How to Produce Clear, Concise Annual Reports

In its August 2014 report, the Financial Reporting Lab launched by the UK Financial Reporting Council in 2011, provides an overview of what companies have been doing in the past year to improve the clarity and conciseness of their annual reports.

The Lab’s study is based on a review of 41 annual reports of FTSE 350 companies. Although focused on UK financial reporting requirements, the observations and recommendations in the report ­— Towards Clear and Concise Reporting — are broadly applicable. They include the following:

• Companies’ Communication Channels — To improve the clarity and conciseness of what is presented, companies should consider the communication channels used to match the information needs of users.
• Focused Content — To focus content on what is most important to investors, companies should report on actions rather than processes, consider placing standing information elsewhere, and provide more tailored board and executive biographies.
• Materiality — To improve the clarity and conciseness of information, annual reports can be improved by removing elements that are no longer required, improving the quality of accounting policy disclosures, and removing immaterial notes to the financial statements.
• Logical Layout — A logical layout and a minimum of duplication will contribute to the clarity of an annual report. Cross-referencing and signposting of information within the annual report will also improve clarity.

We applaud the Lab for its recommendations. They are in line with those made by CFA Institute in our report Financial Reporting Disclosures: Investor Perspectives on Transparency, Trust, and Volume, with one exception.

The Lab’s report calls on companies to remove immaterial disclosures. While we are aware that a perception exists among preparers and auditors that financial statements are filled with immaterial information, we believe this is based on anecdotal evidence, and we are not aware of any systematic, empirical studies or evidence to substantiate or validate this assertion. In fact, our 2012 financial reporting survey of investors — cited in our publication noted above — demonstrates the opposite:

• Fully 76% of investors surveyed do not find an obvious overabundance of immaterial information within the financial statements.
• The majority (51%) of respondents believe that the impact of enhanced materiality guidelines is unclear, because the application of materiality is a matter of judgment; if there were an obvious inclusion of immaterial information, this would not be the case.
• Another 25% indicated that the impact of enhanced materiality guidelines would not be significant, because they believe materiality is already a concept that is being applied in practice.

The Lab, whose mission is to help improve the effectiveness of corporate reporting by providing an environment where investors and companies can come together to develop pragmatic solutions to today’s financial reporting needs, has produced this report to provide details of actual trends and developing practice it has identified in corporate reporting. The Lab’s report also contains a section outlining practical steps that companies can adopt when seeking to implement processes to improve their annual reports to make them clearer and more concise, and includes two case studies on what makes good corporate reporting.

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