Developments in corporate reporting
ICAEW: What’s next for corporate reporting: Time to decide
In June 2017, the Financial Reporting Faculty of the Institute of Chartered Accountants of England and Wales (ICAEW) published a report which looks at where corporate reporting stands at present and identifies key decisions that need to be taken before a step change in the quality and usefulness of financial reports can be achieved, with particular reference to non-financial reporting.
A number of roundtable discussions have been held with stakeholders and the report sets out the main themes arising from those discussions. It sets out points of view that enjoyed substantial support and highlights major issues that were singled out as barriers to change in corporate reporting. The Financial Reporting Faculty believes stakeholders need to agree collectively a way forward in relation to these areas, which include the following:
- Objectives of corporate reporting – who is the user?: The report points out that the definition of “corporate reporting” is uncertain, as is the definition of the users of corporate reports.
- One report or many - the needs of investors v other stakeholder groups: The annual report is seen as the cornerstone of the corporate reporting process and most agree it needs to focus primarily on reporting to investors. However, this can result in short-termism and there are concerns that other stakeholders have different information needs. The report provides examples of disclosures required other than in the annual report (for example reports under the Modern Slavery Act 2015 and gender pay gap reporting) and there is a question as to whether the trend for separate reporting outside the annual report should be encouraged or whether a single comprehensive report is more effective for communicating with a wide range of stakeholders.
- Consistency, credibility and the pace of change: The question is whether a concerted international effort to encourage adoption of a consistent approach to non-financial reporting is needed or whether it should be accepted that initiatives aimed at standardisation may inhibit experimentation and innovation.
- The intangibles problem: Should standard-setters prioritise ways and means of bringing a wider range of intangibles onto the balance sheet or should attention be focused on a broader approach to reporting that looks beyond historical financial performance?
- Data and technology: Should it be accepted that the pace of progress in the use of technology as a corporate reporting tool is likely to remain slow or should stakeholders make a concerted effort to accelerate and coordinate progress, requiring greater collaboration between technology specialists and those with an interest in better corporate reporting?
The Financial Reporting Faculty will consider comments on the report and expects to publish a follow up paper in 2018.
FRC: Approach to changes in IFRS
In June 2017, the Financial Reporting Council (FRC) published a Feedback Statement ‘Triennial review of UK and Ireland accounting standards: Approach to changes in IFRS’. The Feedback Statement summarises respondents’ comments to its consultation document on updating Financial Reporting Standards (FRS) 102 for changes in IFRS, published in September 2016.
The consultation document asked for views on whether FRS 102 should be kept up to date with IFRS as IFRS changes, particularly in relation to major new standards that have been issued. It outlined a timetable for the possible changes in relation to financial instruments, revenue and leases.
The Feedback Statement shows that almost all respondents agree with the proposed revised principles (set out in FRED 67: Draft amendments to FRS 102, March 2017). However questions were raised over the proposed timetable and implementation. Respondents felt that more IFRS implementation experience is needed before assessing if and how requirements based on these standards should be incorporated.
The FRC agrees that further evidence-gathering and analysis needs to be undertaken before a second FRED is issued. Currently there is no effective date for any changes to FRS 102 or FRS 103 and the FRC will consult on any detailed proposals in due course.
Investment Association’s long term reporting guidance
In May 2017, the Investment Association (IA) published new guidance on various aspects of long term reporting including the reporting of the long term drivers of value creation and productive enterprise. This guidance applies to companies whose shares are admitted to the Premium Segment of the Official List of the UK Listing Authority. Companies whose shares are admitted to the Standard Segment of the Official List, to trading on AIM or to the High Growth Segment of the London Stock Exchange’s Main Market are encouraged to adopt the guidance as best practice. Companies are urged to read the guidance in conjunction with the Financial Reporting Council’s (FRC) 2014 Guidance on the Strategic Report.
