The future of narrative reporting

Thursday, October 13, 2011 | Posted by: Simon Lowe
Categories: FRC, Governance | Tags: governance, FRC, Corporate Governance, Simon Lowe, FTSE 350, Corporate Governance Review, financial reporting, BIS, annual reports, IIRC, Ben Langford, narrative reporting

Government plans to rationalise the structure, format and content of annual reports are aimed to improve clarity for investors.

The size of annual reports has risen by 5%, growing to 135 pages from 128 pages last year. They have become unwieldy documents, often full of boilerplate text and regulatory disclosures of little interest to investors and other stakeholders.

Increased regulatory interest has culminated in the recent report by the Department of Business, Innovation and Skills, The Future of Narrative Reporting. The recommendations include a Strategic Report and an Annual Director’s Statement and simplification of outdated disclosure.

The Strategic Report will provide shareholders with a concise description of the company’s business model, financial results, strategic direction and risks. Companies would have the discretion to decide the detailed content and format of this report. The format of the Annual Director’s Statement would be more prescriptive.

There is good practice out there already with the best companies using innovative ways of presenting key information. It is clear that they have taken the time to understand the key drivers of their business and the information which is of most use to investors.

The FRC is launching a Financial Reporting Lab in October 2011 to remove roadblocks to effective reporting and promote innovation. This should help to streamline reporting and share good practice.

Integrated reporting
The International Integrated Reporting Committee (IIRC) has also issued a recent consultation, “Towards Integrated Reporting – Communicating Value in the 21st Century”. This aims to forge a global consensus on a framework for reporting with an exposure draft due to be published in 2012.

With an increasingly global economy and the success of international accounting standards, the first steps towards harmonising narrative reporting should be welcomed. A two-year pilot programme is to commence shortly and it will be interesting to note how this proceeds.

We encourage all interested parties to respond to both the BIS and IIRC consultations before they close later this year.

Is this achievable?
Our challenge last year to reduce annual report length by 10% has fallen on deaf ears. Some were listening – 39 companies achieved this target with another 40 getting some way toward it. The majority, however, ploughed on, providing more information, increasing the average size to 135 pages, as shown in our table of FTSE 350 annual report length:

                               

	2011	2010	2009
Annual report	134.5	128.2	120.7
Narrative reporting	69.3	65.4	63.6
Financial statements	65.2	62.8	57.1

Source: 2011 Grant Thornton Corporate Governance Review

The government clearly hopes its proposals will lead to a fall in length of annual reports. We re-issue our challenge to companies to cut the length of their narrative reporting by 10%.

You might also find these posts useful:

* What’s new for FDs in 2011
* Corporate governance framework for European companies: what needs to be improved?
* Eight key changes in UK Corporate Governance Code