accountingcpd.net author Lisa Weaver looks at the importance of cutting clutter in your annual reports.
By Lisa Weaver
The Financial Reporting Council published a report in April 2011 entitled "Cutting Clutter: Combating clutter in annual reports".
The report argues that company annual reports often suffer from the problem of information overload, containing too much data and overly verbose narrative explanations which obscure relevant information and make it difficult for key points to be determined by interested parties.
The FRC considers that clutter exists because annual reports contain too many unnecessary disclosures on immaterial matters, and a tendency to include 'boiler plate' explanatory disclosures on issues which are unchanged from previous years.
The problem for preparers of financial statements is that in order for annual reports to comply with financial reporting standards, company law, listing and governance regulations, they must provide a huge volume of numerical information and written descriptions. Preparers of annual reports are likely to err on the side of caution and include more detailed disclosures than are strictly necessary to avoid challenge from auditors and regulators.
The biggest culprits in creating clutter have to be illustrative accounts and disclosure checklists, including those used by the audit firms. Many finance directors have commented to me that their auditors have advised them to include certain disclosures 'to be on the safe side', even if the disclosure relates to something immaterial.
Materiality should be seen as the driving force of disclosure, as its very definition is based on whether an omission or misstatement could influence the decisions made by users of the financial statements. The problem seems to be that disclosures are being made because a disclosure checklist suggests it may need to be made, without assessing whether the disclosure is necessary in a company’s particular circumstances.
While it is a fact that where required by law, financial reporting standards or other regulations, disclosures will need to be made, it would be good news for preparers, users and auditors of financial statements if disclosures were tailored, made as relevant as possible and ultimately streamlined and made more user-friendly.
You can find out more on Lisa Weaver's course on Corporate Governance here.