investors can go directly to Note 8 in the footnotes on another page. This allows them to immediately obtain additional context on what amounts the company has included in its sales.

By clicking on 8, investors go to a new page where they can immediately see the note about the company’s Sales figures.

Since you cannot provide this functionality on paper, following this technique in your next online annual report might prompt more investors to go online to access your company’s information. And that, of course, will save your company money in lower print and mailing costs.

New window or same window?

There is some debate about whether to open the note links in the same browser window or in a new, smaller one. Opening notes in new windows can sometimes be problematic because users may lose track of the different windows on their screens.

However, that depends on how the links are coded, users’ experience and abilities, and on investors’ screen sizes and resolutions, which are getting bigger all the time.

In the example below from the Cadbury Schweppes 2006 Annual Report & Accounts the note window moves to the front of the user’s screen each time they click on a new note link.

By clicking on 35, a new smaller browser window opens in front of the financial statement. Users with large screens are able to view the financial statements and notes at the same time (see below).

The new window approach suits someone who is doing extensive research, like a new investor who is assessing a company for a possible investment. If they have a big monitor, they can see the note and the related financial statement at the same time, which speeds up their research and involves about half the clicking of going to a new page each time.

The other approach, sending people to the note on a new page and making them click “Back,” doesn’t work as well for this type of user because it disrupts their focus too much and they cannot view both items on a single screen.

Going to a new page in the same browser window works best for someone who only wants one or two notes, such as an analyst needing to quickly look up a specific fact and then leave the site.

A $50 additional cost, but only 10% do it

In the end, it doesn’t matter which approach you use because either one improves the usability of financial statements. What’s important is that investors are encouraged to access and read the notes to your company’s financial statements.

Targeted links to footnotes invite investors to dip into the footnotes when they otherwise might not, and it helps them develop a deeper understanding of your company’s performance and future results.

In all, it will take about 2 hours for a junior web designer to add contextual links to your online annual report’s financials, so we’re talking about an added cost of $50 on average.

Unfortunately, this practice is followed in the online annual reports of only 10% of the 530 large-cap companies in our global survey of investor relations websites.

That suggests that either companies don’t know about the value of hyperlinked notes, or they deliberately don’t want investors to have a better understanding of what is going on in their businesses.

But unless your company is one the 10% that do follow this simple technique to improve financial statement usability, it can be extremely difficult for investors to tell the difference.

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