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The amazing shrinking annual report

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Obese annual reports hit the treadmill as the IASB and new reporting standards crack the whip.

Annual reports are probably the most expensive publications ever produced that never get read. Each year, listed companies spend months preparing their glossy ‘flagship’ reports in a tedious process often called ‘the annual migraine’.

Banks are notorious for their encyclopaedic annual reports, with the 2012 HSBC annual report running to 546 pages and the Royal Bank of Scotland’s shelf-bender at 543 pages. Until recent years our own ABSA was infamous for the size of its big red annual tome. How many shareholders have the time and interest to wade through all that?

As a result annual reports – meant to enlighten – are just plain confusing, as investors get lost in a maze of company intricacies, pretty pictures and page after page of pie charts.

A South African industrial giant recently published an annual report in which its environmental graphs had accidentally been placed with completely unrelated text. Although copies were distributed by the thousands, not a single reader, investor, analyst – or environmentalist – commented on the error. Which begs the question: besides the highlights, financials and possibly the CEO’s statement, how much of the annual report is actually read? How many trees had met the axe before this truth dawned?

In South Africa, the new Companies Act allows summarised financial statements, while the King III code encourages concise and plain reporting on just those issues most material to the business.

The IRC of South Africa commissioned a research survey of the 2011 IR of the JSE top 100 companies. Professor Mervyn King noted that the average length of these reports was 179 pages, but for the 18 companies in the survey that published summarised rather than full financial statements, this total dropped to 124 pages.

Summarised financials ranged from one page to 34 pages, averaging at 11 pages. This compares to the 70 page average for full financials, which now may be published on the company website.

International pressure is also being brought to bear. In June 2013 Hans Hoogervorst, chairman of the International Accounting Standards Board (IASB), said that a new framework is needed to get rid of the multiple disclosures that submerge material financial information, saying: “The risk is that annual reports become simply compliance documents, rather than instruments of communication.”

With the front-end narrative and back-end financials under pressure to trim down and shape up as useful investor and stakeholder tools, are we seeing the advent of the genuinely informative annual report?

Reports for the real world that are 40 pages maximum, linked to detailed information on company websites, offering transparently analytical narrative with crisp infographics, complemented by digital versions optimised for screens and tablets?

Then annual reports will no longer be much ado about nothing.
Author: Clive Lotter is a IR Consultant and writer of annual reports for listed companies.