Expectations of future long term reporting include the following:
Business models and long term reporting
- Quarterly reporting – IA members would prefer companies to stop issuing quarterly reports and quarterly earnings guidance, in favour of greater attention being given to longer term performance and strategic issues. If, however, a company continues to report quarterly, it should publicly explain this position and how it is relevant to the achievement of the company’s long term strategy. The IA also refers to its public position paper on quarterly reporting published in November 2016.
- Business model disclosures – Companies should review their current approach to business model disclosures against the FRC Reporting Lab’s Business Model Reporting recommendations published in October 2016. The guidance highlights certain key findings in that publication.
- Focusing on the longer term – Reporting should strive to provide insight into the significant strategic issues and potential risks that may face the company over the next three to five years – or longer time horizons wherever possible.
- The drivers of productivity – The Strategic Report should include a narrative discussion of how productivity is regularly assessed within the business and the main drivers of productivity should be described, together with their influence on operations and planned investments to improve productivity. Companies are urged also to outline both the significant opportunities and challenges that may affect productivity in the forthcoming year.
- Measures of productivity – Companies are encouraged to provide evidence of the investments they are making, or are planning to make, in improving productivity. The IA suggest a series of Key Performance Indicators (KPI) such as infrastructure, innovation, skills and culture, which companies should use to enable improvements in productivity to be measured over time.
- Investors’ expectations of capital management – IA members are keen to understand a company’s capital position, how it manages its capital and measures the performance of its capital allocation decisions. Capital ought to be allocated efficiently, and open and effective dialogue on capital management issues between investors and companies would be welcomed.
- Understanding a company’s capital management strategy – IA members expect the narrative discussion in the Strategic Report to set out the objectives and investment priorities of the company’s capital management strategy, the policies governing what it regards as capital, the process by which capital allocation decisions are made and the board’s role in setting the capital management strategy.
- Capital allocation decisions in practice – A company should keep all capital allocation decisions under regular review and provide shareholders with updates on significant developments. The guidance sets out the types of disclosure on capital management to be included in the Strategic Report.
- Supporting quantitative disclosures – Companies should work to develop financial metrics, suitable for each sector or market they operate in, that support a framework for long term growth. Results should be displayed either in a table or a clear signpost system with the following quantitative disclosures: working capital, investment capex, research and development, capital distribution (including debt servicing, dividends and buybacks) and investment in skills and training.
- Merger and Acquisition transaction data – Disclosures on the rationale and performance of merger and acquisition activities should include the following: information on the full price paid, debt reconciliation, annualised sales, returns and margins, tax planning, and ROCE or ROI on the transaction.
- Nature of funding – Information regarding a company’s funding arrangements and the nature of funding in relation to its capital management strategy should be provided. This should include: company policy and approach to leverage, a mix of funding approaches (such as bonds, bank loans and other funding sources), a net debt reconciliation, key maturity dates, impact of bonds/the state of bank covenants and actuarial assumptions.
- Cost of capital – A company’s cost of capital (including an explanation of how this is calculated), its capital allocation decisions (including an explanation of how a discount rate is applied for risky or volatile activities) and the extent to which the expected return on investment will exceed the cost of capital should be made clear to shareholders in the annual report.
- Demonstrating return on investment – Companies are expected to demonstrate the returns generated as a direct result of the capital allocation decisions made.
Disclosure of material environmental and social risks
- Importance of ESG issues – The IA supports increased disclosure on environmental, social and governance (ESG) matters in long term reporting.
- Role of the board in addressing ESG issues – The annual report should state whether the board takes into account the significance of ESG matters to the company’s business, whether ESG risks that may affect the short and long term value of the company are assessed and whether there are effective systems for managing and mitigating those risks.
- ESG disclosures in annual reports – With regards to policies, procedures and verification, annual reports should include information on ESG related risks and opportunities, how companies can combat such risks and ways to achieve a reasonable level of credibility in relation to verification of ESG disclosures.
- ESG issues being considered by the remuneration committee – Companies are expected to state in their remuneration report whether the remuneration committee can include corporate performance on ESG issues when setting the remuneration of executive directors and if not, a reason should be provided for its absence.
