Embed a materiality mindset
Published: 12 October 2023
5 minute read
Companies shared some advice and tips to embed a materiality mindset in their corporate reporting. This list is not meant to comprehensively cover good reporting processes. Companies may also find it useful to consider the process map for accounts preparation set out in Appendix 3 to What Makes a Good Annual Report and Accounts.
Many of these tips focus primarily on narrative reporting, as applying materiality is often more challenging for this area of reporting. Section 5 of the Guidance on the Strategic Report provides a detailed discussion on materiality to aid companies.
FRC, What Makes a Good Annual Report and Accounts“The approach taken to assess the materiality in the strategic report can be applied to the whole ARA including other narrative reporting unless there are requirements that:
- are more specific; or
- mandate the disclosure of information irrespective of materiality”
Create a common understanding of key messages
Many different teams and reviewers are contributing to the content of ARAs. Producing an ARA that has a consistent voice and focus throughout can therefore be challenging.
Company"The issue is that every part of the business wants to tell their own story and make it as interesting as possible. This can make it disjointed without coordination."
To address this challenge, it is helpful to sit down with senior management, both upfront and throughout the reporting process, to identify the key messages that they want to communicate. These messages should relate to the issues you have identified in your holistic materiality assessment. Having a common understanding of these messages among contributors to the report can help to tie the report together.
Company"We think about what the golden thread is. If we had to summarise the ARA on one page – what we would think about, what would we talk about and what would matter?"
Get senior buy-in
Companies tell us it is often difficult to remove legacy pages or content from the ARA. Senior buy-in can be very helpful in ensuring everyone plays their part in cutting clutter. One company told us they were successful in cutting down the length of the narrative reporting in the ARA because their chief executive had set a target of a 25% reduction in page count. Reconsidering the need for legacy text also means that the annual report can better explain the company’s performance in the reporting period.
Company"It does help that the message is coming from our CEO rather than from the annual report project team. We get to say to contributors - look, this is coming from way above us, you need to reduce your pages and word count."
Start from a blank piece of paper every so often
Many companies have told us they are rolling forward the annual report from last year and adding in information where needed. Making significant changes creates additional work and risks. However, over time, this may result in a long, unwieldy and incoherent report.
To avoid this, some companies go through an exercise every few years to think about how they can better communicate the key messages within a report, if they were starting from scratch. You may want to start afresh on sections on a rolling basis, so every section is refreshed regularly.
Take a critical look at your accounting policies
Recent changes in IFRS Standards emphasise the need for companies to report their material accounting policies. For example, companies may want to review whether there are any policies that were previously added in the year of transition to a new IFRS standard. Some information may cease to be material once investors become more familiar with how the new standards have impacted the financial statements.
Company"When we first applied IFRS 16 Leases, we added quite a lot of disclosure, including extensive disclosures about judgements. At the time, investors were really scratching their heads about how to reflect the change in their valuation models. Since then, we have cut back those disclosures."
Ensure material information is not obscured
Consider whether there is any topic that gets disproportionate attention in your report. Investors are often concerned that sometimes companies are including disclosures because they thought it was ‘the right thing to do’ rather than because they were actually spending substantial time and resources on it. This is more frequently an issue in narrative reporting, than in financial statements.
Company"When we say in our report that people are important to us, we ask ourselves: do our actions really show what we’re saying or are we just paying lip service?"
For example, consider whether case studies provided for illustration add value and are a fair representation of the balance of your company’s activities. Actively reviewing and considering materiality against the Task Force on Climate-Related Financial Disclosures , Companies Act 2006 and Section 172 reporting requirements may also be helpful, as well as checking whether any information is not an explicit reporting requirement.
While the application of materiality to financial statement recognition and disclosure matters is typically better understood, there is still scope for improvement to remove clutter in some areas, such as accounting policies, detailed disclosure notes for immaterial balances, and rolled forward disclosures which are no longer relevant (for example, historic acquisitions or legal cases).
Avoid duplication
Consistent messaging is good, but there is no need to duplicate text. For example, having a CEO and chair statement that are nearly identical is not helpful.
FRC What Makes a Good Annual Report and Accounts"Excessive duplication of material across the ARA that obscures other decision relevant information may attract regulatory comment."
Reflect on how the report works as a package
Once you have produced a draft of your annual report, take a step back to reflect on the content of the report as a whole and ask:
- Are the key messages that you identified upfront communicated clearly and consistently in the annual report and other materials, such as investor presentations?
- Is there any information necessary to understand the entity’s business model, strategy and future prospects that is missing?
- How balanced is the messaging? Is there material information that needs to be presented more prominently? For example, are the topics that took up a lot of the Board’s bandwidth during the year also given more space in the annual report? Are underperforming businesses and adverse events given sufficient prominence compared to success stories?
- Where issues are qualitatively material but quantitatively immaterial, how have you ensured disclosures are sufficient and balanced?
- How have you connected your reporting across the narrative disclosures and the financial statements?
Company"We acquired a business this year, which was quantitatively immaterial. However, because we generally pursue organic growth rather than acquisitions, we concluded it was qualitatively material. We described the details of the transaction and the rationale behind it in our ARA and investor presentation." Company
Some companies find it helpful to incorporate these considerations in their ‘fair, balanced and understandable’ assessment, which is already on the board agenda for those applying the Corporate Governance Code.
Engage your auditor early
If you conclude that a piece of information is not (or is no longer) material, it may be helpful to have early discussions with your auditor ahead of the year-end. Set out your judgements and rationale in a paper and have a conversation with them as early as possible. A proactive, documented approach is more likely to be productive than last-minute discussions close to the publication of the report.
Leverage your website and other communication formats
Consider whether there is information that is not material and not required to be in the annual report that could be moved to your website. Some information may only be relevant to a small subset of investors and other users, such as ESG rating providers. Such information could be presented in a separate supplement on your website.
Some information, such as case studies, may be better suited to be presented on a website using images and videos, rather than in a static PDF. Companies may want to have a look at the Lab’s report on the use of videos in corporate reporting for inspiration.
Company"We used to have a written CEO Q&A in the annual report, in addition to a CEO statement. Now we have a video of our CEO talking through the Q&A on our website, which is more engaging."
Large amounts of tabular data may also be easier to consume when provided in a separate data sheet. The Lab’s recent report ESG Data – Distribution and consumption discusses how to use datasheets effectively. The report provides some further tips for companies on how to provide sustainability-related data in a way that facilitates investors’ and data providers’ consumption of the data.
Share your tips
If you have some more tips that you want to share with other companies, please get in touch at [email protected]
This is part four of a four-part series Applying a materiality mindset.