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Reporting models on the catwalk

It’s a delicious irony that dissatisfaction with financial reporting has grown in proportion to its increasing complexity and volume. FDs and their staff struggling to cope with the changeover to international accounting standards will appreciate the news that there is a growing tide of opinion which believes the business reporting models need drastic overhauling.

Perhaps it is understandable that such opinion should be voiced when we are so close to achieving a level playing field in global reporting. Just because we all produce comparable accounting information does not make it any more useful.

This frustration with the current report model has been highlighted by the Institute of Chartered Accountants in England & Wales. This autumn, it is planning to publish a report summarising the major bodies of work in this field over the last 10 years. It promises to take account of the work of accountancy and other professional bodies, pressure groups and think-tanks.

The long-standing argument against the traditional financial reporting model is that the world it is trying to reflect has changed. The one area that has changed most significantly is the rise of the intangible. Physical assets have declined in importance as intangibles – human capital, brands, goodwill, and knowledge and intellectual know-how – have become the drivers that create business wealth. The history of financial reporting of the last 15 years is a tale of half-hearted, unsatisfactory attempts to deal with that inescapable fact.

But if the current isn’t working, is there any chance of introducing a new model? One of the main objections to reforming the business model has always been the sheer difficulty of doing so – trying to co-ordinate regulatory and legal changes across so many governments and agencies.

However, there is a market-based theory which circumvents that difficulty.

PricewaterhouseCoopers has argued that it is not necessary to change corporate law or accounting standards to change the reporting model.

Instead, market forces will perform the task. If companies develop new measures that improve the transparency of their reporting then, in theory, the market will reward them through a higher share price.

There are some signs that change may happen. First, some of the criticism emanates from accountancy bodies – notably Canadian and American – that suggest vested interests can be dislodged. Second, some of the leaders in the accounting standards setting process have, in the past, acknowledged the problem. For instance, Sir David Tweedie, chairman of the IASB, co-produced a booklet in the 1980s entitled, Making Corporate Reports Valuable.

Could accounting standards’ setters move on to repaint a wider canvass?

Of more immediate relevance is the growing emphasis in the UK on the Operating and Financial Review. The call to make it mandatory indicates that business reporting has to be widened in scope. It is not too far fetched to suggest that the OFR could sit alongside the traditional financial statements as an equal partner.

As those working on the OFR know, any reporting model has to deal with the concept of materiality. The point about any model is that is should serve as an important tool upon which investors base investment decisions.

It has to deal with the key drivers and echo the information management has used to make decisions.

A new model does not equate to giving in to special interest groups, though. For instance, in the UK, the health and safety lobby is pushing for more disclosure on company records on accidents to be included in annual reports. But if it doesn’t meet the materiality test, it should be elsewhere. Perhaps this is where technology has a part to play. Want to know how many incidents were recorded for Sainsbury’s? Go to the internet.

The ICAEW is attempting to identify the key issues. Here’s Financial Director’s summary of what a new model should contain: it has to be complete, including all the drivers of the company’s performance, tangible, intangible, financial and non-financial. It should be based on the information the board uses to formulate its decisions. It needs to concentrate on significant or material matters fairly presented and even-handed. It should further transparency, giving investors information that will help them assess future prospects, but it should not be required to give detailed forecasts.

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