As the UK government looks to modernise corporate reporting, ICAEW's experts have been exploring the key questions that need to be addressed. Here we explore why is it so important for organisations to have real clarity over the purpose of the annual report.
Key takeaways:
- ICAEW agrees that annual reports should provide material information that is useful to existing and potential investors, lenders and other creditors.
- A clearer distinction between core decision-useful information and more static information could help keep the annual report focused on the information most relevant to its primary users.
- A modern framework should be capable of explaining if a single reporting purpose can apply across all entities, or if it needs to be articulated differently for different types of organisation.
A clear explanation of the purpose of annual reports provides a firm basis for decisions about:
- materiality,
- reporting boundaries,
- proportionality, and
- disclosure requirements.
It can also help determine what information belongs within the annual report and what information may be better communicated elsewhere.
Investor focus
ICAEW has previously supported an investor-focused purpose for the annual report. We argued that an annual report should provide material information that is useful to existing and potential investors, lenders and other creditors when they are making decisions relating to providing resources to the organisation.
This approach aligns the purpose of the annual report with the objective of financial reporting in the IFRS Conceptual Framework. Furthermore, it aligns with the ISSB's recently developed sustainability standards, which define primary users of general-purpose financial reports as: existing and potential investors, lenders and other creditors.
An investor-focused purpose provides a clear basis for determining what information is likely to be relevant to users and helps anchor decisions about materiality. It also offers practical advantages, such as: creating a clear primary audience and reducing the risk that reporting becomes an attempt to satisfy every conceivable information request simultaneously.
Wider stakeholder needs
Beyond investors there are a range of stakeholders, such as employees, suppliers, customers, regulators, tax authorities, local communities and wider society, who may all have legitimate interests in information about a company's activities. In some cases, for example, suppliers and tax authorities, these interests will be in their capacity as creditors of the reporting entity. But interests may also be aligned to broader objectives.
Many reporting requirements have emerged precisely because policymakers identified information needs beyond investors, lenders and creditors.
Some disclosures support economic decision-making, while others are primarily intended to support accountability, transparency or wider public policy objectives.
A reporting framework designed to meet all stakeholder needs through the annual report risks becoming increasingly complex and may make it harder for users to identify information that is genuinely material.
This is particularly important in relation to disclosure. Materiality is generally well understood in the context of recognition and measurement, but it can be harder to apply discipline to narrative and other disclosure requirements.
Wider stakeholder information needs can be important. However, determining that information is relevant does not automatically mean that the annual report is the most appropriate place for it. In some cases, websites, Companies House filings, targeted regulatory filings or direct communications may provide a more effective channel.
A clearer distinction between core decision-useful information and more static or standing information could help keep the annual report focused on the information most relevant to its primary users.
A modernised framework should be capable of explaining whether a single reporting purpose can apply across all entities, or whether that purpose needs to be articulated differently for different types of organisation.
Specific types of entities
A further challenge is whether a single purpose can effectively apply across all entities, regardless of their size, ownership structure or nature.
An investor-focused framework makes the most sense where external investors and capital markets play a central role, for example listed companies. It may also work well for many larger private companies with significant external financing arrangements.
The position is less straightforward for other types of entity, such as owner-managed businesses, closely held companies, subsidiaries, and not-for-profit entities.
For many small and micro-entities, for example, shareholders may already have direct access to information through their involvement in management and external creditors may use the annual report more than investors. For some entities, there may be relatively limited external demand for publicly available financial information.
A modernised framework should consider whether a single reporting purpose can apply across all entities, or whether that purpose needs to be articulated differently for different types of organisation.
Questions government is asking
- Do you agree or disagree that requirements in the annual report and accounts should be focused on the needs of existing and potential creditors and investors?
- What are the benefits and drawbacks of aligning reporting requirements for publicly listed and private companies?
- What types of disclosures are most useful for decision-making from either a company, or investor and creditor perspective?
Have your say on MCR
ICAEW wants to understand members' views on the government's proposals on modernising corporate reporting. Your feedback will inform ICAEW's engagement with the consultation.
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