Human capital and culture
- Human capital and productivity – Annual disclosures on human capital management should be reported to improve the productivity of a company’s workforce over the longer term.
- Understanding a company’s approach to human capital management – Companies should provide shareholders with narrative discussion in the Strategic Report on: significant investments a company has and will make to improve the productivity of its workforce; opportunities and principal risks that relate to human capital management; and how the workforce is incentivised to become more productive. Reporting on human capital management issues should demonstrate how it will improve the business’ long term strategy.
- Metrics to support human capital disclosures – There should be an appropriate mix of quantitative and qualitative disclosures to explain human capital management to shareholders. Some key metrics that should be considered are: total headcount (broken down by full-time and part-time employees, gender and diversity); annual turnover; investment in training, skills and professional development; and a calculated employee engagement score.
- Culture – Companies should review their current approach to corporate culture and consider how it is assessed and reported. The board should determine the purpose of the company and ensure that the company’s values, strategy and business model reflect this purpose.
Implementation and monitoring
Going forward, the IA encourages companies to adopt this guidance at the earliest possible opportunity. The IA’s Institutional Voting Information Service (IVIS) will monitor the implementation of this guidance by analysing annual reports for financial year-ends on or after September 30, 2017. IVIS will outline to its members those companies that continue to report on a short term basis and where companies are not making the desired disclosures.
ICAEW Technical Release – Guidance on realised and distributable profits under the Companies Act 2006 – TECH 02/17
In April 2017, the Institute of Chartered Accountants in England and Wales (ICAEW) published a Technical Release, TECH 02/17, which updates its guidance on realised and distributable profits. It is based on TECH 02/10 but has been updated as proposed in TECH 05/16, published in March 2016. The ICAEW has also published a mark-up of changes to the guidance to show the changes made to both TECH 02/10 and TECH 05/16.
The guidance provides advice on realised and distributable profits under the Companies Act 2006 (CA 2006) and all relevant statutory instruments made under the CA 2006. Its purpose is to identify, interpret and apply the principles relating to the determination of realised profits and losses for the purposes of making distributions under the CA 2006.
Changes made to the March 2016 draft TECH 05/16 include the following:
- The use of footnotes makes it clear that the definition of a distribution for Part 23 of the CA 2006 reflects case law.
- The ICAEW confirms that this guidance reflects accounting standards in issue at December 31, 2016 in relation to the meaning of realised profits. However, the additional guidance about the definition of a distribution in paragraphs 2.6A to 2.6D is based on legal advice and is not a question of generally accepted practice. Therefore, it is possible that some transactions previously entered into were distributions at the time they were entered into and would have been unlawful distributions in the absence of adequate distributable reserves. For example this may apply to some intragroup loans on off-market terms.
- Further guidance is included on the definition of distributions in kind under sections 845 and 846 CA 2006.
- A new paragraph has been included on the determination of the amount of a distribution in kind (paragraph 2.9FA). This states that a transfer of assets may be lawful in accordance with the statutory provisions of section 845 CA 2006, but nevertheless be an unlawful distribution of capital contrary to common law.
- The paragraphs on intragroup loans have been redrafted to address comments received though not to change the overall conclusions.
- Amendments have been made to address the consequences of the change in the law concerning distributable profits in relation to long-term insurance business made by The Companies Act 2006 (Distributions of Insurance Companies) Regulations 2016 (SI 2016/1194) which were made on December 7, 2016.
- There is confirmation that there is no requirement under law or accounting standards for financial statements to distinguish between realised profits and unrealised profits, or between distributable profits and non-distributable profits.
FRC’s Discussion Paper on auditors and preliminary announcements
The Financial Reporting Council (FRC) published a Discussion Paper in April 2017 to stimulate discussion on the use and value of preliminary announcements and the role of the auditor in respect of such announcements. The Discussion Paper includes a number of possible options and views on those options will drive revisions to auditor guidance in Bulletin 2008/2, The Auditor’s association with Preliminary Announcements made in accordance with the requirements of the UK and Irish Listing Rules. This Bulletin, last updated in 2008, needs to be updated to reflect subsequent changes in law, regulation and applicable accounting standards.
