How can management explain the performance of their business in the light of their strategic goals? How can they avoid losing their story amid the mass of financial data usually contained in annual financial statements? Producer/broadcaster ITV successfully answered these questions in its own 2010 financial report, which has been recognised as a perfect example of concise corporate reporting.
Adam Crozier established ITV’s clarity mission when he became Chief Executive in April 2010. “He wanted to ensure the 2010 financial statements really conveyed his strategy for ITV,” explains KPMG Audit Partner Mark Summerfield. ITV’s CFO, Ian Griffiths, adds, “We really didn’t want the key messages lost in the usual morass of corporate reporting.”
Crozier worked with Griffiths to identify the most relevant key performance indicators in helping shareholders understand ITV’s performance. ITV refined its KPIs to: EBITA before exceptional items; adjusted earnings per share; working capital management; and net debt. They then added key non-financial indicators relating to: people; commercial success; re-engineering the creative pipeline; and on-screen performance.
“The need for clear messages in the annual report highlighted how distracting it was to use space reconciling IFRS numbers to the KPIs that the directors wanted to talk to,” says Summerfield. “Ian Griffiths called me to ask whether it would be possible to move these reconciliations to the notes to the accounts, and radically overhaul them so that they would support the message upfront.”
Part of this overhaul involved restructuring the notes to group them into distinct sections. “Typical financial statements start with ten pages setting out all the company’s accounting policies, but the notes to which they relate appear many pages later,” says Summerfield. “This doesn’t make much sense. Furthermore, as new International Financial Reporting Standards have been issued over time, companies have often just bolted on extra disclosures. This has resulted in a lot of repetition and excessive use of accounting jargon.”
Led by their Group Financial Controller, David Slater, ITV addressed this problem by gathering related groups of notes. Griffiths adds, “As well as grouping notes to reflect our KPIs, we gathered them around the areas of interest to our stakeholders, which, as well as shareholders, include debt investors, banks, pensioners and employees.”
ITV placed their groups of notes alongside their associated accounting policies. Only general accounting policies were left in a ‘Basis of preparation’ section of two pages. “The process of simply grouping existing notes around common themes, rather than the order numbers appearing in the accounts, revealed the degree of repetition that resulted from having related disclosures scattered throughout the accounts,” says Summerfield.
ITV also confronted the traditional use of IFRS terminology. “ITV firstly worked hard to rewrite the accounts in plain English,” says Summerfield. “The company then agreed to do something I have only seen done once before, some 20 years ago: to add speech bubbles, written by David and his team, telling shareholders what specific notes convey about ITV.”
Just as importantly, ITV cut all immaterial disclosures. “It’s very easy – and safe – to include an item because a standard seems to require it,” says Summerfield. “But when you look at a company like ITV with a materiality level in excess of £10 million, why would you disclose balances and transactions that were less than this? If they are not material, they are not important to an understanding of the business. So they were brave and questioned every disclosure and every number.”
KPMG acted as a sounding board throughout, helping ITV review proposed wording changes and advising on whether certain disclosures were immaterial and could be removed. “With increased regulatory scrutiny, some companies err on the side of caution when it comes to disclosure,” says Summerfield. “It was refreshing to realise that you could remove the immaterial, write in plain English and still be compliant with IFRS.”
Another innovation within the ITV report was to take the reconciliations between the reported KPIs and the underlying IFRS numbers and then move them into the notes to accounts section. “That means the audit opinion covers those reconciliations,” says Summerfield. “I think that gives a really positive message about the relevance of audit. Shareholders are able to better understand and trust non-GAAP data. We are making a positive statement that these KPIs give a fair representation of the business, even if they’re not terms defined under IFRS.”
ITV was pleased with the resulting clarity. “In terms of de-cluttering and increasing clarity, these accounts go a long way towards meeting the objectives of regulators,” Summerfield says, referring to the Financial Reporting Council, who highlighted the need for clearer communication in its discussion papers Louder than Words (2009) and Cutting Clutter (2011).
The Financial Reporting Review Panel has re-enforced the messages in the FRC’s documents and ITV has received praise for removing disclosures that it considered immaterial. “It would appear that the regulatory bodies are acting on their own advice,” says Summerfield.
Having advised a number of clients – audit and non-audit – on the reporting process, Summerfield notes that, “We now have a team of specialists who work with non-audit clients, to whom we can provide direct help, including project-managing and challenging the company to make its financial statements relevant and useful.”
Looking ahead, many companies may need to focus attention on the structure of their financial reports and accounts if the UK Department for Business, Innovation & Skills implements the proposals outlined in its September 2011 consultation document The Future of Narrative Reporting. “This sets out proposals for shaping the front-half of reports and accounts primarily around the company’s business model and its strategy, including an assessment of progress against that strategy as measured by KPIs, and a clear articulation of the risks management face in delivering that strategy,” Summerfield explains. “This would require companies to look again at how they structure their accounts and whether the back-half supports the messages in the front. There is also an opportunity for my profession to answer some of the criticism it has faced through being at the forefront of the drive for clarity and by giving shareholders additional comfort over the front-half as well as the back-half of the accounts.”