The Accounting Standards Board has published a review of narrative reporting by a sample of 50 companies in the FTSE 100, 250 and small cap indices. This is accompanied by a report summarising the main findings.
Enhanced business review
The review looks at compliance with the enhanced business review content requirements in Section 417(5) of the Companies Act 2006. It highlights examples of effective communication and presentation but also flags areas that are leading to clutter in narrative reporting. The concern about clutter is related to the interest of the ASB's parent body, the Financial Reporting Council, in reducing complexity in company reporting.
The review also includes a table indicating which areas of the ASB’s reporting statement on the operating and financial review and narrative reporting best practice are relevant to particular areas of the business review.
Risk and corporate social responsibility
The ASB noted that risk and corporate social responsibility reporting contained the most clutter. Many companies included too many risks (eight companies listed 20 or more risks). Nine companies had a CSR section which was longer than their financial review and only 20% provided a convincing explanation of why CSR was important to the business.
The ASB warns that the “evolving plethora” of sustainability reporting requirements (e.g. under the Climate Change Act) will add further clutter to companies’ already lengthy annual reports. Companies should comment on CSR matters only to the extent that they impact long-term sustainability of the business and detailed explanations of sustainability issues would be better dealt with in a separate report.
Areas of weakness
The ASB found that the weakest areas of disclosures were:
- forward-looking trends and factors;
- non-financial KPIs;
- the requirement to discuss contractual and other arrangements; and
- the disclosure requirements relating to risk.
Do’s and don’ts for a better report
The ASB report includes a helpful list of do’s and don’ts for companies which want to improve their reporting, including recommendations that companies should:
- provide a context for principal risks and uncertainties but avoid including generic descriptions of risks that could easily be about another company;
- use tables to link principal risks to related actions to manage the risks;
- explain why CSR is important to the business but avoid including information on employees, environment and social and community that is not important; and
- provide a comprehensive explanation of their business models, incorporating a discussion of processes, distribution methods and structure.
The ASB’s review can be found at http://www.frc.org.uk/images/uploaded/documents/Full%20results%20of%20a%20Review%20of%20narrative%20reporting1.pdf. A report summarising the main findings, “Rising to the challenge”, can be found at http://www.frc.org.uk/images/uploaded/documents/Rising%20to%20the%20challenge%20October%202009.pdf.