The Discussion Paper summarises the key legislative and regulatory requirements relating to preliminary announcements, as set out in the Listing Rules and Companies Act 2006. It then analyses current practice among listed and AIM companies and evaluates the current guidance and options for change.
- The number of listed and AIM companies continuing to issue preliminary announcements remains high (though publication for listed companies has not been required since 2007).
- FTSE 100 companies take on average 52 days from their year end to the results announcement, with AIM companies taking on average 98 days.
- In most cases auditor’s reports have been signed on or before the date of preliminary announcements.
- The average time to complete the audit after the preliminary results have been issued is 2-3 weeks for a listed company and just over a month for AIM companies.
Possible options for change
- Bulletin 2008/2 could be converted into an engagement standard or regulators could establish a requirement that when preliminary results are disclosed, auditors should be aware of the relevant FRC guidance and be prepared to explain where they chose not to follow it in the conduct of an engagement. The guidance could also be extended to voluntary engagements by companies outside the main market so that, for example, AIM companies could be required to agree the release of preliminary announcements with their auditors.
- Currently the auditor’s report on the statutory final statements does not have to be signed before auditors can agree to publication of preliminary results but this position could be changed.
- An auditor’s report could be included with preliminary announcements confirming their agreement, describing the extent and scope of their work and/or setting out key information derived from the auditor’s report on the statutory financial statements.
- The definition of a preliminary announcement in the Bulletin may need amending which could potentially change the scope of procedures required for an auditor to agree publication.
- Auditors could be encouraged or required to assess whether the material in a preliminary announcement is “fair, balanced and understandable”, there could be specific guidance on the application of materiality, there could be more clarity on the auditor’s responsibilities in respect of “other information” (and more consistency with the approach in ISA (UK) 720) and the material on Alternative Performance Measures in the guidance could be updated.
Comments on the Discussion Paper are due by June 2017. Bulletin 2008/2 will then be revised and there will be a formal consultation on any changes the FRC proposes to make.
FRC’s letter to investors ahead of annual reporting season
In April 2017, the Financial Reporting Council (FRC) wrote to investors ahead of the 2017 shareholder meeting season to highlight some recent changes and developments in reporting which it hopes will be helpful. The letter encourages investors to engage with companies to provide a steer on what information they believe is relevant for inclusion in the annual report and to challenge where reporting falls short of expectations.
Business model reporting in the strategic report
The letter reminds investors about the Financial Reporting Lab report, published in October 2016, which identified room for improvement in the clarity with which many companies explain how they make money and what differentiates them from their peers.
Alternative performance measures in the strategic report
The FRC continues to monitor how alternative performance measures (‘APMs’ or ‘non-GAAP’ measures) are used to report performance. The letter comments that this year will be the first in which the European Securities and Markets Authority (ESMA) ‘Guidelines on Alternative Performance Measures’ apply to annual reports. Investors should expect to see disclosures that give a clear and complete understanding of the APMs presented, how they are calculated and why they are useful and, where relevant, reconciliation to amounts presented in the financial statements.
Risk reporting and viability statements in the strategic report
The letter notes that the FRC’s initial assessment of viability statements suggests that there is little variation in disclosures between business sectors. This year, the FRC has encouraged companies to provide clear disclosure of why the period of assessment selected is appropriate for the particular circumstances of the company, what qualifications and assumptions were made, and how the underlying analysis was performed.
Brexit and the strategic report
Companies will need to consider the consequential risks and uncertainties in the political and economic environment and the impacts of those risks and uncertainties on their business. As the economic and political effects are developed and become more certain in the medium and longer term, the FRC would expect boards to provide increasingly company specific disclosures with, ultimately, quantification of the effects.
The letter reminds investors that the UK Corporate Governance Code operates on a comply or explain basis. Where companies elect not to comply with key provisions of the Corporate Governance Code, they should provide specific explanations. This means setting out the background, providing a clear rationale for the action being taken and describing any mitigating activities. The FRC encourages investors to challenge companies where they do not believe that explanations given are sufficiently persuasive.
