Corporate Reporting blog

Back to reality

I don't know what you find but I'm always disappointed how short the 'holiday dividend' is once you've got back into the routine of life and have caught up on how little has happened while you've been away. No magic wand has been waved over the economy and sadly despite some well laid plans the action list has grown. While I can cope with my to do list, the state of the economy is concerning - although as wiser men than I have pointed out, "why worry about something you cannot effect". Never could a truer statement be made, but sadly most people are not single-minded enough to think like that and the noise in the system is what drives mass behaviour.

Trying to interpret the current noise in the system is difficult but the action last week of the Bank of England to extend its Quantitative Easing Programme by £50bn is a sure fire indication that we are a long way from getting out of the woods. This figure while significant in the context of the UK economy is dwarfed by the IMF's recent $11.9 trillion estimate of the cost of mopping up the financial crisis - an amount equivalent to about a fifth of global GDP. Having read the weekend press, I sense that a consensus of business writers believe that the market bounce of the last few months may be short lived as people come to terms with the fact that the recovery may be as painful as the downturn itself. Let's hope we are not heading, as some predict, for a Japan-style lost decade.

The news this week that France and Germany appear to be coming out of recession should make us a tad more optimistic.

As I've mentioned in previous blogs, one of the main casualties of the past 12 months has been trust in business. So it was with some optimism that I read Edelman's Midyear Trust Barometer. In summary the survey indicates that trust in business has stabilised and is recovering significantly in some of the world's largest markets. In the US, 48% trust business to do what is right, up from a low of 36% in January. Much of this change is attributed to tangible actions such as repaying bailout money, reducing CEO pay and firing non performing teams.

Perhaps the most critical point however, given that we may be facing a long haul out of recession, is the importance trust appears to play in determining peoples' buying decisions. The survey indicates that cost is only marginally more important than trust with 53% saying that in the past six months they have switched brands for a lower cost and 45% saying they switched because of lost trust. This must be music to the ears of those businesses that have made a virtue of maintaining their standards and investing in key stakeholders over these difficult times. After all these are things every business can control when all around is in a state of flux.

I would be really interested in hearing your views on this by commenting on the blog, or by email..

David

Management commentary - reading between the lines

We're now in that period of the year often referred to as the 'silly season' when sensible people head for the beach to savour the tranquillity of life without newspapers and the TV. Life takes on a whole new meaning - no need to be depressed each morning by reading about the state of the recession, government finances and the strife that engulfs so many parts of the world. Save for the odd peek at the Blackberry, it’s a carefree experience - while it lasts.    

It's at this time of the year that the broadsheets have to scour the world for news. Sometimes it’s hard to work out why an article has been written and who has let it slip through the editorial net. Sadly, I had some of these feelings when I read the recently released exposure draft from the IASB on Management Commentary. At first glance, this non-binding guidance seems perfectly sensible. In large part it replicates the Business Review introduced in the UK a few years ago. However, when you read between the lines, it raises some fundamental questions about the role financial reporting has within the wider corporate reporting model and consequently the role the IASB should play in this context.      

Let me start by putting my cards on the table, I am a full supporter of an integrated reporting model and believe that management commentary has a critical role to play in achieving this ambition. Put simply, without it, today’s financial reporting model would be little more than a jumble of numbers whose meaning is obscured to all but the technical few. Even the IASB’s Sir David Tweedie has been heard extolling the virtue of narrative reporting – particularly given the volatility in reported performance that IFRS has introduced, in large part because of the increased use of fair value accounting. Add to this current market practice - what is presented at analyst meetings, the use of non GAAP information etc – and the central role that management commentary needs to take becomes clear.

So it was with some relief that early in the exposure draft that I read the following statement: "Management commentary, prepared in accordance with this framework, is within the boundaries of financial reporting, therefore, is within the scope of the conceptual framework for financial reporting". This is great news for all those who support a progressive and integrated reporting model.

However as one reads on, the positioning of three board members poses some interesting questions about the direction of reporting and the role of the IASB. The three board members voted against the exposure draft for the following reasons:

• the fact that it will result in non-authoritative guidance, and therefore no improvement in financial reporting;
• that management commentary cannot satisfy the requirement of neutrality - i.e. the absence of bias;
• it is an ineffective use of the Board's time as it will not result in an IFRS.

While these are all understandable objections, their nature does raise some important questions that need to be bottomed out if the reporting model is to remain relevant. First, do we want a reporting model that embraces management's view of the business and its performance? Currently, what is presented to analysts is heavily coloured by non-GAAP information and management's analysis of the underlying performance as they see it. Do we ignore this information or do we embrace it in the mainstream of reporting?

Secondly, should standard setters, auditors and regulators be spending more time on management commentary and critical aspects of non-financial reporting around the market context, strategy, business models, risks and remuneration? If not, who should be responsible for these aspects of reporting as we have learnt from the credit crunch that to rely on financial reporting to explain all that's going on in a company would be a mistake.

As always I am pleased to hear your views and comments on the postings, and to take questions about corporate reporting.

David