Tim Copnell looks at the new ‘narrative reporting’ regulations and believes that while opportunities have been missed to enhance Annual Reports, it’s not too late for companies to demonstrate what good looks like.
After three years in the making, the new ‘narrative reporting’ regulations, The Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013, finally come into force for 30 September 2013 year ends.
The Department for Business, Innovation and Skills (“BIS”) aired some interesting and radical proposals during the consultation phase, proposing a “simpler framework for narrative reporting that would reduce the burden on companies that are currently producing large, complex reports that lie unread by investors.” Unfortunately, the new Regulations fall a long way short of achieving that goal. As companies report for the first time under the new Regulations, the question is whether they too will miss the opportunity.
The Regulations do not include the earlier proposals relating to an online Annual Directors Statement – intended to be a repository outside the annual report for all the detailed information.
The requirement for a Strategic Report survived, but is essentially the same as the Business Review it replaces; albeit quoted companies will in addition be required to include a description of the company’s strategy and business model, and (to the extent necessary for an understanding of the business) any human rights issues. It’s not clear how much of a change in requirements this represents. Most quoted companies already addressed these items and disclosure of the business model has long been a prerequisite of compliance with the UK Corporate Governance Code.
The omission of the online Statement is, in my opinion, a real opportunity missed. The process of radically changing the look and feel of the annual report would, of itself, have encouraged preparers to reflect on what should, and should not, be included in the Annual Report and where it should be included. Instead, the new requirements largely reflect the status quo and, with the contents of the Strategic Report having been prescribed so closely, a compliance approach could, unfortunately, be only a short step away.
But while an opportunity may have been missed to enhance Annual Reports this time around, it’s not too late for companies to demonstrate what good looks like, enhancing their narrative reporting, even within the constraints of the new legislation. If they do this there is the hope that BIS may rethink its requirements and facilitate some of the more innovative proposals to enhance corporate reporting further.
I believe that the new narrative reporting requirements are an opportunity for Boards to take a fresh look at their annual report, and to deliver a much clearer explanation of strategy, business model, risks and performance. Their communication with shareholders could be much improved for it.
Tim Copnell is an Associate Partner at KPMG in the UK
3. However, I'm unclear whether or not they will do this as deeply or as extensively as they might.
Putting aside the current debate about whether Interim Management Statements (IMS) lead to short-term investment strategies; if IMS are to provide both a general description of the performance during the relevant period and an explanation of material events and their impact on the financial position of the company (as required by the Listing Rules), then it is difficult to see how disclosure of the underlying KPI’s and KRI’s would not be useful.
Tim Copnell, Associate Partner - KPMG in the UK
2. IMS should include underlying KPI's and KRI's.
Many thanks for your comment. The job of an annual report is to provide the investors and stakeholders with the right information for them to feel confident in their investment. We think that more should be included in the annual report so it includes some forward looking/assurance based commentary, the inclusion of a more detailed opinion from the auditor is a step in the right direction but can we do more?
Tim Copnell, Associate Partner - KPMG in the UK
1. The regulations were a great disappointment, but any opportunity to stop and reflect on whether the annual report is doing its job should not be missed. But what is it's job?
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