A Discussion in the Implication of the Increasing Length of Annual Reports

...

Nonetheless, EBR is another reason to boost an increase in annual reports’ growth. The core parts of EBR are about Key Performance Indicators (KPIs) and applying KPIs in environmental or employee matters. According to the Companies Acts 1985

(section 234) and the Companies Acts 2006(section417), A key performance indicator is defined in law as a factor which measure the development, performance or position of the company’s business. Although it is not required used for companies’ EBR, 77% of companies clear identify KPIs. The objectives of financial and non-financial KPIs are assessing profitability, shareholder return, employee-related matters, customer satisfaction, environmental matters and health & safety. For example, as the graph shown below, this is J-Sainsburys plc EBR included KPIs. It shows sale growth in recent 5 years, like-for-like sales and total sales growth dramatically increase from 1.8 to 15.9 and from 4.3 to 27.8 (profitability). On top that, dividend per share increase from 13.2 pence to 16.7 pence (shareholder return). J-Sainsburys plc launched a City & Guilds’ training programme for 20000 staffs (employee-related matters) Moreover, over two million meals donated in UK’s food driver; half of this comes from Sainsbury’s customers but J-Sainsburys plc matched the other half (customer satisfaction). Company already reduce 50% water consumption against the their baseline, and 75% of their waste can be transfer in positive (environmental matters). J-Sainsburys plc conduct ‘Five-A-Day the basics ways’ policy, it helps to improve the quality of fruits and vegetables (health & safety). Therefore, it is clear to see that KPIs can enhance communication with customers, and companies can provide excellent customer service or product depending on the requirements of KPIs

[pic 2]

[pic 3]

Problems of the increase in annual reports’ length

Because of an increase in annual reports’ length, it also brings some problems to its’ users. First of all, this will result in some clutters in annual report, because some additional information is complicated and irrelevant for users. According to The financial Reporting Council (FRC) public report “Louder than Words”, principles and actions for making corporate report less complex and more relevant in June 2009. Nevertheless, FRC identify clutter as a problem because it ignores some key information and materiality to the business. This means that FRC required annual reports to be concise but informative. Clutter makes annual reports more complicated for users assess information in annual reports, because users only have limited time and efforts to assess it. Clutter could be divided into two types of problem. First, company need to eliminate or tailor immaterial disclosures but focus on material information, because immaterial disclosures are beyond than most of users can use. For instance, detailed notes supporting line items that are small – often the case for share-based payments. Therefore, companies have to identify immaterial information and focus on material disclosure, and then reduce irrelevant information. More importantly, to reduce immaterial information helps to improve communication effectiveness and understandability of annual reports. It is beneficial for company leaders to make decision, and investors or users generally assess financial situations and companies’ management. Specifically, according to EY “Disclosure effectiveness”, they need to reduce repetition; revise disclosure information; remove the outdated information. On the other hand, companies may build up some regulations of disclosure, controlling the size of immaterial information.

Second of all, accumulated explanatory narrative information was continually present in annual report every year. The narrative information could be wholly or largely unchanged from year to year, but firms hardly judge it is useful or not. Take Tesco plc as an example; 2008 Tesco plc annual report used three pages to introduce Tesco plc general information which was already known by the public; and these information was repeatedly present in the last four years’ annual reports. However, 2016 Tesco plc annual report did not mention these accumulated explanatory narrative information. This is because this disclosure included for business conditions or some events, which are no longer material. More importantly, some auditors encourage companies to put this kind of information in annual reports. It could be helpful for some firms to some extent, but it definitely rise difficulty for users to assess information. However, according to IFRS requirement, these accumulated narrative explanatory information are required to be a part of appendix rather than a separate part within reports. This requirement can remove some unuseful disclosure, and it is helpful for users to assess information.

Conclusion:

In conclusion, it is no denying that recent years already experienced a remarkable increase in annual reports’ growths. This phenomenon basically results from three main reasons. Firstly, the Companies Act 2006 regulates firms’, rather than the Companies Act 1985 because the former require more disclosure than latter. Thus, It required companies provide additional information environmental, employment, social and community issues and the main factors likely to affect the company’s future business. Moreover, IFRS 7 refers to a financial instrument– disclosure. It required companies provide disclosure information in their financial statements included firms’ financial positions, performance. The last reason is additional explanatory information; therefore we need more pages to explain additional information. Due to the changes of annual reports’ length, it will bring both advantages and disadvantages. For advantages, firms present CSR statement; it makes contribution to annual reports’ explanation in environmental issues, employment and social issues. Another benefit is KPIs, because key performance indicator helps corporations measure the development, performance or position of the company’s business. However, the dramatic growth also takes some disadvantages. Clutter causes too much immaterial information; it makes annual reports more complicated for users assess information in annual reports, because users only have limited time and efforts. However, company need to eliminate immaterial information and focus on the useful information. Therefore, companies need to build up some regulations or policies of disclosure; it will control the size of immaterial information. Second problem is accumulated explanatory narrative information are repeatedly