2017 volume 27 issue 3

Annual Reports: Room for Improvement

FINANCIAL REPORTING AND IR

Andy Brown, KPMG
Rob Brouwer, KPMG

It can be challenging to identify the gap between the information investors need to assess the health and prospects of a company and the information they receive through corporate reporting channels. Drafting an annual report involves balancing regulatory requirements, accounting requirements, market expectations and effective communication of the company’s narrative.

In its second edition, KPMG’s Survey of Business Reporting presents the main findings from a global analysis of the content of 270 larger listed companies’ annual reports. The report aims to highlight weaknesses and identify best practices in the presentation of corporate information, while helping to chart a course toward improved communication between companies and their stakeholders.

Main survey findings – the ‘must dos’ for improvement:

1. Give investors the information they need

Annual reports can do more to look beyond past financial performance to provide objective information on current performance levels, details of strategy and progress in implementing it. They should provide more insight into how key business resources are being managed to meet the longer-term needs of the business.

Report content

The average report devotes 42% of the content to the financial statements but only 14% to business strategy.

Looking forward

Just 7% of reports provide information on things like order book or sales run rate to explain how the baseline performance of the business has changed.

2. Keep the report content clear and relevant

Narrative discussions of corporate performance are often repetitive, anecdotal and fail to reflect business priorities, while the length of financial statements is often driven by national practices rather than the specific circumstances of the business.

Plenty of space

The average annual report is 204 pages long. Reports certainly don’t need to get any longer to be more insightful.

Different views of ‘concise’

Financial statement average length varies significantly between countries – from 60 pages average length in Russia to 140 pages average length in Italy.

3. Provide a longer-term view using operational KPIs

Better reporting of non-financial key performance indicators can help to balance short-term discussions of financial performance with a longer-term view of business success. The right objective operational performance measures provide valuable insight into business prospects. Companies can support a longer-term view of performance by selecting measures that align closely with the specific drivers of success for their business.

A healthy business

Only 11% of reports come close to covering performance information on key areas of business health.

Track record

Only 9% of reports provide a five-year track record of operational performance.

4. Provide practical KPIs that align with strategy

Some companies already provide simple measures that explain some major aspects of business performance. These measures can help investors assess the commercial success and prospects of the business.

Winning customers

Only 17% of reports indicate whether the business is winning or retaining customers.

Building presence

Just 15% of reports show how brand or market share is developing.

Building capability

Only 8% of reports show whether the business is building or retaining its relevant know-how and expertise.

5. Provide deeper analysis of strategy

Descriptions of business model and strategy could be more tightly focused. Many business model descriptions focus on just a few aspects of the company and strategy discussions tend to highlight short-term incremental performance improvement rather than the long-term corporate direction.

Short term

Nearly half of reports (44%) do not look beyond short-term initiatives when discussing strategy.

Missing the point

Almost three-quarters of reports (73%) do not discuss customer focus as a key business objective.

Part of the story

Only 58% of companies identify knowledge and expertise as a key part of their business model.

6. Focus risk analysis on what’s important for the future

The quality of risk discussions is variable. Many risk discussions appear to have been published in order to comply with regulations rather than to help investors understand how the most important risks are being managed. Common issues were failure to focus on the risks that are most relevant to business value and not addressing risks related to growth strategies.

Risk overload

Risk disclosures in four countries (including Canada) identified an average of over 20 ‘key’ risks each, suggesting a lack of focus on the most important matters.

A static view

Only 11% of reports show how the risk profile has been managed over time.

Strategic risks

Fewer than 10% identify risks in relation to strategy selection, product relevance and change management.

Canadian regulators are looking at their role

Consistent with the findings above, regulators are encouraging companies to focus on improving their disclosures.

Earlier this year, the Canadian Securities Administrators (CSA) issued Consultation Paper 51-404 to seek stakeholder comments on areas of securities legislation that could be modified to reduce regulatory burden without compromising investor protection. In the Consultation Paper, the CSA recognized that the volume of information included in annual filings under existing regulatory requirements may obscure the focus on key information needed by investors and analysts. In considering ways to refocus annual filings, the CSA sought comment on, among other suggestions, removing the requirement to discuss prior period results in the management discussion and analysis (MD&A) and reducing overlap between information required in the MD&A, financial statements and annual information form (AIF). These suggestions support the finding that annual reports do not need to be longer to be more insightful. By reducing information that has already been communicated (whether in other documents or in previous reports), companies can focus more real estate on discussing their business model and strategy.

Closing the gap between investors’ needs and the information they currently receive will take time. The process will be incremental and evolutionary; however, companies that meet this challenge are likely to find they have the basis for a more focused discussion with their investors of business performance. 

Andy Brown, CPA, CA is a Senior Manager, and Rob Brouwer, FCPA, CPA is Canadian Managing Partner, Clients and Markets, for KPMG LLP in Canada.

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