View from Europe

This year's batch of annual reports speaks volumes about the confusing state of corporate reporting.
Janet KersnarNovember 1, 2006

It wasn’t all politics as usual at the UK Labour Party’s annual conference in Manchester in late September. On the afternoon that Chancellor Gordon Brown was giving his why-I’d-make-a-good-prime-minister speech, Industry Minister Margaret Hodge held a side meeting about a topic that has rankled more than a few CFOs. She was discussing a contentious draft clause in the “companies bill” — a 700-page tome that has been gestating with UK lawmakers during the past year — that would require a company’s top executives to report on how they take into account employees, the environment, and the like in their decision-making process.

It’s just one example of how lawmakers and regulators are casting a dark shadow of confusion across Corporate Europe as they debate what information companies should disclose to the public. With few clear guidelines, companies have been left to try to second-guess what rulemakers want. At the heart of the matter: how to handle the narrative text accompanying financial statements that explains the main trends and drivers influencing a company’s past, present, and future performance.

Narrative reporting is hardly a novel concept. What is new, however, is the reopening of old debates about just what that narrative reporting should include.

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Nowhere have the debates been more heated than in the United Kingdom. Corporate Britain’s annual reporting was thrown off course a year ago when Chancellor Brown unexpectedly scrapped a new law requiring listed companies to publish Operating & Financial Reviews (OFRs), a much more detailed, structured narrative in annual reports than required by the European Union at the time.

Brown’s backtracking left a big question for CFOs to answer: Do they go ahead and produce the OFRs they had already spent months preparing, or settle for a more watered-down business review, based on EU requirements? Of the annual reports prepared by the 23 FTSE 100 companies with March year-ends, only half, in fact, published full-blown OFRs in their annual reports.

To complicate matters, the International Accounting Standards Board will soon weigh in. The IASB could simply issue a set of voluntary guidelines, or dictate that the narrative section of accounts be integrated into international accounting standards. The latter prospect sends shivers up the spines of Europe’s CFOs, who have spent the past year moving from their national GAAPs to international standards.

Ultimately, there’s room for the quality of narrative reporting in Europe to improve, becoming more consistent and comparable across jurisdictions, and possibly even converging with U.S. practices.

How the current debates will be resolved remains to be seen. But given that at the September conference Hodge suggested that the reporting requirements under the new law could be extended to private companies, any CFO hoping that the next reporting season will be less contentious will be sorely disappointed.

Janet Kersnar is editor-in-chief of CFO Europe.