By Helen Brand, chief executive, ACCA
Read a company's annual report (here's a selection from McDonalds, AstraZeneca, Vodafone, and us as random examples) and you'll notice its front and back halves are almost entirely different documents; the back full of figures and accounts, the front narrative.
The back half presents the bald financial facts and figures, while the front half – the narrative report – is a business's opportunity to tell its own story in its own words, to provide extra non-financial information that will help stakeholders take decisions regarding the business.
At least this is what should happen. Yes, the financial statements spell out the financial facts, but there are growing problems with the usefulness of narrative reports: increasingly, voluminous and complex regulatory requirements are seeing the story of business performance drowned out by a mountain of detail.
We've been working with Deloitte to look at some of the problems experienced by report-preparers, and we've carried out a survey of some 230 chief financial officers and other preparers in listed companies in nine countries (Australia, China, Kenya, Malaysia, Singapore, Switzerland, the UAE, the UK, and the US).
The survey found:
- meeting legal and regulatory requirements was the most popular driver (83%) for narrative disclosures. Shareholders' needs came marginally behind this (82%). When asked to identify audiences of high importance, regulators were picked by 67% of interviewees while shareholders were picked by 88%
- 71% of respondents consider the top critical challenges in producing a narrative report to be the number of requirements placed on preparers, and the cost and time involved in preparing the report
- the interviewees see the five most important disclosures for shareholders to be: explanation of financial results and financial position (identified as of high importance by 87%); identifying the most important risks and their management (67%); an outline of future plans and prospects (64%); a description of the business model (60%); and a description of Key Performance Indicators (KPIs) (58%)
- in the aftermath of the global financial crisis, 78% of preparers consider that the discussion of risks and their management is of greater interest. (The failure of conventional reporting prior to the financial crisis to explain the risks inherent to business models of complex organisations is an area of concern for me)
- looking at improving future narrative reporting, 65% of interviewees say that they would like a reporting environment with more discretion and less regulation, 58% cite the inclusion of external auditor opinion, 57% believe there should be more emphasis on forward-looking information and 51% ask for IASB guidance.
Narrative reports certainly throw plenty of information at us to satisfy both regulators and report users but this is risking turning reports into tree-obscuring woods. There needs to be more flexibility for preparers to tell their business's story in a way they think would be useful to stakeholders. Regulation should underpin this, not get in the way.
The IASB is due to issue guidance on narrative reporting at the end of October. Greater clarity and simplicity would be welcomed by CFOs – not least because they believe it would benefit the report-users they serve.
Update: The full ACCA/Deloitte report