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Still room for improvement in corporate reporting
01 November 2017
Corporate reports still need to have more detailed explanations and have better clarity, says the Financial Reporting Council.
While the quality of narrative reporting has improved among the large listed companies, the FRC still found too many of cases where there isn’t sufficient balance and where descriptions are too vague.
In its Annual Review of Corporate Reporting it said boiler-plate text still lingers, doing little to explain why certain assets were subject to significant risk of material change.
Another annoyance was a lack of explanation when there are changes to performance measures, such as when KPIs are changed but not the reasons for the changes or their impact.
The FRC said beyond basic compliance with the law and accounting standards there are nine characteristics of corporate reporting which it believes make a good annual report:
1 A Single Story
The narrative in the front end is consistent with the back end accounting information; significant points in the financial statements are explained in the narrative reports so that there are no surprises hidden in the accounts.
2 How the Money is Made
The strategic report gives a clear and balanced account, which includes an explanation of the company’s business model and the salient features of the company’s performance and position, good and bad.
3 What Worries the Board
The risks and uncertainties described in the strategic report are genuinely the principal risks and uncertainties that concern the Board. The descriptions are sufficiently specific that the reader can understand why they are important to the company. The report also describes the mitigating actions taken by the Board to manage the impact of its principal risks and uncertainties. The links to accounting estimates and judgements are clear.
Highlighted or adjusted figures, key performance indicators (KPIs) and non-GAAP measures referred to in the strategic report are clearly reconciled to the relevant amounts in the accounts and any adjustments are clearly explained, together with the reasons why they are being made.
5 Cut the Clutter
Important messages, polices and transactions are highlighted and supported with relevant context and are not obscured by immaterial detail. Cross-referencing and signposting is used effectively; repetition is avoided.
The language used is precise and explains complex accounting and reporting issues clearly, jargon and boiler-plate text are avoided.
Items are reported at an appropriate level of aggregation and tables of reconciliation are supported by, and consistent with, the accompanying narrative.
8 Explain Change
Significant changes from the prior period, whether matters of policy or presentation, are properly explained.
9 True & Fair
The spirit as well as the letter of accounting standards is followed. A true and fair view is a requirement of both UK and EU law and applies equally to accounts prepared in accordance with UK GAAP and IFRS.
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