Restructuring the UK statutory directors’ report is part of the necessary process of making corporate reporting more responsive to the information needs of investors, says ACCA (the Association of Chartered Certified Accountants) in its official response to the Department of Business, Innovation and Skills (BIS) consultation on a new narrative reporting framework.
In its response, ACCA says current structures are not helping narrative reporting to reach its full potential. Instead, ACCA wants to see narrative reports focus on what the markets want to hear, not on what companies want to talk about.
ACCA believes a long standing flaw in the UK’s statutory directors’ report is that it has tended to be used as a convenient place for information mandated to be disclosed by various items of law and regulation. This has meant that as the number of disclosures required to be made in the directors’ report has increased, it has made the report progressively less capable of communicating a coherent message.
John Davies, head of technical at ACCA, advises: ‘Given this situation, it makes much sense to separate compliance-related disclosures from the strategic narrative, which will in future be set out in a more focused Strategic Report. The second proposed statement, the Annual Directors’ Statement, should however, have its own coherent rationale and should not simply become a repository of ad-hoc disclosures.
‘ACCA considers that this project offers an important opportunity to ensure that companies prepare and publish information which helps to facilitate constructive company-investor engagement and to encourage both sides to address the wider issue of long-term focus.’
ACCA believes high quality narrative reporting can help enhance communication between companies and their investors, and other stakeholders.
ACCA has carried out a number of studies in recent years which have looked at the issue of narrative reporting from the perspectives of both preparers and users. The results of these exercises have underlined the need for policy makers to:
- restrict mandatory disclosures to those which are likely to add value for users
- allow companies the freedom to tell their own ‘story’ in a way which communicates their boards’ genuine desire to engage with their stakeholders.
However, ACCA is concerned that any changes which are introduced need to take into account the various current parallel global developments in the areas of stewardship and reporting, and ensure inconsistencies do not arise.
John Davies adds: ‘The International Accounting Standards Board (IASB) has recently issued a Management Commentary standard which provides substantial advice for companies on how to provide further explanation of the results in the financial statements - listed companies will be obliged to adopt that standard. Also, the IIRC is working on an ambitious project to develop a new framework for ‘integrated reporting’, which may in due course either become the acknowledged benchmark for narrative reporting or even become the sole reporting statement.’
John Davies concludes: ‘When companies explain what they are doing in a way which satisfies the specific information needs that investors have, it serves the public interest goal of transparency and at the same time enhances the efficiency of decision-making in the marketplace. Where companies are able to explain their actions and future plans in a way which has the effect of increasing trust and confidence in what they are doing, that stands to benefit companies themselves by enhancing their attractiveness to investors and potential investors.’