The growing complexity of rules and standards is at risk of seriously limiting the usefulness of narrative reporting, warns a major new report from ACCA (the Association of Chartered Certified Accountants) and Deloitte.
Hitting the Notes, But What's the Tune? collates the opinions of 230 chief financial officers in listed companies across nine countries on the current challenges and future shape of narrative reporting in annual reports.
The report finds that the divergent needs of shareholders and regulators are leading to overly-complicated and compliance orientated reports.
"Companies are trying to serve two masters at the same time," explains Professor Isobel Sharp, Deloitte audit partner. "They want to inform shareholders of what is happening in the business. They need to satisfy regulators by meeting all the disclosure rules. To achieve succinctly and simultaneously both outcomes in the same report is a major challenge."
The report found that meeting legal and regulatory requirements was the most popular driver (83%) for narrative disclosures. Shareholders' needs came marginally (82%) behind this.
Seventy-one percent 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.
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. The IASB is due to issue guidance on narrative reporting, entitled "Management Commentary," at the end of October 2010.
"Even before the global financial crisis, questions were being raised about the validity of current corporate reporting. As our report finds, increasingly voluminous and complex regulatory requirements are seeing the story of business performance drowned out by a mountain of detail," says Helen Brand, ACCA's chief executive. "Today's reporting is meeting the data requirements but is it information? Our results suggest not. Preparers seek more discretion and less regulation."
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