PracticeConsulting‘Cut the clutter’ from annual reports, regulator warns FDs

‘Cut the clutter’ from annual reports, regulator warns FDs

FRC to release guidance aimed at FDs who fill financial reports with unnecessary and trivial information

Finance directors will be asked to do their part to clear the clutter from
financial statements under planned guidance due to be released by the UK’s
reporting regulator.

The Financial Reporting Council (FRC) will release new guidance aimed at FDs
who it believes can inadvertently inflate financial reports with sometimes
trivial information.

The paper is part of the council’s ongoing agenda to sweep out unnecessary
clutter from annual reports, which can paint a confusing and complicated picture
of companies’ performance.

The move is an ironic one. Finance directors, who often blame excessive
regulation for the complexity of financial statements, will be asked to think
harder about what’s really necessary to include in financial reports.

The guidance, likely to be titled “Cutting Clutter”, will include a tip sheet
for use when compiling annual reports.

Reform to financial statement presentation has become a sideline issue in the
wake of the global crisis, with regulators fearing important information can be
lost among vast lists of disclosures.

Stories of FDs declining to throw trivial disclosures into financial
statements, when they should leave the decision to audit committees, spurred the
FRC into action. The council has also been told companies sometimes include
lengthy accounting policies for transactions which may be irrelevant for their
business type.

The FRC released a report – “Louder than words: Principles and actions for
making corporate reports less complex and more relevant” – in June, but received
a lacklustre response.
Thirty submissions came in, only one from a FTSE-100 company – BT. A similar
consultation on changes to corporate governance received 119 submissions.

Investors often complain annual reports are “typically poorly structured”,
according to a submission by Grant Thornton (GT).

“The com­plexity and volume of information in the annual report tends to
obscure key messages and management fails to tell the story because it does not
put financial information in the context of business strategy and targets to
measure implementation of that strategy,” Steve Maslin, head of external
professional affairs at GT, said in the submission.

The FRC first asked the ICAEW to produce its own anti-clutter tips but were
turned down. The institute publishes materiality guidance on what should be
included in financial statements, but would not consider added guidance on what
shouldn’t.

Seamus Gillen, policy director at the Institute of Chartered Secretaries,
said companies shouldn’t be “blasè or complacent” when compiling their annual
reports. “Occasionally one does see a lack of consistency, but that is something
one sees throughout the report. We are looking for a consistent narrative that
marries the front end and back end and is consistent,” he said.

In Our View

It’s been a long standing complaint from FDs that there is too much red tape
and this is making annual reports unwieldy. However, it seems the FRC believe
that it is the finance function themselves that might be contributing to the
complexity. Maybe FDs should examine their own behaviour before they criticise
others.

Further reading:

frc.org.uk

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