In January, the ASB published a report of its review of narrative reporting by UK listed companies in 2006. Project Director Simon Billingsley gives a summary of the report and the main conclusions.
The ASB carried out this review in order to keep the spotlight on the importance of encouraging continuing improvement in the area of narrative reporting.
The review had dual objectives of assessing:
- Best practice - the degree to which companies have adopted the recommendations in the ASB’s Reporting Statement on the Operating and Financial Review (OFR); and
- Compliance - how UK companies are performing in the light of the legal requirement under the Companies Act 1985 for a Business Review.
In undertaking the review, we analysed the annual reports of 23 listed companies. We also drew on surveys by other organisations. Together these reviews of annual reports cover a significant number of the FTSE 350 leading quoted companies.
In terms of conclusions, whilst companies are in general complying with the legal requirements, when measured against best practice, we found the following:
Areas of good reporting
- Descriptions of business and markets, together with strategies and objectives.
- Descriptions of the current development and performance of the business.
- An increase in companies reporting environmental, employee and social issues, although there is scope for further improvement.
Areas for improvement
- The greatest area of difficulty is the disclosure of forwardlooking information, although the ‘safe harbour’ provisions in the Companies Act 2006 may help in the future.
- Companies need to improve their descriptions of resources available to the entity, in particular intangible items such as brand strength and corporate reputation not reflected in the balance sheet.
- Companies need to describe more carefully their principal risks and uncertainties, and set out their approach to managing and mitigating those risks, rather than simply providing a list of all risks (33 in one case).
- Many companies are providing a good deal of information on measures and indicators, but improvements can be made in identifying their Key Performance Indicators, both financial and nonfinancial.
The report also sets out some suggestions of what companies might to improve their reporting.
So where do we go from here?
One aspect of the review that has been pleasing to see is that many of the companies surveyed are reporting beyond simple compliance with the law and moving towards best practice. As part of the ASB’s role in promoting confidence in corporate reporting, we seek to support the trend towards more transparent and open communication between companies and their shareholders and we will continue to review progress in this area. We hope that this trend will continue as companies with December 2006 yearends publish their annual reports and accounts over the coming months.
And there’s more to come…the Companies Act 2006
The Companies Act 2006, which received Royal Assent last November, contains a number of further provisions in relation to the Business Review, which is to be given a statutory purpose: to inform the members of the company and help them assess how the directors have performed their duties to promote the success of the company.
For quoted companies, the Act will bring back some of the provisions contained in the former OFR legislation. To the extent necessary for an understanding of the company, the Business Review shall contain information about environmental matters, the company’s employees, social and community issues, and persons with whom the company has contractual or other arrangements which are essential to the business. The Government’s intention is to commence all parts of the Act by October 2008 and the provisions will clearly have an impact on reporting in the future by quoted companies.
The full report is available on the website at: http://www.frc.org.uk/asb/press/pub1228.html.
