New group spearheads debate on corporate reporting

The Report Leadership project aims to provide solutions and ideas for a new reporting model. By Tim Cooper, editor, email newsletters, CIMA.

David Phillips

A new initiative aimed at maintaining the health and relevance of corporate reporting has been launched. This is the first stage of the Report Leadership project - a coalition between CIMA, PricewaterhouseCoopers, Radley Yeldar and Tomkins.

Announcing the launch, David Phillips, corporate reporting partner, PwC, said: 'We are at a critical crossroads in the development of reporting. The convergence of US GAAP with IFRS poses many challenges, one of which is the need for increasing explanation of performance as earnings become more volatile. Also societal expectations are increasing the importance of contextual and non-financial information. Report Leadership aims to present constructive ideas to address these and other issues.'

Phillips said the challenge was to create a reporting model fit for purpose, not one driven by compliance or 'created by regulators for regulators'. It should also enable management to explain performance and recognise the real information needs of shareholders and investors. He added: 'This won't happen by chance. We need serious debate and input from all those involved in the reporting process. It is this challenge that brought the Report Leadership group together.'

Future direction

Rather than criticise current reporting models, the group aims to look ahead and help define future direction of travel.

Phillips said: ‘It is not an academic thesis, gathering dust. It is a set of ideas, which we hope will act as a catalyst and stimulate a fundamental debate on the future shape of reporting. This should change how we think about reporting and the mechanisms we need to create the right model.'

To kick off the process the group has released two documents. The first is a framework document setting out the issues that investors say need adressing, and the second is a report of a fictitious company called Generico, which brings the issues to life.

The issues that the reports address fall into three main categories.

Modelling the future

CIMA has a particular interest in modelling the future through the provision of contextual information. This should allow investors to assess the quality and sustainability of future cash flows. It needs a broad information set, covering critical contextual, non-financial and financial information.

Charles Tilley, chief executive of CIMA, said: 'The financial statements now cover only a limited proportion of the value of a company. 25 years ago, it was estimated that around 80% of the market value of the S&P 500 was reflected on the balance sheet, with 20% being in intangibles and future growth opportunities. Today that ratio is roughly reversed with only around 20% being on the balance sheet. There are many reasons - not least ownership and measurement - why much of this value cannot and should not be reflected in the financial statements.

'It therefore falls to narrative reporting for directors to set out and explain the contextual information, such as the business environment, strategy, forward-looking information and key performance indicators.

'External reporting should be the top slice of management information that is used in board discussions. Report Leadership seeks to align external reporting with management reporting and uses some practical examples of how this might happen.'

Rethinking the financials

Here the group has taken a few selective areas - segmental information, pension and debt information - and shown how financial information can be enhanced by introducing new disclosures and new ideas for presentation.

Effective communications

Phillips said: 'We all know when we read something that is engaging and accessible - you can't put it down. This is not prevalent in corporate reporting today. The report shows how effective use of structure, messaging and navigation can make a report effective in telling a corporate story and make information accessible.'

The Generico report then illustrates practical ways that companies can address these issues and so meet the demands of investors. It highlights ways to deliver effective and accessible reporting.

Phillips said: 'This report is not intended to be the final answer, but we hope it will engender debate and change. Importantly, the ideas it contains can be implemented today.'

Visit the Report Leadership website.

December 2006