Audit committee report
In 2015, the FRC issued its ‘Audit Quality Practice Aid for Audit Committees’ to assist audit committees in evaluating and reporting on audit quality in their assessment of the effectiveness of the external audit process. The FRC notes that investors should expect to see this reporting in the context of the company’s business model and strategy, the business risks it faces, and it’s perception of the reasonable expectations of the company’s investors and other stakeholders.
The FRC’s thematic study of tax reporting identified areas for improved disclosure. More companies are expected to disclose the amount of their tax provisions than in previous years.
In light of the 2015 Financial Reporting Lab report on best practice in dividend disclosures, the FRC has already noted examples of improved disclosure, and expects to see more over the coming reporting period. The FRC suggests investors may wish to challenge companies that provide insufficient information in this area.
Low interest rates
The FRC has reminded companies that they should consider the impact of low interest rates on the amounts reported in their financial statements. In particular, careful consideration should be given to the valuation of long term assets and liabilities and companies may need to provide sensitivity analysis to highlight the potential impacts.
Accounting policies, significant accounting judgements and estimates
Companies should explain significant judgements and accounting policy choices, particularly where there is diversity of treatment, in pension reporting, for example. However, the FRC notes that there continues to be room for improvement in the disclosure of accounting policies, particularly in relation to revenue recognition. Investors should be able to see a clear link between the sources of income described in the business model and revenue recognition policies. Companies should also identify the precise nature of the judgements they make rather than merely repeat the accounting standards so investors can assess the quality of management’s policy decisions. Clear descriptions of sources of estimation uncertainty should explain the extent to which the values of assets and liabilities have the potential to change materially in the next year.
Developments in IFRS
The FRC notes that the International Accounting Standards Board has published three major standards that will become effective in the next few years: IFRS 15 Revenue from Contracts with Customers (effective for periods beginning 1 January 2018), IFRS 9 Financial Instruments (effective 1 January 2018), and IFRS 16 Leases (effective 1 January 2019). It expects that most companies that apply IFRS will have made substantial progress in their implementation of these standards. Investors should expect to see companies provide information on this progress and disclose the likely impacts of each of the new standards once they can be reasonably estimated.
FRC Conduct Committee revises corporate reporting review procedures
In April 2017, the Financial Reporting Council (FRC) published revised operating procedures for reviewing company reporting together with a Feedback Statement and some revised Frequently Asked Questions (FAQs).
The revised operating procedures follow a consultation published by the FRC in October 2016, and no substantial changes have been made to the consultation draft. The changes implement new ways of working to address requests for more transparency about Corporate Reporting Reviews (CRRs) and their outcomes, and to enhance the efficiency of CRR procedures without compromising the quality of decision-making. Additional changes have resulted from requests for greater transparency in respect of the review process and clarity in the content of the operating procedures.
The FRC makes the following observations in the Feedback Statement:
- Any interaction with CRR (including that the company’s accounts have been reviewed but no substantive issues have been raised) should be disclosed in the relevant company’s audit committee report, as it will enhance users’ understanding.
- Respondents observed that the FRC’s Guidance to Audit Committees only applies to premium listed companies and there is no specific reference in the operating procedures to the reporting expected of other companies such as AIM companies. The FRC notes that guidance on this has been added to the FAQs, which clarifies that if any company, whether listed or not, has had its report and accounts reviewed, this is likely to be of general interest to any reader of the next year's accounts and so boards are encouraged to be transparent about the extent of any interaction with the FRC's CRR function in their subsequent reports and accounts.
- The FRC’s Conduct Committee has committed to reviewing the effectiveness of the revised operating procedures once there is sufficient experience of their operation.
- The FRC has concluded that it is for the company to explain its response to regulatory interventions to its shareholders and others, but that the FRC Board will monitor the quality of the disclosure provided by companies and the extent to which it is fair and balanced.
