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A matter of principles: The future of corporate reporting

The FRC recently issued the thought leadership paper A matter of principles: the future of corporate reporting, which explores ideas for changes to the system of corporate reporting. Julia Penny looks at the implications of the proposed changes in the report.

21st Oct 2020
Director JS Penny Ltd
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A MATTER OF PRINCIPLES THE FUTURE OF CORPORATE REPORTING
FRC_https://www.frc.org.uk/getattachment/cf85af97-4bd2-4780-a1ec-dc03b6b91fbf/Future-of-Corporate-Reporting-FINAL.pdf

In October 2020, the FRC issued the discussion paper A matter of principles: the future of corporate reporting. The report states that the production of a single paper-based document, published annually, appears outdated in the modern world. 

On top of these changes in the availability of more data and modes of communication, information needs have also shifted. 

It is apparent now that stakeholders are not just interested in a company’s financial position and performance, but in its value creation and wider impact on society and the environment. 

In a world where climate change threatens an even greater impact than the current pandemic, the information companies are expected to share has expanded enormously.

The reporting network

Over the years, little more than increased tweaking of the existing model has left many wondering the annual report’s purpose and intended audience. The FRC is proposing is to start again with a fresh, holistic approach, governed by overarching principles that recognise the needs of different stakeholders. 

The paper envisages a reporting network with a business report providing stakeholder-neutral information about how the company creates long-term value. This would be similar to the current strategic report, including some financial (eg the primary statements) and non-financial information. 

The financial statements would then form part of the network of reports, together with a new public interest report. Other information is then provided in the network reports, such as standing data about the company and various other reports sometimes incorporated into the annual report or uploaded onto separate sites. 

Cohesive principles

This network of reports should be based on cohesive principles to allow a more flexible and responsive system for setting and applying requirements and consuming the information produced. The model proposed is a multi-report one with three broad themes that will guide all reports:

  • Objective-driven: Rather than focus on different user groups, companies should consider the objective of each report to drive the content. Materiality for these reports would also be judged by reference to the objective of the report. 
  • Communication-focused: Communication should enable active dialogue, engagement and from that continuous improvement.
  • One set of principles: This would ensure coherence across all company reporting and would incorporate: system level attributes, report level attributes and content communication principles.

Definition of corporate reporting

Before we further explore the paper, it is worth putting the above into context by highlighting the definition of corporate reporting that the FRC has developed as a basis for the proposals: 

“Corporate reporting comprises information publicly communicated by a company, about the company, for the purposes of enabling its stakeholders to:

  • understanding the company’s performance and how it generates and sustains value;
  • make decisions; and 
  • hold the company to account.”

The FRC’s view is that the company itself should determine its key stakeholders. 

The single set of principles

If we dig a little deeper into the proposals, we start to get a sense of what this new model envisages. Let’s start with the concept of a single set of principles that will apply to the “reporting network”. The paper proposes that to guide good practice there should be:

System level attributes:

  • Accessibility - the ability to easily find the information the user requires;
  • Connectivity - the package of reports in the network should be regarded as interconnected so sign-posting and links from one to another will be vital;
  • Consistency - although reports will have different purposes there should be consistency in the way terms are used and information presented;
  • Transparency - this includes open discussion of the good and the bad

Report level attributes:

  • Fair, balanced and understandable;
  • True and fair.

Content communication principles:

  • Brevity, comprehensibility and usefulness;
  • Relevance - by reference to the report objective
  • Company-specific, not boilerplate, information; 
  • Comparability - over time and with other companies.

Most of these principles are familiar but their application to a whole reporting network and the addition of system level attributes should help ensure that users have a much better chance of finding what they need. 

In the current reporting environment a fragmented approach, based largely on pdf documents, severely limits the users’ ability to gather information on a themed basis and so build up a comprehensive picture of an issue, or indeed the company itself. 

Annual reporting cycle

The new reporting network still envisages that the business report, the financial statements and the Public interest report be published annually. As now, not all reports will be annual though, or they may have a different reporting date. 

For instance, a gender pay gap report is required every March, but this will still be regarded as part of the reporting network. Part of the annual cycle is a requirement for companies to consider whether the reporting network as a whole is complete. 

Extra information, not otherwise specified, might be needed for the reporting network overall to make sense. Companies will therefore need to assess this and fill in any gaps to create a coherent picture.

Non-financial information

Non-financial information and its current reporting, in a mish-mash of voluntary and mandatory statements, garner particular attention in the paper. The FRC believes that regulatory standards for non-financial reporting are necessary. 

The FRC’s view is that for non-financial information reporting to be meaningful it should consider both how the ecosystem in which the company operates can affect the sustainability of the company and how the company’s business model is affecting the ecosystem. 

As part of this, standardised metrics should be used to report on outcomes. One approach put forward is for companies to identify the sustainable development goals to which external outcomes relate and identify how the company’s activities have contributed to these societal impacts. 

Technology

The section on using technology to enable users to find all the information they need reflects something I have been dreaming of ever since XBRL came on the scene.

Tagging all information in the reporting network and uploading content to a single storage location that works across all regulatory reporting requirements could and should revolutionise the access to corporate information. 

The paper envisages that tagging requirements need to be developed to fully meet these objectives on a cross-regulator basis, to allow the reuse of data and limit the tagging effort. In time, new search and analytics tools should also develop to help users to “build-their-own” reports and use technology such as AI to interrogate the contents. 

Proportionality

Small companies are unlikely to need the external reporting envisaged in the paper, but the plan is to require that the business report be produced by medium and large companies.

Initially, the public interest report will be required only for PIEs and very large companies.

Conclusions

The developments proposed in the paper seem sensible and would at least move reporting to a more modern and relevant footing. They are also a stepping stone to more radical changes that technology may allow in the future. 

Many modern cars have dynamic cruise control, lane-assist and other features, but mostly are not yet fully self-driving. Similarly, this reporting framework would provide many useful features whilst the technology for a more radical approach further develops. 

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