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There is a fundamental dichotomy at the heart of UK corporate reporting for which the resolution seems to rely upon our national culture and the very British way of doing things. The dichotomy is inherent in the ‘principles-based’ approach to constructing annual reports. On the one hand the policy makers and regulators invite discretion and hope for a measured sufficiency of information to enlighten investors and stakeholders, relying on a British sense of fair-play and respect for the spirit of the law; on the other hand they demand compliance and expect rigid adherence to the legislation, as well they should. It is hard not to feel there is something refreshingly anachronistic in this, reflective of a bygone age when ‘uberrimae fidei’ really was more than just a quaint Latin phrase. But, one of the problems with this duality of approach is that even the regulators seem to get confused on where to draw the line between what is in the regulation and what is expected in its application. My good colleague Neville Wells harangued me on this before he went on holiday last week and missed the 22/10 FRC ‘Discussion Forum on the Exposure Draft: Guidance for the Strategic Report’. Neville wanted answers and hoped I would get them for him at that FRC meeting.
“What I would like the FRC to come clear on is the relationship between ‘core’ and ‘supplementary’, ‘comprehensive’ and ‘materiality’, explained Neville. “‘Core’ is what is important to shareholders, and is defined by ‘materiality’. ‘Supplementary’ is, therefore, non-core and non-material. Non- (or im-)material information is supposed to be cast into the outer darkness, so is ‘supplementary’ the outer darkness? If it is, why are the FRC letting it seep into the Annual Report by association (i.e. appended)?” You can’t fault the logic in his question. With tongue slightly in cheek, Neville took the opportunity to elaborate further. “‘Boilerplate’ is information that does not change much year by year. A good strategic business model does not change much year by year. So is it, by definition, the FRC’s detested ‘fungus of boilerplate’ and destined for removal? But, wait, no, it is a compulsory inclusion.” I found it hard not to agree with Neville’s point of view on this, particularly as there is yet another dimension here to the business model issue. The version of the business model preferred and promoted by many accountants is an ‘operational’ business model, not a ‘strategic’ one. An operational business model shows how a business turns its strategy into output – the ‘how’ not the ‘why’ – turn the handle and this is what you get. This is of limited value to investors compared to a true strategic business model and, in the scheme of things and in the search for uncluttered conciseness, is therefore not material. So, in summary, here we have a new mandated narrative reporting inclusion, the business model, that in at least one form could arguably be excluded from the Annual Report for being both boilerplate and immaterial. That is not bad before the first mandated business model has yet appeared in any Annual Report!
Neville hadn’t quite finished. “And then the lawyers and auditors want everything in (comprehensive, plus, plus), just in case they get sued for allowing it to be left out – the auditors’ report is certainly not concise any more, with a four-fold increase in size!” His final rueful comment was an observation of the FRC’s application of ‘core and supplementary’ visible in their very own UK Corporate Governance Code – 2012 edition. The Code would permit the publication of a Corporate Governance Statement in the Annual Report simply containing two words: ‘We’ and ‘comply’, presumably to make space for a four-page audit report? With that he left for Spain.
Discretion was the better part of valour, and that is my excuse for not seeking explanation of Neville’s points at the Discussion Forum last week. Recovering yesterday from a surfeit of Gran Reserva Rioja and easing himself slowly back into the day-to-day grind that is corporate reporting, Neville chided me for not getting any explanations in his absence, but then we both know that there aren’t any answers anyway. So, the list of items for inclusion in FutureValue’s response to the consultation on the Draft Guidance for the Strategic Report just gets longer and longer, and we have to get it to the FRC in two weeks’ time. Is it time to panic yet?