Simpler financial reporting 'step in right direction'

A GOVERNMENT MISSIVE on simplifying financial reports has been well received by industry heavyweights, but will it make a dent in hefty annual reports?

Deloitte audit partner Isobel Sharp welcomed the Department for Business, Innovation and Skills paper, saying it “strikes a good balance between flexible and formal reporting”.

The ICAEW’s Dr Nigel Sleigh-Johnson leapt on a proposal to split narrative reports into two halves, calling this a “sensible” idea that should help investors get a handle on a business’s prospects.

Simplifying financial reporting would provide greater clarity on how companies are run, the paper suggests, improving transparency and accountability for the benefit of investors.

BIS plans to do this by eliminating duplication and clarifying existing provisions, and has asked experts to flag up disclosures that are irrelevant and ripe for cutting.

These could include asset values, charitable donations and employee involvement.

Justification for reducing the disclosures ranges from changes in accounting standards to irrelevance to investors and aligning UK law with European Union directives.

Examining the format of financial reports, BIS rails against boilerplate disclosures and pushes for increased comparability of company data.

Splitting the report into two halves is aimed to balance the requirement for a concise business overview with some users’ need for more detailed information.

A strategic report containing a company overview, key financial data and other central information would stand alongside an annual directors’ statement containing more detailed narrative disclosures.

Tim Copnell, head of corporate governance at KPMG, questioned how content would be split between the halves, saying: “It still comes down to the man holding the pen”. The BIS initiative should help, he observed, but no legislation can offer complete protection for lazy reporting and excessive disclosure.

Dr Sleigh-Johnson warned the directors’ statement must not become a repository for yet more statutory disclosures, saying: “A statement that ends up being padded with generic text to satisfy regulatory concerns would be unwanted and would either [be] unread or could even distract users from the real story being told.”

Isobel Sharp was more critical, laying the burden of responsibility at the FRC’s door. She called on the regulator to scrutinise all of its provisions and supporting guidance, regardless of whether they are in the UK Corporate Governance Code, and “determine if and how they fit in to this new framework for the annual report”.

CIMA welcomed the overall thrust of the BIS paper, saying quality information and reporting are “major drivers of long-term success”.

However, it focused firmly upon the value of integrated reporting and refrained from delving deeply into BIS’s proposals. Aligning the strategic report with global integrated reporting initiatives could help “deliver a clear and concise explanation of what drives sustainable value creation in an organisation”, said head of corporate reporting Nick Topazio.

BDO’s James Roberts also placed the onus on the strategic report, saying transparency and the abolition of “arcane disclosures” would be welcome. However, BDO’s recent survey showed 80% of investors want more detail on business models and risk, meaning directors must think carefully about balancing user needs with simplification.

It looks like BIS is on the right track, but there is still a long way to go. Even if regulators, investors and standard setters reduce their reporting requirements, companies will have to sit down and red-pen their way through hundreds of pages of annual reports.

Corporate board member Roger Marshall said a “major effort” would be needed to reformat reports, making them shorter and more accessible. The process would add to directors’ burgeoning workloads, meaning significant pressure might be required to distract them from their day jobs.