Financial Reporting Brief - December 2014
Clear and concise reporting – achievable?
Welcome to our Financial Reporting Brief for December, our opportunity to update you on recent developments with our featured article "Clear and concise reporting – achievable?" commenting on the corporate focus to improve the delivery of key messages to stakeholders and to declutter the annual report.
Clear and concise reporting – achievable?
Clutter in annual reports is a problem, obscuring relevant information and making it harder for users to identify the key messages in corporate reports. This has been a focus of much attention by the Financial Reporting Council (FRC) and other members of the standard-setting community, together with those in the corporate community who have applied themselves to developing and innovating new ways of communicating with their stakeholders and the market in general.
In June this year the FRC, through its Financial Reporting Lab, announced the Clear & Concise initiative, a programme of activities aimed at ensuring that annual reports provide relevant information for investors. The Clear & Concise initiative builds on the FRC’s previous work including “Cutting The Clutter”, with the FRC’s objective being to provide companies with an opportunity to rethink aspects of the annual report and innovate with more transparent ways of providing messages and insights about their activities to their stakeholders.
In August, the Lab published a report that examines what companies have done to aid clarity and conciseness, based on observations that the Lab made on how companies dealt with the significant changes in corporate reporting requirements introduced in 2013.
The Deloitte publication ‘Providing a Clear Steer’, based on a survey of 100 listed companies, presents key findings split between narrative reporting, corporate governance, disclosures and the financial statements.
A way forward
The annual report continues to be the cornerstone of communications between companies and their stakeholders. Many companies have taken steps to match communication channels to audiences and in that way to improve the clarity and conciseness of what is being presented. Companies have used effective signposting to the different information segments in the annual report to direct users to what is of particular significance to them. The use of infographics has also become more widespread.
The manner in which companies organise the content of the annual report has also moved on reflecting changes in regulation, business and reporting. There are many areas in which improvements have been made to annual reports. While some improvements are more particular to listed companies, there is much to be gained by other entities in reviewing the principles underlying these improvements as to how to enhance their own reports. Developments in recent times include:
- Reporting on actions rather than just process – with committees such as the audit committee and the risk committee, investors are interested in what a committee actually did to resolve issues rather than just a description of the process involved
- Focusing the level of sustainability reporting – some companies have focused the sustainability information on only those aspects which are material to their business or are mandated disclosure, and have placed more detailed information in a separate annual sustainability report or in an appendix to the annual report
- Removing standing information – some companies have removed standing information from the annual report improving the prominence of the remaining disclosure
- Changing the placement of five year financial summaries – moving the summaries from the annual report and placing them on the company’s website, facilitating direct access to investors of information useful in assessing trends
- Reducing the detail presented in the financial review – for example, splitting information leaving key information in the ‘front-end’ review with more detailed information in an additional information section within the annual report.
Other areas where the quality and transparency of information can be improved, and which have been a focus of corporates, include:
- Using materiality to review elements which are no longer relevant and removing elements which are no longer required – thereby improving the quality of accounting policy disclosures and removing immaterial notes to the financial statements
- Linkages between the 'front half' of the annual report and the financial statements, to provide a clear and comprehensive message regarding the manner in which a company's business plan is being executed, and the risks and uncertainties involved.
The majority of corporates look to the use of non-GAAP financial measures to highlight key performance statistics and related messages within their annual report which may not receive the same clarity under IFRS or other accounting frameworks.
The latest proposed guidance in this area came in September 2014 from the International Organisation of Security Commissions (IOSCO), following on from similar guidance from the IASB and numerous other concerned bodies, including IAASA. The IOSCO proposed statement on non-GAAP Financial Measures accepts that these measures can be useful in providing additional insight into an issuer’s financial performance, financial condition and cash flows. The proposed Statement goes on to note potential problems regarding inconsistent presentation, being inadequately defined or obscuring GAAP information. The proposed Statement also draws attention to further difficulties arising from lack of comparable definition. The proposed Statement provides specific expectations with regard to (a) defining the measures, (b) avoiding bias, (c) prominence of GAAP and non-GAAP measures, (d) reconciliation, (e) consistency of presentation, and (f) recurring items.
A clear steer
Following on from its review of annual reports for 2013, ‘Providing a Clear Steer’, Deloitte address how companies may wish to enhance their Annual Report for 2014. It considers this in a manner which reflects the differing appetites as to how far preparers want to go, at four different levels:
- The bare minimum – complying with new and existing requirements plus key concerns of regulators
- Upping your game – looking at further regulatory areas of focus including linkage
- Clearer communication – considering the qualitative characteristics of effective communication and ways to cut clutter, and
- Going the extra mile.
Those companies that go the extra mile adopt new requirements early, take on board non-mandatory guidance and provide additional information that is considered will improve a user’s understanding of the performance and strategy of the business.
The Deloitte publication goes into some detail as to how to go about making improvements at each of the four levels.
The Corporate Governance Code requires listed companies to confirm that the annual report, as a whole, is fair, balanced and understandable. While specific to listed companies, the underlying principles are applicable to all entities.
Companies must aim to achieve clear and concise reporting with a cohesive framework for the Annual Report, with accessible language and layout to enable the key messages to be clearly drawn out. Boards should focus on developing a more coherent and holistic annual report which clearly sets out how the business has performed during the year and the extent to which objectives have been met and risks to the business have been controlled and mitigated.
Those that deliver a clear and concise message to their stakeholders should be rewarded with continuing loyalty.
What’s new - monthly reporting pack
Irish/UK GAAP/GAAS and related developments
- FRED 56: Draft FRS 104 Interim Financial Reporting
- A new framework for Technical Actuarial Standards
- Lab reminders for the 2014 reporting season
IFRS and related developments
- 16th ESMA enforcement decisions report released
- ESMA sees room for improvement in EU endorsement process
- IPSASB issues finalised public sector conceptual framework
- Tentative agenda decisions of the IFRS Interpretations Committee
- IASB proposes amendments to IFRS 2 to clarify the classification and measurement of share-based payment transactions
Regulatory and related developments
- EU Directive on disclosure of non-financial and diversity information published
- Central Bank publishes Skilled Persons’ Reporting – Statement of Proposed Use
Financial Reporting Brief
- November 2014: Supervisory authorities - fundamental to consistent reporting
- Quarterly Financial Reporting Brief: October 2014
- October 2014: Group reporting – A way forward
- September 2014: The Financial Reporting Lab – An experiment that works?
- August 2014: Financial Instruments – Accounting we can all understand?
- July 2014: Standards – the current state of play
- Quarterly Financial Reporting Brief: July 2014
- June 2014: Revenue – getting the top line right
- May 2014: The quest for improved disclosure
- Quarterly Financial Reporting Brief: April 2014
- April 2014: Sustainable investment – accounting a concern?
- Financial Reporting Brief special edition (March 2014): FRS 103 Insurance Contracts
- March 2014 - Annual reports – Achieving their goal?
- February 2014 - Pensions – more than an accounting challenge?
- January 2014 - Quarterly edition of Financial Reporting Brief