The Accounting Standards Board (ASB) has today issued ‘Rising to the challenge’, the report of its review of the narrative reporting of 50 UK listed companies in 2008 and 2009.

The review focused on:

• how companies are complying with the enhanced business review content requirements from the Companies Act 2006 (CA);
• effective communication and presentation of the required content; and
• areas that are leading to clutter in narrative reporting.

The review found that the best reporters continue to evolve their narrative reporting and also did well across a number of content areas. Overall, most companies provided good content in relation to their:

• financial performance and position;
• financial key performance indicators (KPIs); and
• articulation of strategy.

Ian Wright, the FRC’s Director of Corporate Reporting noted that providing the reader with a good understanding of the business is critical:

"For many companies, although we understood what they sell, where they sell it and who they sell it to, generally they fell short of describing how all the pieces fit together – that is, the business model. Many of the strongest overall reports in the sample included a business model disclosure, which lead us to conclude that good business model disclosure can drive better disclosure in other areas."

However, some companies continue to struggle to meet some of the requirements, notably the communication of principal risks and non-financial KPIs.

Ian Mackintosh, Chairman of the ASB said:

"When reporting principal risks, 66% of the sample was technically compliant but in our view needed to make improvements to meet the spirit of the requirements. A number of companies resorted to simply providing descriptions of generic risks that could be easily cut-and-pasted into many other FTSE annual reports. Thirty-two percent of the sample did not disclose any non-financial KPIs, despite the CA requirement to do so where ‘necessary’ and ‘appropriate’."

In addition, the ASB found that companies are having difficulty with some of the new enhanced business review requirements:

• only 38% of companies provided discussion of trends and factors that was relevant and forward looking
• it was unclear whether 52% of the sample specifically addressed the requirement to discuss contractual and other arrangements ... for 12% it was clear they did not.

The review found that risk reporting and CSR sections contained the most clutter, which distracted from important information in these sections.

Ian Mackintosh said:

"Listing every conceivable risk just adds to clutter, one company had 33 risks and 8 companies had 20 or more. Some companies had risk sections that were 10 pages long."

Ian Wright said:

"Another common source of clutter relates to Corporate Social Responsibility (CSR) reporting. The annual report should principally address the specific needs of shareholders and lenders, although such reports may also be useful for other stakeholders. Many shareholders and lenders are increasingly interested in environmental and other social impacts, particularly where they have an impact on the long-term sustainability of the business. Thus companies should comment on CSR matters in their annual reports to the extent that they do impact long-term sustainability of the business. Detailed explanations of sustainability issues, in our view, are best dealt with in a separate report."

Some key points to assist companies in rising to the challenge of narrative reporting have been summarised in the following list of ‘Do’s and don’ts for companies’.

Narrative Reporting: ‘Do’s and don’ts for companies’

1. Do provide context for principal risks and uncertainties – are they increasing or decreasing…don’t simply include generic descriptions of risks that could easily be cut and pasted into another company’s report.
2. Do use tables to link principal risks to related actions to manage the risks…don’t shrink the risk content down to fit the table, instead expand the table to fit the content.
3. When articulating strategy, do ensure that you describe ‘what’ your goals are and ‘how’ you plan to achieve them…don’t make bland statements like ‘our plan is to grow’ with no further explanation.
4. Do use your KPIs to demonstrate progress against stated objectives and strategies…don’t just tick the box by providing a KPI table that does not link to the rest of the narrative.
5. Do explain why CSR is important to the business…don’t include information on employees, environment and social and community that is not important.
6. Do include non-financial KPIs to explain how the key drivers of the business are monitored…don’t include peripheral measures such as number of employees just to tick a box.
7. Do provide a comprehensive explanation of your business model - how you make money incorporating discussion of processes, distribution methods and structure…don’t limit this to discussion of just products and services or resort to the use of undefined technical jargon.
8. Do support your discussion of relevant industry trends with external evidence…don’t be afraid to quantify the trends instead of relying on bland statements like ‘the outlook for our industry is good’.

1. The ASB is an operating body of the Financial Reporting Council (FRC), the UK’s independent regulator responsible for promoting confidence in corporate reporting and governance. Its functions are exercised principally by its operating bodies (the ASB, the Auditing Practices Board, the Board for Actuarial Standards, the Financial Reporting Review Panel, the Professional Oversight Board and the Accountancy Discipline and Investigation Board) and by the FRC Board. The Committee on Corporate Governance assists the Board in its work on corporate governance.
2. The prime role of the ASB is to maintain UK accounting standards. The ASB collaborates with accounting standard-setters from other countries and the International Accounting Standards Board (IASB) both in order to influence the development of international standards and in order to ensure that its standards are developed with due regard to international developments.
3. The ASB has ten Board members, of whom two (the Chairman and the Technical Director) are full-time, and the remainder, who have a variety of experiences as preparers, auditors and users of financial reports, are part-time.
4. The report ‘Rising to the Challenge’, plus a full report of the detailed results, can be downloaded, free of charge, from the ASB’s website at http://www.frc.org.uk/asb/publications/review.cfm.
5. Press enquiries should be directed to Ian Mackintosh (Chairman) on 020 7492 2434, David Loweth (Technical Director) on 020 7492 2420 or Melanie Kerr (Project Director) on 020 7492 2428.