The UK Financial Reporting Council’s (FRC’s) Financial reporting Lab (Lab) has published an insight report "Towards Clear & Concise Reporting" that highlights progress made by companies towards producing more relevant and succinct annual reports and accounts, and provides practical ideas on how companies can make further progress.
The first part of the report looks at examples of what companies have done to aid clarity and conciseness including
- Thinking about communication channels for instance by targeting financial reports to match specific users’ needs e.g. moving breakdowns of sales and space data for retailers which are principally of interest to analysts outside of the annual report.
- Thinking about content – reporting on actions rather than just processes, focussing on material items within the annual report, reviewing the level of detail provided, removing standing information and placing it on company websites.
- Thinking about materiality, relevance and quality of disclosures
- Thinking about layout to present a more logical flow, reduced duplication and a more user friendly experience
Change programs are something that most of us have some experience of but in the second part of the report the Lab provides observations on the process of change reflecting the experiences of those who have undertaken a process of corporate reporting improvement. The Lab suggests a four step process – plan, manage, do and evaluate.
- Plan the change: build momentum, get leadership from the top of the organisation and decide on the scope.
- Manage the process: identify who will make the changes, set targets and get agreement from the board.
- Do what is needed: start with a blank piece of paper, ensure that changes in business and regulation are reflected and make sure that the auditors are included in discussions.
- Evaluate the process: debrief early, ask for feedback from investors and reflect how to make improvements continuous.
And importantly proving that this work is not just based on abstract thought, the Lab presents two case studies from companies that have managed the process of change and made significant progress towards clear and concise reporting:
- Prudential plc: Being a financial services organisation Prudential operates in a challenging compliance-based reporting sector. The Pru’s report in 2011 totalled nearly 500 pages but by 2013 this had been reduced by more than 20% despite additional disclosure requirements being imposed on the sector. In meeting the new strategic report requirements the company took the opportunity to reconfigure how they went about explaining their business model which is now used as the framework to discuss strategy and segmental performance.
- BP plc: At a time when FTSE100 company accounts increased in length on average by 13 pages, BP managed a 25 page reduction from the 303 pages of their 2012 report. The BP approach to providing clearer and more concise reporting was to focus on placement of information which was useful but not fundamental to understanding the performance and position of the company. The fact that BP is a dual listed company added complexity as their annual report is also their US filing document and subject to different regulation. BP involved UK and US legal teams at an early stage and this helped to focus what was produced. Information removed from the main body of the report was placed in an additional disclosures sections at the end and included more detailed information about the group and their upstream and downstream operations. The result is a more concise strategic report while maintaining the same level of information across the full report.
The report concludes with nine characteristics of good corporate reporting, originally set out by the UK Financial Reporting Review Panel in 2011 and 2012. The panel believes that a good set of report and accounts should
- Tell a single story – consistency between the narrative section and the financial statements;
- Disclose how money is made – clear explanation of business model;
- Discuss what worries the board – disclosed risks and uncertainties are those discussed at board meetings;
- Be consistent – highlighted, adjusted or non-GAAP key performance indicators are clearly reconciled to the financial statements;
- Cut clutter – important messages are highlighted and not obscured by immaterial detail;
- Use clear language – avoiding jargon and boiler-plate disclosures;
- Summarise – appropriate levels of aggregation are used;
- Explain change – significant changes from prior periods are properly explained; and
- Be true and fair – the spirit as well as the letter of regulation is followed.
As part of its contribution to the FRC’s theme of clear and concise reporting the Lab is pursuing a series of case studies and input will be sought through these case studies on approaches investors consider to be most effective. We believe that the work of the Lab is very important and CIMA's CEO Charles Tilley sits on the Lab Steering Group. We encourage companies interested in improving corporate reporting practices to get involved with the Lab’s work by contacting Financialreportinglab@frc.org.uk.