- Paragraph 62 of the operating procedures has been amended to clarify that the list of companies whose reports have been previewed which is published by the FRC will indicate the type of approach made to the company and the specific report and accounts under issue.
Developments in non-financial reporting
European Commission’s guidelines on non-financial reporting
In June 2017, the European Commission published non-binding guidelines on the methodology for reporting non-financial information. The guidelines have been prepared in accordance with Article 2 of the EU Non-Financial Reporting Directive (Directive 2014/95/EU) which requires the disclosure of non-financial and diversity information by certain large undertakings and groups.
The guidelines are designed to help companies disclose non-financial information in a relevant, useful, consistent and more comparable manner. The guidelines are not mandatory and do not create new legal obligations, so companies may also rely on international, EU-based or national narrative reporting frameworks, according to their own characteristics or business environment.. The overall aim of the guidelines is to promote sustainable growth and provide greater transparency to shareholders. They include examples and key performance indicators (KPIs) throughout.
The key principles of the guidance are:
- To disclose material information so that it can be assessed regularly. Material disclosures should cover both positive or adverse impacts of a company’s activities in a clear and balanced way and the guidelines set out certain factors that may be relevant when assessing the materiality of information.
- To be fair, balanced and understandable and presented in an unbiased way. Views and interpretations should be distinguished, plain language should be used, material information should be provided with appropriate context and the scope and boundaries of information disclosed should be explained.
- Include comprehensive but concise material information on environmental, social and employee matters, human rights and anti-corruption and bribery matters. Companies should focus on providing the breadth and depth of information that will help stakeholders understand its development, performance, position and the impact of its activities.
- To provide a strategic and forward-looking statement. Disclosures should provide insight into the strategic approach to relevant non-financial issues – what a company does, how and why it does it.
- Ensure that all of the information is relevant and stakeholder orientated ie the information needs of stakeholders collectively should be considered rather than the needs or preferences of individual or atypical stakeholders.
- The non-financial statement should be consistent and coherent with other elements of the management report.
In relation to the content of non-financial reports, the European Commission recommends the following:
- Business model – Companies should consider using KPIs to explain their business model and main trends and highlight and explain any material changes to the business model during the reporting year. When describing their business model, companies may want to include the following: their business environment, their organisation and structure, the markets in which they operate, their objectives and strategies and finally any factors that may affect future developments.
- Policies and due diligence – Companies should consider disclosures on their approaches to key non-financial aspects, their main objectives, and how they plan to deliver those objectives and implement those plans. They may want to explain the management and board’s responsibilities and make clear any changes to policies and processes.
- Outcome – Companies should provide a useful, fair and balanced view of the outcome of their policies. The non-financial information disclosed by companies should help investors and other stakeholders understand and monitor the company’s performance.
- Principal risks and their management – Companies are encouraged to disclose information that relates to principal risks and how they are managed and mitigated. A company should make such information on risks available to shareholders regardless of whether they stem from its own decisions or actions, or from external factors, and explain the processes used to identify and assess such risks. Companies should make clear any material changes to possible risks, or the way in which it intends to manage them in the reporting year.
- KPIs – Companies are expected to report KPIs that are useful, taking into account their specific circumstances. KPIs should also be used consistently from one reporting period to the next to provide reliable information on progress and trends.
- Thematic aspects – Material disclosures should provide a balanced and comprehensive view of a company’s development, performance, position, and the impact of its activities. The guidelines set out a list of thematic aspects that companies ae expected to consider when disclosing non-financial information in relation to: environmental matters, social and employee matters, respect for human rights, anti-corruption and bribery matters, information on supply chain matters that have significant implications for the company and, where relevant, responsible supply chains for minerals from conflict-affected and high risk areas.
