IR Magazine - Room for improvement
Corporate reporting improving in quality but still lacks forward-looking information.
The UK Accounting Standards Board (ASB) has announced its review of narrative reporting in an attempt to assess the progress being made by companies on the issue.
The report seeks to ascertain to what extent companies are incorporating the recommendations from the operating and financial review (OFR) as part of their best practice. It also aims to show how well companies are meeting the requirements of the EU accounts modernization directive which asks companies to provide a business review in the director’s report in their 2006 report.
Persistent problem areas include an unwillingness to include sufficient forward looking information. However, this may change as the director liability provisions in the Companies Act 2006 may encourage firms to provide greater detail in the future. These are the UK’s new equivalent of the ‘safe harbour’ provisions already present in the UK.
The review concludes that ‘companies need to improve their descriptions of resources availed to the entity, in particulatr intangible items such as brand strength, corporate reputation and natural resources not reflected in the balance sheet.’ It also flags up the need for greater identification of Key Performance Indicators, both financial and non-financial.
Sallie Cooke Pilot, director of corporate reporting at Black Sun says, “with of without the legislation, company reporting is getting much better at telling the story. They’re not just looking at reporting as a box-ticking exercise.’ She advocates what she calls a ‘holistic’ approach which involves assessing strategies and their associated risks in addition to including the appropriate metrics for assessing performance. ‘People are looking for contextual information rather than forecasts.’ She also emphasizes the increasing need for contextual information: ‘I think the narrative is going to become so much more important as companies compete on a more global basis, because the numbers are getting so much more difficult to understand.’