How corporate reporting can be reformed to help users and preparers

Proposals for a new network of interconnected company reports aim to deliver a radical overhaul of the current UK reporting framework.

In brief

• The Financial Reporting Council (FRC) proposes to unbundle the annual report and accounts (ARA), and increase reporting of value creation and societal impacts.
• Companies might need to produce three core reports (Business Report, Public Interest Report and financial statements) supported by additional network reports.
• This article summarises recent roundtable discussions that we have held with a number of companies on these proposals.

The FRC’s discussion paper on The Future of Corporate Reporting explores ideas for changing the UK’s corporate reporting system with the aim of making it more effective and engaging for all those with an interest in a company. It responds to the frequent complaint that the ARA – widely seen as the ‘set piece of corporate reporting’ – is too long. It reflects the growing interest in non-financial information and understanding companies’ impacts on society and the environment. However, it also identifies the challenge of balancing the need for more concise reporting against demands for more transparency.

The proposals aspire for a ‘more radical overhaul’ than simply tweaking at the edges. They outline a new model that would unbundle existing reporting and replace it with a network of interconnected reports.

FRC’s key proposals

Three core reports would form the part of the annual reporting cycle: a Business Report, Public Interest Report (PIR) and the financial statements.

The Business Report would provide information that enables users to understand how the company creates long-term value – similar to a concise Strategic Report and including financial and non-financial information. The PIR is intended to provide information that enables a user to understand how the company views its obligations in respect of the public interest and how it has measured its performance against those obligations, as well as information on future prospects. It is seen as being akin to a sustainability report but broader and subject to a greater degree of rigour.

Companies would also produce additional network reports, some mandatory and some voluntary. These would be developed around a communication objective, as opposed to a particular stakeholder, for example, providing standing data. Materiality would vary across the reports, being set from the perspective of a particular report and its communication objective.

Market views

Based on EY’s recent discussion roundtables with companies, we know there is considerable support for corporate reporting reform of some sort. Many expressed the need for the FRC to be more progressive however and for change to occur well before its 2030 timeframe, so that the UK can be a change leader or at least an influencer in this space over the next few years. There is little support for drip-feed change: the final proposals will need to be issued as one package in order to drive real change. Real change also requires the willingness of the UK Government to commit to enabling legislation. Otherwise the outcome is likely to amount to tinkering at the edges, regardless of the FRC’s initial ambitions.

Unbundling the current ARA is seen as a good idea in principle. This is not a new concept however – many companies already split parts of their annual report such as a Strategic Report or governance report for users to access and download separately if they wish. Roundtable participants also thought it was important to have a framework in place so that stakeholders know exactly where to find core information and aid comparability across companies. Too much disaggregation risks duplicating information as well as losing the benefits of cohesive, integrated reporting and story-telling that exist now. It also seems unlikely to ease the current burden felt by reporters, and could even increase it.

The PIR triggered substantial discussion and deserves further debate. There is recognition that, in the post-COVID-19 years, companies will face stronger calls to recast their corporate contract to demonstrate how they are adding value for wider society, and not just their shareholders. That said, roundtable participants expressed the need for more concrete detail on the FRC’s proposals on the PIR’s contents and how it would differ from the public interest aspects of the Business Report. A lack of clarity may neither reduce the burden on reporters, nor produce information that is relevant or different for stakeholders. The PIR also seems to be doing the opposite of unbundling, by including many elements that are currently provided online, such as supplier payment and gender pay gap reporting.

As the FRC’s proposals stand, governance reporting does not feature in any of the core reports. We are concerned about this omission – we see governance as being central to long-term value creation and think governance reporting should be an important element of the Business Report. If it is not, we could see a return to a tick-box compliance mindset, which is undesirable.

We also found a consensus that reporting on stakeholder issues is of critical importance, but there needs to be clarity around materiality and the metrics companies report. The proposed definition of materiality, based on the objective of a report, needs development. Information that might be material to the objective but immaterial to all stakeholders could obscure more relevant information. We could also see a proliferation of reporting different things to different stakeholders.

The use of technology could feature more strongly in the FRC’s proposals – they could be better grounded in, and led by, digital tools and capabilities such as tagging and data extraction.

Engage now to influence the future

The FRC’s discussion paper represents the starting gun on a new era of corporate reporting reform. It is therefore a welcome and important development.

This is a long-term project and we need as many voices as possible to help shape future recommendations. Whilst the consultation has now closed, we encourage you to engage with the FRC as its work progresses. Please share your thoughts with us too so that we can reflect your thinking in our own discussions with the FRC.