The guidelines also address board diversity disclosure in a bid to help large listed companies prepare an appropriate description of their board diversity policy for inclusion in their corporate governance statement. The board diversity description does not, however, form a part of the non-financial statement, so this section of the guidelines is without prejudice to the need to disclose material diversity information. Companies should:
- cover all aspects of diversity including age, gender, educational and/or professional backgrounds;
- show how their diversity policy objectives are taken into consideration and the role of board committees in doing so;
- disclose the status of the implementation and also the results from the last statement regarding diversity aspects of their policy;
- if the diversity objectives are not met, the company should disclose how it intends to meet the objectives, including the expected timeframe within which these objectives are to be met.
Financial Reporting Lab reports
Financial Reporting Lab: Quarterly update
The Financial Reporting Lab (Lab) published its quarterly newsletter in June 2017. The newsletter highlights the Lab’s most recent activities over the last three months:
- Lab Stakeholder survey – launched in April 2017, the survey asked for feedback on previous projects and sought views on topics the Lab might undertake going forward. The response was continued support for the Lab’s series of projects on the strategic report. The Lab plans to prioritise annual reports and remuneration reporting over the coming months.
- Digital Future – in May 2017, the first in a series of reports on the Digital Future Project was released. It set out a framework of 12 characteristics which are important to consider in any future (or current) system of digitally enabled reporting. The Lab invites people with the relevant skills or experience in digital reporting to join their workshops over the summer and autumn in London.
- Risk and viability reporting – the Lab is currently working on a project on risk and viability reporting, which follows its 2016 report on business models. The Lab is currently obtaining the views of members of the investment community in a private investor survey.
- Improvements in dividend disclosures – in June 2017, the Lab decided to review developments in dividend disclosures following on from its implementation study which was released in December 2016.
Financial Reporting Lab’s report - A framework for future digital reporting
In May 2017, the Financial Reporting Lab (the Lab) published a report which sets out a framework for future digital reporting. The Lab has decided to undertake a Digital Future project and this is the first in a series of reports, following on from the Lab’s 2015 Digital Present Report. Written by a wide range of preparers, investors and others, the report expresses what they would like to see in any future (digitally enabled) system of corporate reporting.
The future digital reporting framework consists of twelve characteristics that are fundamental to the future of digital reporting and these are contained within three broad stages in the process of corporate reporting:
Digital reporting must be cost efficient, easy to produce, timely and compatible with current reporting systems. Production characteristics are of most interest to companies and those supporting them. They focus on the collation, amalgamation, packaging and presentation of financial and non-financial information that a company or organisation will gather with the intention of releasing it externally.
The distribution of such reporting must be free, prompt, compliant and easily accessible to find. This stage is focused on the dissemination of the information, meeting the regulatory requirements and communicating with external stakeholders. These characteristics interest both companies and those consuming the information.
Successful future digital reporting will have certain consumption characteristics too; it shall be contextual, usable, credible and engaging. This final stage is focused on the analysis and the use of the distributed information. The consumption characteristics are of most interest to those bodies utilising the information.
The Lab is keen to hear from technology experts and others with strong views on, or experience of, how technology might be used for corporate reporting. The next stage of the project will assess various reporting technologies and initiatives against the future digital reporting framework, to see how they might work together to meet the needs of preparers and users.
Financial Reporting Lab’s call for participants in risk and viability reporting
In March 2017, the Financial Reporting Lab published a lab project call for listed companies, investors and analysts to participate in a project on risk and viability reporting. This project follows the publication of the Lab report on business model reporting which was published in October 2016. The new report will explore how companies can develop effective principal risk reporting and viability statement reporting to meet the needs of investors.
While the scope of the project may evolve to explore the needs of companies and investors identified during the project, it is expected to examine characteristics including:
- how companies identify their principal risks, the controls that mitigate the risks and how they are communicated;
- the linkages to the business model, strategy and other parts of the annual report;
- how companies develop the viability statement and how this links to the risk and control framework;
- communication of key judgements made, including any qualifications and assumptions, and the rationale for the number of years the statement is covering;
- communication of the approach to modelling and stress testing; and
- how investors use principal risk disclosures and viability reporting to inform investment decisions and their stewardship of companies.
It is hoped that the results of the project will be published in time to assist those preparing December 2017 year-end annual reports.