Topic: Discuss the implications of the increasing length of annual reports
Financial report is the primary tool for companies to reach all stakeholders. IFRS (2005) defines purpose of financial reporting as to present information for investors, potential investors and creditors for equity and lending decisions. Usefulness of financial reports for these decisions are controversy but great increase in the length and complexity of annual reports create a new debate area. Deloitte (2009) conducted that length of annual reports increased by 41 percent compared to 2005. Firstly reasons for increase in the length due to legislations and possible solutions will be investigated. Secondly relationship between financial reports and marketing perspective will be analysed. Lastly this essay will concentrate on implications of this increase in length and complexity on users and preparers.
One of the reasons for the great increase of the length of annual financial statements is the wide variety of legislations and guidance available for the preparers. To exemplify Deloitte (2009) summarises main legislations and guidance papers that preparers should comply with as, Companies Act 2006 for business review, Accounting Standards Board reporting statement for operating and financial review, European Union directives and local listing rules for publicly listed companies. Financial Reporting Council (2009) interviewed more than hundred annual report preparer and majority agreed that complexity in reports are the reflection of complex rules and guidance. Another point is that having broad guidance creates an incentive for companies to share some unneeded information. A chief financial officer quoted that ‘Regulation is bad sometimes but if things are left to discretion you may actually disclose too much information sometimes’ (cited in ACCA 2010.) In addition wide disclosure requirements resulted repetitions inside companies statements. PWC (2007) argues that having separate chairman’s statement and operating and financial review which shares some similar information causes repetitions on annual reports. To exemplify BT (2013) annual report, chairman’s introduction part include dividend rates which is repeated at financial highlights part and their contribution to London Olympics where it is also repeated at the brand reputation part of the report. Most of the researchers investigated these phenomenon argues that solution is to have a complete and clear guidance or legislation for preparing annual reports. PWC (2011) suggested another alternative where companies should concentrate specific requirements and guidance which is related with the nature of business rather than trying to comply with all. Another problem is the repetition of same information from past years which do not add any value to reports. These are generally explanatory material which repeats accounting or other policies of companies and FRC (2011) argues that this repeated information which do not add value could be removed or added to appendix or website of companies where these places could be referenced inside the annual report.
Another reason for the increase in the length of the annual reports is the new marketing strategies created by increased chance to reach enormous audience. The target of annual reports started to shift from investor oriented to other stake holders with the increased usage of websites where everyone could easily reach the annual reports of firms. A survey conducted by ACCA (2010) shows that building reputation is one of the highest concerns of narrative report preparers. Websites of firms started to be the first address of information seekers about a corporation. ACCA (2008) argues that annual reports are the main way to reach stake holders especially for companies which do not have advertisement and other marketing campaign. In addition there are some regulations on the way for companies to disclosure more social responsibility matters. Deloitte