Cutting Clutter in annual reports and financial statements

1. Cutting Clutter
Recent years have seen a seemingly inevitable trend of annual reports getting longer and
longer. Sadly the view of many is that this trend has not resulted in annual reports becoming
more and more informative to investors and other stakeholders alike.
The reasons behind this trend are many with preparers, auditors and regulators all being
partially responsible. All too often companies, aided by auditors’ checklists of compliance, seek
to fully comply with all disclosure requirements, regardless of materiality and once disclosure is
added it is rarely removed. Such behaviours are often reinforced by fears of review either the
Audit Inspection Unit (‘AIU’) or the Financial Reporting Review Panel (‘FRRP’).
A recent discussion paper, Cutting Clutter, issued by the Financial Reporting Council has
sought to challenge this seemingly unstoppable trend. The paper recognises that clutter
“undermines the usefulness of annual reports and accounts by obscuring key messages” and,
through the time and effort taken to collate and prepare such additional information, can also be
a big issue for preparers. It goes on to recommend some practical steps that companies can
take to seek to address this issue.
One of the main causes of clutter in accounts is the number, and length, of disclosures
concerning immaterial items. IAS 1 states that an entity “need not provide a specific disclosure
required by IFRS if the information is not material” but, the report recognises, there continues to
be significant uncertainty as to what material means from a disclosure perspective.
Despite this the report challenges preparers and their auditors to use the concept of materiality
to reduce disclosure “with little or no risk of regulatory challenge”. The report highlights share
option disclosures as all too often containing a disproportionate level of disclosure especially for
immaterial schemes.
The report also highlights narrative explanations that remain unchanged year on year as a
source of clutter. Some of this disclosure is unavoidable, either because of company law or
accounting standards, but some of it is not. The example provided is corporate governance
where many companies seek to demonstrate compliance with each of the 52 code provisions
as opposed to just the 18 provisions where disclosure is required. Many companies, and
investors, may feel that the additional disclosure is useful but need it be in an already lengthy
annual report or could it be included, with a clear reference from the annual report, on a
company’s website instead?
Even if preparers decide that all information provided is material and required the report still
challenges how that information is presented to a reader. Information is more easily accessed
by a reader if paragraphs of narrative are broken up by suitable sub-headings, if, where
possible, numbers are presented in tabular form as opposed to within the narrative and if areas
of change from the prior year, estimates and judgements are clearly highlighted.
Looking to the future the report would like to see full advantage taken of the internet age with
much unchanging narrative, such as accounting policies, being taken out of the annual report
altogether and placed on a company’s website with the annual report focussing much more on
areas of change. Such suggestions would require legal changes and hopefully the government
will consider them alongside its current review of narrative reporting.
Properly used annual reports are a vital tool for communicating with investors and other
stakeholders and are frequently the first document a potential investor, or customer, will look at.
Cutting Clutter challenges preparers, auditors and regulators to stand back from the normal
reporting process and consider whether they is a better, simpler way of presenting and
disclosing information. Reconsidering the reasons for disclosure and the format of those
disclosures in an annual report could be time well spent.