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Disclosures in Annual Reports: Nicety or Necessity?

 
April 14, 2016

Disclosures in annual reports have risen in number and grown in importance over the last few years. Most jurisdictions across the globe require the annual report to include statements of compliance relating to governing laws and internal financial control. The International Accounting Standards Board (IASB) is currently engaged in a project to improve disclosures. Similarly, the International Integrated Reporting Council (IIRC) has come up with an integrated framework for corporate reporting, which focuses on conciseness and strategic relevance of the annual report.

In a 2014 progress report, the Enhanced Disclosure Task Force (EDTF) of the Financial Stability Board (which assesses the extent of disclosures in corporate reports of banks) revealed that in 2013, participating banks disclosed 73 percent of the information recommended by EDTF. This is a rise of 27 percent from the number of disclosures in 2012. The report notes that since different organizations have different ways of summarizing their results and there is no standard template for this, there needs to be a balance between providing organizations the flexibility to do this and ensuring minimal disparity to allow for effective inter-organization comparisons. The ETDF follows the Basel Committees Review of Pillar 3 disclosure requirements as well as IASB and FASB disclosure requirements.

These developments lead us to an important question: whether all additional disclosures will result in better communication between stakeholders or simply add clutter to the annual report. The Financial Reporting Council of UK feels that clutter makes it difficult for users to assess a companys progress by obscuring relevant information.

There is a strong case for disclosures and explanatory notes in annual reports. They form an important communication tool between a company and its stakeholders, thus enabling effective corporate governance. Though voluntary disclosures are increasing, corporate governance is too critical to be left exclusively to voluntary compliance. It is legislation which sets the tone of corporate governance in an economy. A 2014 Transparency International report on corporate reporting notes that in the context of organizational transparency, companies that were compelled to present disclosures of their subsidiaries like in India and Germany fared far better than their peers in other countries. India has performed reasonably well as per this World Bank study, scoring a disclosure index of 7 in 2014 and 6 in each year from 2010 to 2013 where 0= less disclosure and 10= more disclosure.

With regard to corporate reporting, whether mandatory or voluntary, companies need to be mindful of the fact that disclosures with irrelevant information can easily confuse the reader. Financial and other mandatory reports remain the base of corporate reporting, but linking these with the companys strategy, its objectives, its role in the society and economy, requires skillful narrative reporting. Investors prefer companies that are transparent with regard to reporting their performance. Disclosures are not just nicetohave, but are a powerful means for the company to communicate relevant information to its internal and external stakeholders. They convey the information that mere financial data cannot.

Aparajita Sarkar is part of the Financial Reporting group at Tata Consultancy Services (TCS). She holds more than 17 years of experience as a Chartered Accountant and a Certified Public Accountant, of which the last eight have been with TCS, where she has been actively associated with the implementation of IFRS guidelines. Her responsibilities also include building domain competency and technical excellence in TCS for IFRS and IGAAP.