Fair, balanced and understandable

In October 2012, the Financial Reporting Council (FRC) introduced the requirement for Annual Reports to “present a fair, balanced and understandable assessment of the company’s position and prospects”.

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This was in response to the widespread sentiment that companies were withholding or disguising key information on the less positive facets of their performance, position and outlook from shareholders and investors.

Common examples of content which many had formerly considered, and in some cases still consider to be deficient include highlights and risk sections, along with Chairman’s/CEO’s statements, and neglecting to reflect upon poor financial performance (which will likely be evident in the financial statements) in the strategic report.

The fair, balanced and understandable (FBU) requirement was designed and implemented in such a way as to leave it broadly open to interpretation. Whilst the fair and balanced elements can be considered reasonably objective, given that it is not especially taxing to deduce whether positive and less positive data and information have been presented in equal measure, the requirement for reports to be understandable is far less so. This is broadly interpreted as requiring reports to use language that is accessible to a reasonably well-informed reader, and where this is not possible, to provide clear definitions for technical vocabulary and acronyms.

In spite of this, there is evidence to suggest that it is the understandable component of FBU that has had the greatest positive impact upon reporting; primarily in terms of cohesion. In order for a report as a whole to be considered understandable, it should not be disjointed or repetitive, and should tell a complete and easy to follow story. Since the introduction of this requirement there has been considerably more effort employed to create cohesive annual reports, and reporting standards across the board have elevated appreciably as a result.

To illustrate, good examples of understandable reporting include presenting a complicated strategy (that would normally only be accessible to readers with an academic background in business/finance) with the use of an analogy, or providing a comprehensive explanation of the significance of the KPIs chosen to evaluate a company’s performance.

With regard to the fair and balanced components, many consider them to be fairly inseparable. The fair element requires reports to present a complete account of the company’s position, performance and outlook, whilst the balanced element requires that a mixture of both positive and negative content is provided. As such, it is difficult to satisfy one of these components without simultaneously satisfying the other, and they can be considered to be broadly similar.

Some draw a subtle distinction, in that whilst in order to be balanced, a report must simply present both positive and negative information on the company while to be fair it must also present this information in a measured way, without exaggerating the significance of the positive and downplaying that of the negative. Whether this can be considered a truly organic distinction, or merely one fabricated out of semantics is open for debate.

Any statement by a Chairman or Director which offers commentary not only on the successes of the previous year but also on the shortcomings can be considered fair and balanced; as can an honest evaluation of performance against KPI targets set the previous year. Likewise, whilst it is practically unheard of to do so, including information on negative as well as positive feedback from employees on subjects such as training, development and management would constitute another sound example of fair and balanced reporting.

In summary, there is little doubt that the FBU requirement has dramatically improved annual reporting in the UK, in doing so benefiting stakeholders considerably and also helping companies to create more value within the documents they produce. In spite of this however, many would still argue that the FBU requirement is so lenient and accommodating that it too often fails to ensure that companies deliver a truly honest impression of their position, performance and outlook.

Many would argue that the most tangible benefits of the FBU requirement for annual reporting have been driven by the understandable component, and indeed from browsing a selection of the most recent FTSE 100 reports it is evident that even now many continue to openly flout the fair and balanced components. Nonetheless, the FBU requirement provides an excellent guidance framework for companies who wish to excel in their annual reporting and IR in general, and in this regard also remains fundamental to the work done here at Jones and Palmer. To find out how we can help with your corporate reporting, talk to a member of our team.