A Discussion in the Implication of the Increasing Length of Annual Reports

A discussion in the implication of the increasing length of annual reports

Introduction:

The term ‘ annual report and account ‘ is a corporation document that includes a package of information both numerical and narrative (Holmes, G 2008). Some information required by law, accounting regulation, the Financial Services Authority (FSA) or the London stock exchange. Other information will be a result of recommended guidance for investors. Annual report is mandatory; therefore list companies must provide annual reports to shareholders about their operations and financial situations. Therefore, corporate reports should include relevant, reliable, comparable, because it is useful and helpful for decision-making or understanding. However, according to Deloitte report “Swinmming in words” in 2011, it stated that annual reports surge in length by 2% compared to 2007 and are 34% longer than in 2005. Thus, it is obvious to see a fact that annual reports become increasingly longer than before. In this essay, it will discuss that the influence of the rising length of annual reports. First, this essay will explain main reasons why annual reports have rise dramatically in length. Then, an argument whether the length of annual reports presents problems for users, and another argument about whether a longer report results in better communication. Finally, a conclusion about these arguments discussed above will be draw.

[pic 1]

Arguments:

Fact and examples

According to Deloitte “ building a better report”, it concluded Deloitte’s first survey of IFRS annual reports’ length back in 2006 are 85 pages, but in 2015 the same survey measured an increase from 85 pages to 135 pages. More specifically, as the Bar chart draw by Deloitte shown above, it shows an increased trend of length of annual report from 2005 to 2008. More importantly, for Top 350 companies by market capitalization, there was a remarkable rise in length from nearly 110 pages to 140 pages. For middle, the period from 2005 to 2007 witnessed a gradual increase in length from 56 pages to nearly 85 pages. Smallest 350 companies by market capitalization surged from 46 pages to 63pages over the period from 2005 to 2008.  

The main reasons why annual reports have rise dramatically in length

As the examples and graphs shown above, it is obvious to see that the overall length of annual reports already increased. Therefore, there are three main reasons, resulting in this growth of annual reports’ length. According to Deloitte report, EBR and international financial reporting standard 7 (IFRS 7) on financial instruments’ disclose seemed to be the main causes of this increase in smallest companies. EBR refers to enhanced business review. A difference between requirements of The Companies Act 1985 and requirements of The Companies Act 2006 is a main reason why an increase in annual reports’ length. To be specific, according to The Companies 1985 Act, it included an analysis of position of Group, a description of the principle risks and uncertainties facing the Group. However, According to the Companies Act 2006, after 1 October 2007 the content requirements for a business review are extended dramatically. Specifically, the directors’ report should to include additional information environmental, employment, social and community issues and the main factors likely to affect the company’s future business. Therefore, to satisfy the requirement of the Companies Act 2006, 95% and 83% of company already survey EBR in 2007 and 2008 respectively. Firms considered putting a complete and improved business review in annual report since 2006, and even 5% of corporations already included EBR in director report. This is because this statement will cover the most common place which information on the environment, employees and social and community problems. Therefore, the increase in annual reports’ length results from a regulation in 2006.

On top of that, as part of its long-term project on financial instruments, the international Accounting Standards Board(IASB) has consolidated all disclosure requirements related to financial instruments in IFRS7(Bischof, J 2009). IFRS 7 refers to one of financial instruments, which is disclosure. There are two main objectives of IFRS 7. The objectives require companies to provide disclosure information in their financial statements included firms’ financial positions, performance. More importantly, IFRS suggest firms to provide the nature and extent of exposed risks arising from financial instruments and how corporations’ managers deal with risks. This IFRS should be applied by all entities. More importantly, it required every entity disclose their information, it will help users of its financial statements to evaluate the significance of financial instruments for its financial position and performance. Thus, all companies will obey this regulation. Therefore, annual reports need to be extended, because annual reports needs to meet IFRS7 requirements.

Lastly, compared to the past, annual reports need more explanatory information to explain it to users. Therefore, it will result in the increase in annual reports. To be specific, in annual report, companies may conduct a survey where it needs separating explanatory material outside the printed annual report. For example, many companies included a Corporate Social Responsibility (CSR) statement in their annual report, and some firms put additional information about CSR in a separate document. Corporations sometime suffer from social pressure from the public, because users may focus on corporations’ CSR rather than other areas. Therefore, firms may give additional information about CSR, resulting in a rise in annual reports’ length.

The length of annual reports presents problems for users, and another argument about whether a longer report results in better communication.

Benefits of the increase in annual reports’ length

Based on three reasons above, it clearly explained reasons why annual reports increase gradually. However, There are some advantages of increase in annual reports’ length. Because of the Company Act 2006, it required companies should add more additional information. Many firms prefer to present CSR statement, because it can show environmental issues, employment, social issues and future visions. According to Deloitte survey from 2008, 77 percent of firms pointed out the environmental issues in CSR statement or director statement. 80 percent of corporations showed employment issues in CSR statement or director statement. Social issues were present by 66% of companies in the CSR statement or directors’ statement. Therefore, it is obvious to see that there is still a room for companies to enhance their communication effectiveness and their CSR policy. Take Jarvis plc as an example; according to its annual report CSR framework in 2008, it mentioned some CSR principles. Specifically, Jarvis plc will promote a well-trained workforce to recognize the right of all employees. On the top of that, Jarvis plc also will corporate with their communities to maintain its’ development or promotion (community engagement). Moreover, Jarvis plc will supply the environmentally friendly services to their customers; build up environmental management system and set up environmental objectives for their company. From this example, it is obvious that CSR statement plays a vital role in annual reports’ explanation in environmental issues, employment and social issues. Therefore, it is beneficial for companies to enhance relationship with users and investors.