Political and regulatory news

AIC proposes new-style annual reports

The Government has published proposals for a new reporting framework.

The annual report has traditionally been the main communication tool for companies to update shareholders on their progress and financial performance.  Yet over time annual reports have expanded in length and complexity to such an extent that their usefulness for many shareholders is now questionable.  In many cases reporting obligations have been added to piecemeal, creating disjointed disclosures.  Many shareholders complain of ‘boilerplate’ reporting and difficulties in extracting key messages as the accounts try to be ‘all things to all people’.

In response, the Government has published proposals for a new reporting framework.  In place of the full annual report it wants companies to distribute a shorter strategic report to shareholders along with the financial statements.  All the other information from the annual report would then be presented online with an option to provide links to standard policies and procedures published elsewhere.  The intention is that the strategic report would provide an overview of the company’s strategy, business model, performance and risks.  It could also be used as a stand-alone document replacing the summary financial statements which are currently prepared by some companies in lieu of the full annual report.  The intention is that it would meet a growing shift in demand for high-level strategy and governance information as opposed to historical financial figures.

It is questionable how effective this framework will be at improving the quality of reporting.  Where disclosures are made across three or more different locations, it could encourage repetition and create a fragmented structure which makes it harder, and more time-consuming, for shareholders to locate facts which are relevant to them.

The Government’s approach also leaves scope for further information to be moved online, most notably the financial statements, which are not seen as ‘critical’ information for most shareholders.

A better approach would involve a more focused strategic document, which would be the key deliverable to shareholders, and for all other disclosures, including the financial statements, to be accessible via a single page on the website.  It should then be possible to reduce the length of the main report to a third of the current annual report and to move at least two thirds of the material online.  Shareholders will then receive a useful snapshot of the company’s activities with access to further information if required.

This approach also fits well with the proposals for investment companies to produce a two-page Key Investor Information Document (see previous article).

Radical changes are needed to the reporting framework if they are to deliver significant and worthwhile improvements.  We are urging the Government to avoid the temptation for any ‘quick fixes’ and to implement a structure which secures the long-term delivery of high quality information to shareholders.

View Government proposals on narrative reporting

View AIC response

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Back to Issue 5 - 12 Dec 2011