Annual reports: When growth isn’t good

In response to the demands of increased regulations and pressure from stakeholders, annual reports have more information. Quite a bit more information.

Indeed, the average length of reports in the UK has doubled over the past 16 years, a Deloitte survey found, and still the reports are falling short of providing enough clarity for some users.

The good news: The quality of annual reports has improved over the years, Veronica Poole, Deloitte UK’s national head of accounting and corporate reporting, said in a video introducing the survey.

“At the same time,” she said, “the quantity of information has also grown enormously. That mass of information means it is harder to see the wood for the trees. The regulating bar is set higher every year, and users’ demands are rising steeply.”

So, how do companies provide more information without providing too much? The Deloitte report addresses that issue, breaking down trends in the annual reporting of 130 UK companies.

According to the survey, Joined Up Writing: Surveying Annual Reports:

• The average length of annual reports is 103 pages, up 5% from 2011 (1996 average length was about 50 pages). The five-page increase, in general, came from the narrative section of the report; the length of the audited financial statement section remained unchanged.

• The bigger the company, the longer the annual report; the survey looked at public companies of all sizes. One bank had an annual report of 428 pages, 43 pages longer than its 2011 report.

“What we need to do is draw breaths and think about what is really important, and that is to have reports which show connected thought,” Poole said. “They need to marry up narrative with the figures.”

Groups such as the International Integrated Reporting Council (IIRC) have advocated for streamlined annual reports. The IIRC has a pilot programme that tracks 75 global companies’ progress in including more nonfinancial data in their annual report. U.S. companies such as Coca-Cola and Microsoft are taking part in the programme.

Other resources exist for best practices in annual reports. The European Financial Reporting Advisory Group’s Disclosure Framework discussion paper outlines principles for cutting back on the disclosure section of financial statements. And the Institute of Chartered Accountants of Scotland weighs in with Making Corporate Reports Readable.

PwC’s Practical Guide to IFRS: Streamlining the Annual Report, meanwhile, offers five tips on how companies can improve annual reports:

• Make the report easy to navigate. Users should be able to drill down and return to a summary quickly and easily.

• Play up the most important information. Think big picture and provide the entire scene first and foremost. Too many details can be a hindrance. They need to play a supporting role.

• Connect the information. Link strategy to objectives, objectives to performance and performance to remuneration. This provides users with a clear vision of how companies justify executive pay.

• Avoid reporting in silos. Strategy reporting should be all-inclusive. If information is not necessary for understanding the company, it might be better as either an online supplement or not used at all.

• Consider the quality of disclosures. Disclosures should not be boilerplate information. Make disclosures that are company-specific and company-relevant.

—Neil Amato (namato@aicpa.org) is a CGMA Magazine senior editor.