The future of corporate reporting has been discussed for a number of years, but any real change has been slow. This month the Financial Reporting Council (FRC) has published a discussion paper ‘A matter of principles: The future of corporate reporting’ - taking a fresh look at how corporate reporting might develop.
The FRC notes that both regulation and external assurance is primarily directed at the annual report of a company, substantially ignoring the other communications it publishes. This results in the annual report being the default location for an expanding list of requirements, uncertainty about the intended audience, and less accessible and understandable communication.
What do stakeholders want?
The paper emphasises the need for a broader debate and discussion: the purpose is to stimulate a conversation with stakeholders on what they think the future of corporate reporting should look like, in order to take this forward.
To start this conversation, the FRC has looked at the current corporate reporting structure and set out its view of the current challenges it creates and suggestions for how these could be addressed. These are not concrete proposals, but provide a framework for stakeholders to debate and to consider whether:
- The paper is highlighting the key problems to be addressed, and if there are others
- They agree that these suggestions would help address them
- They have any other solution suggestions.
What does the paper suggest?
The paper sets out an over-arching set of principles for effective communication, how they could be applied, and how technology could be better used to facilitate such communication.
The set of principles addresses the entire system of corporate reporting (accessibility, connectivity, consistency, and transparency), the individual reports within the system (e.g. fair, balanced and understandable, and true and fair) and how the content of each report should be communicated.
The FRC suggests that, as the annual report contains information provided for a number of different purposes, this should be split up into a network of reports which would also contain other forms of company communication (e.g. investor presentations), each with its own objective and intended audience, but prepared using the same set of principles. Setting the objective of each report is key to focussing its content, ensuring users receive the information they need in a concise and accessible way.
The core reports in the proposed report network would be:
- Business report: Accessible to all and allows anyone to understand the business (similar to the current strategic report)
- Financial statements: Primary financial statements and notes
- Public interest report: Focussed on how the business interacts with the environment in which it operates and the stakeholders it relies on and affects.
The suggestions are broad and diverse, covering a range of proposals which could be developed together or on a piecemeal basis, while working towards the central goal of more effective communication. While this discussion is intended to start a long term project, many proposals could be applied within the current regulatory framework to improve the existing corporate reporting, even within the framework of an annual report and accounts.
But regulations don’t permit us to split up the annual report?
In their current form, corporate reporting regulations would not permit the deconstruction of the annual report. However, the principles and certain elements of the paper could be adopted now, such as setting clear objectives and attributes for each section of the annual report, thereby rationalising content, reducing duplication and providing clearer communication.
Would this apply to all companies?
Small companies are unlikely to need the external reporting envisaged in the paper, but the FRC suggests the business report would be prepared by medium and large companies whilst, initially, the public interest report would be required only for Public Interest Entities (PIEs).
Have your say on the proposals
Comments on ‘A matter of principles: The future of corporate reporting' are invited by 5 February 2021 and should be sent to [email protected] or using the online form.