8 ways to... focus your annual report

1 Think about the reader
“Remember that the annual report has different audiences,” says Alan Hines, MD of award-winning annual report agency Luminous.

“We’re working on the Debenhams report, which has to communicate something about the brand to both customers and analysts. So the first 20 pages are very accessible, with almost no jargon.” In fact, many professional investors and analysts don’t really care about your narrative section at all.

According to former CFO Jim Weight, one of the reasons Westminster Healthcare went private in a £267m buy-out in 2002 was that even the largest institutional investor could only devote a few hours each year to analysing the company. Hardly surprising, then, that unless it does something very useful, the front of the annual report often gets ripped off and thrown away by analysts.

“But if it’s easy to get the data they want, readers can spend more time understanding the business in the round,” says Hines. “And any report is, to some extent, a sales brochure. Many companies use them as part of tender packs, or with key suppliers. So if you’re simply ticking the regulatory boxes, it’s not going to work as well.”

2 Keep it simple
The financials are defined by reporting standards. But even the Accounting Standards Board thinks they should be better presented.

“Clutter [within reports] makes it more difficult for users to assess a company’s progress by obscuring relevant information,” it explained in its report, “Cutting the Clutter”. “[It] is also a big issue for preparers.” And there’s even more scope for getting messages across more directly in the front section.

But “simple” isn’t “dumbed down” – it’s just using what you know about the audience to tailor information and present it clearly. That usually means graphically. It also pays to be succinct.

Deloitte’s Gems and Jetsam survey of UK reporting showed annual reports actually got shorter – just – in 2011, averaging 98 pages. Bear in mind that in every survey since 1996 (when the average was just 44 pages), the length of annual reports has increased. Punchier reports ought to be more effective at getting their messages across. (And they’re cheaper.)

3 It’s all about context
“Every good report starts with a contextual overview,” say Hines.

“The detail is crucial, of course, but it’s useful to have an up-front summary explaining how big the business is, where it operates, what it does and who makes that happen. Then you can provide context for that information – the market size, how it’s changing and so on.”

Then it’s about clarity on performance within that context. “We are very pleased that descriptions of risks and uncertainties are improving,” said Financial Reporting Review Panel chairman Bill Knight in his 2011 report.

“We applaud honest, straightforward reporting that reflects the good and the less good aspects of performance.”

Nevertheless, only 31 per cent of UK companies describe their business model in their annual report, according to Deloitte. That’s going to be a requirement of the Corporate Governance Code soon, but smart businesses will already look at it as a way of creating a clear context for their operations. It also helps build towards integrated reporting (2012 - the year of integrated reporting).

4 Get your KPIs right well ahead of time
The data you use to explain performance needs to be well thought through, too. Obviously you need to present the headline information from the financial accounts in the most visually pleasing way possible. “You often see strong sector analysis at the back of the annual report,” says Hines.

“But a lot of companies don’t pull that material out and make it easy to find or digest.” And the choice of which management accounting information you present – and how – is equally important.

“That’s a strong trend,” he adds. “Presenting the metrics that really matter to the business. It’s about giving the reader a quick view of the important data.”

5 There’s no escaping the net
“We think that an annual directors’ statement should be structured and aimed at online users,” explained Ed Davey MP, introducing the Investor Relations Society discussion paper on the future for narrative reporting.

“For example, tagging narrative information to make it more easily searchable.”

That places a burden on preparers of the management accounts. How should you prepare data so that relevant information can be automatically delivered into online and offline formats? Which information is regulated? And which KPIs, for example, are the most indicative of company development?

“There are millions of potential investors just a click away,” says Hines. “Try to make the online experience interactive – animate charts, for example, if users want different views of the data. At a minimum, supply Excel spreadsheets they can download.”

6 Make it personal
Within the overall company narrative, human stories can give quite dry information or initiatives a more compelling edge.

That even extends to the finance function. “Reports should include a picture of the FD and be signed off by them,” says Hines.

“Readers like to put a face to a name – that they are dealing with a human being, not just a numbers factory. It also allows you to provide commentary on key topics.”

Of course it’s not uncommon for the FD to have a “column” in the report, and you almost certainly won’t find one without a letter from both the chairman and CEO. But these can be repetitive – so each one should find different ways to complement the overall narrative.

Typically, this means a CEO reflecting on strategy and operations, the chairman addressing governance and board issues – and the FD providing a context for the financial performance.

7 Keep an eye on change
Reporting is a fast-moving area that demands a lot of preparers who want their report to stand out. Groups such as the IIRC (see below) and the Prince of Wales’s Accounting for Sustainability Project (A4S) are pushing it into new areas requiring new and better metrics – that management accountants are best placed to provide.

So it’s worth monitoring their activities and recommendations. UK preparers will want to stay up to date with the FRC’s brand-new Financial Reporting Lab, for example.

And CIMA also contributed to the Tomorrow’s Corporate Reporting project, run by think tank Tomorrow’s Company. It recommends taking a much more holistic view of reporting.

8 Look forward
In an uncertain world, it might seem perverse to emphasise forward-looking statements. But since the finance team is almost certainly pulling together both short and long-term forecasts, as well as feeding into strategy development, it’s actually more strange when companies don’t publish a bit of crystal ball gazing.

ARM Holdings’s annual report is up for several awards this year, and Hines thinks a major reason for that is its desire to frame its own future.

“The report builds up a very clear picture of the business and then projects forward,” he says.

“ARM is very good at that forward-looking side – although not every company is or can be.”

But if the report is, in part, designed to give investors confidence in holding onto their shares, it’s really incomplete unless it shows that management – and their finance team – have got a good handle on what’s coming next.

2012: the year of integrated reporting?
According to the International Integrated Reporting Committee (IIRC), reports should “demonstrate the linkages between an organisation’s strategy, governance and financial performance and the social, environmental and economic context within which it operates”. (See more at www.theiirc.org)

“This is a natural extension to our work, driving forward narrative reporting,” says Nick Topazio, CIMA’s technical expert on reporting.

“We have long advocated the integration of strategy, opportunities, risk and performance, with a clear explanation of how the organisation makes money – the business model.”

In October, 40 of the world’s leading companies – from Akzo Nobel to Volvo – joined a pilot scheme to demonstrate how it might work.

“It provides the mechanism to improve financial reporting by providing information in a concise manner on how a company creates and sustains value,” says Peter Klein, Microsoft’s CFO.

It also creates a framework for every company to start pushing the boundaries in their own reports. “If there are material issues that may affect long-term business success then they should be discussed openly and completely in the narrative report in an integrated manner,” says Topazio.