ASB publishes Review of Narrative Reporting noting continuing challenges for companies
29 October 2009
The Accounting Standards Board (ASB) has today issued ‘Rising to the challenge’, the report of its review of the narrative reporting of 50 UK listed companies in 2008 and 2009.
The review focused 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 found 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.
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 said "When reporting principal risks, 66% 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. 32% of the sample did not disclose any non-financial KPIs, despite the Companies Act 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% of companies provided discussion of trends and factors that was relevant and forward looking
- it was unclear whether 52% of the sample specifically addressed the requirement to discuss contractual and other arrangements ... for 12% 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.
Narrative Reporting: ‘Do’s and don’ts for companies’
- 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.
- 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.
- 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.
- 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.
- Do explain why CSR is important to the business…don’t include information on employees, environment and social and community that is not important.
- 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.
- 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.
- 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’.
For more information see: http://www.frc.org.uk/asb/press/pub2148.html