ASB outlines narrative reporting challenges
29 Oct 09
ASB has published a Review of Narrative Reporting noting continuing challenges for companies and suggesting “dos and don’ts” for those preparing reports and accounts
Rising to the challenge is the report of the ASB’s review of the narrative reporting of 50 UK listed companies in 2008 and 2009. The review focuses on:
• how companies are complying with the enhanced business review content requirements from the Companies Act 2006 (CA);
• effective communication and presentation of the required content; and
• areas that are leading to clutter in narrative reporting.
The review finds that the best reporters continue to evolve their narrative reporting and also did well across a number of content areas. Overall, most companies provided good content in relation to their:
• financial performance and position;
• financial key performance indicators (KPIs); and
• articulation of strategy.
The ASB is part of the Financial Reporting Council’s regulatory structure, and the FRC’s director of corporate reporting, Ian Wright, notes that providing the reader with a good understanding of the business is critical.
He says: "For many companies, although we understood what they sell, where they sell it and who they sell it to, generally they fell short of describing how all the pieces fit together – that is, the business model. Many of the strongest overall reports in the sample included a business model disclosure, which lead us to conclude that good business model disclosure can drive better disclosure in other areas."
However, some companies continue to struggle to meet some of the requirements, notably the communication of principal risks and non-financial KPIs.
Ian Mackintosh, chairman of the ASB, says: "When reporting principal risks, 66 per cent of the sample was technically compliant but in our view needed to make improvements to meet the spirit of the requirements. A number of companies resorted to simply providing descriptions of generic risks that could be easily cut-and-pasted into many other FTSE annual reports. Thirty-two percent of the sample did not disclose any non-financial KPIs, despite the CA requirement to do so where ‘necessary’ and ‘appropriate’."
In addition, the ASB found that companies are having difficulty with some of the new enhanced business review requirements:
* only 38 per cent of companies provided discussion of trends and factors that was relevant and forward looking
* it is unclear whether 52 per cent of the sample specifically addressed the requirement to discuss contractual and other arrangements ... for 12 per cent it was clear they did not.
The review found that risk reporting and CSR sections contained the most clutter, which distracted from important information in these sections.
Ian Mackintosh says: "Listing every conceivable risk just adds to clutter, one company had 33 risks and 8 companies had 20 or more. Some companies had risk sections that were 10 pages long."
Ian Wright adds: "Another common source of clutter relates to Corporate Social Responsibility (CSR) reporting. The annual report should principally address the specific needs of shareholders and lenders, although such reports may also be useful for other stakeholders. Many shareholders and lenders are increasingly interested in environmental and other social impacts, particularly where they have an impact on the long-term sustainability of the business. Thus companies should comment on CSR matters in their annual reports to the extent that they do impact long-term sustainability of the business. Detailed explanations of sustainability issues, in our view, are best dealt with in a separate report."
The ASB has also summarised some key points to assist companies in rising to the challenge of narrative reporting in a list of ‘Do’s and don’ts for companies’:
1. Do provide context for principal risks and uncertainties – are they increasing or decreasing…don’t simply include generic descriptions of risks that could easily be cut and pasted into another company’s report.
2. Do use tables to link principal risks to related actions to manage the risks…don’t shrink the risk content down to fit the table, instead expand the table to fit the content.
3. When articulating strategy, do ensure that you describe “what” your goals are and “how” you plan to achieve them…don’t make bland statements like “our plan is to grow” with no further explanation.
4. Do use your KPIs to demonstrate progress against stated objectives and strategies…don’t just tick the box by providing a KPI table that does not link to the rest of the narrative.
5. Do explain why CSR is important to the business…don’t include information on employees, environment and social and community that is not important.
6. Do include non-financial KPIs to explain how the key drivers of the business are monitored… don’t include peripheral measures such as number of employees just to tick a box.
7. Do provide a comprehensive explanation of your business model - how you make money incorporating discussion of processes, distribution methods and structure… don’t limit this to discussion of just products and services or resort to the use of undefined technical jargon.
8. Do support your discussion of relevant industry trends with external evidence… don’t be afraid to quantify the trends instead of relying on bland statements like “the outlook for our industry is good”.