COVID-19 just might be the catalyst that pushes corporates in the direction that the FRC has been championing all along – namely, narrative reporting that seeks to provide clear, forward-looking insight into the business
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The FRC’s Annual Review of Corporate Reporting 2019/20 was conducted on reports with periods up to October 2019, but that didn’t stop COVID-19 from dominating the discussion. The FRC contends that the current environment has underlined several key messages about narrative reporting that it had been pushing well before the chaos produced by the COVID-19 pandemic, and these principles are more important now than ever before.
Overall, the FRC reports that the quality of UK corporate reporting has remained consistent, with incremental improvements in certain areas as companies adapt to new layers of regulation and reporting standards. However, productive communication with a varied body of stakeholders remains the FRC’s fundamental objective for reporters, and there is still significant room for improvement. In the context of the strategic report, the FRC notes that its concerns are more regularly linked to a lack of detail rather than outright non-compliance.
Too often, companies are taking a ‘box ticking’ approach that results in a clunky, opaque narrative, and especially in the context of global economic turmoil and ongoing uncertainty, stakeholders need companies to communicate better.
Here are 4 key themes that companies should keep in mind for their corporate communications right now:
The FRC has previously released guidance on how corporates should report on COVID-19 by emphasising performance, position and future prospects. On the whole, corporates are doing a sound job of communicating their response and the short-term implications of COVID-19 but providing forward-looking information has proven trickier. Companies should endeavour to give insight into how they are adapting for an uncertain future, either by embracing new opportunities or taking measured steps to ensure survival.
The FRC wants to see greater attention paid to forward-looking disclosure, but any conjecture about future prospects should be underpinned by clear and transparent details. Particularly in the context of COVID-19, this means bolstering risk reporting and paying greater attention to going concern assessments and the viability statement. Companies should seek to provide more details about the key assumptions and methods underlying these disclosures, including evidence in the form of scenario and stress testing.
To establish a coherent narrative across the annual report, the content across the different sections should work together to tell a consistent story. The FRC believes this can be improved if preparers take a step back and look at the report as a whole to ensure various elements do not contradict one another, particularly in relation to the business model, going concern disclosures, the viability statement and financial statement assumptions and estimates. Cross-referencing between sections can help to improve readers’ understanding, reduce redundancies and establish better linkage throughout.
Authenticity is key to meaningful disclosure, and particularly in the context of the upheaval wrought by COVID-19, shareholders and wider stakeholder groups need relevant and candid information, not a marketing speel. For example, the FRC highlights how the financial review should be used as an opportunity to provide a transparent and comprehensive explanation of the company’s financial status. CFOs should avoid highlighting only the good and address any spots of negative or unclear performance head-on; this also goes for the outcomes of stakeholder engagement activities.
Take a step back
COVID-19 just might be the catalyst that pushes corporates in the direction that the FRC has been championing all along – namely, narrative reporting that seeks to provide clear, forward-looking insight into the business with transparent details on the thinking behind the judgements and conclusions put forward. UK corporates are getting ever closer to achieving this goal – this year, try following the FRC’s advice to ‘take a step back,’ consider what good communication looks like and how your annual report can better align with that vision.
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