What is the
Reporting insight: Phil Fitz-Gerald, head of the Financial Reporting Council’s
specialist reporting thinktank talks to MerchantCantos
The Financial Reporting Lab was set up in 2011 to provide pragmatic, market-led solutions to issues in corporate reporting.
What does the Financial Reporting Lab do?
We encourage innovation in corporate reporting by creating a safe environment where companies and investors can come together to explore ways in which a particular aspect of reporting can be improved.
Does the Lab only focus on the back-end of reports?
Although it’s called the Financial Reporting Lab, it actually looks at a broad set of corporate reporting issues – covering topics from both the front half and the back half of the annual report. In fact, in recent years, the focus has been mostly on the front half. So no, we are definitely not back-end only.
We also can potentially go beyond the annual report and look at wider reporting matters. We’ve tended to focus more on the annual report in the past, but, as we’re thinking of different ways that companies communicate their information, we could potentially look at other areas of corporate reporting such as investor presentations, prelims and so on.
Phil Fitgerald, Director, Financial Reporting Lab
The Lab is part of the UK’s FRC. Is it basically a fast track to new regulation?
No. Absolutely not. The Lab seeks to find market solutions to reporting challenges, and provide practical examples of good practice. This is not about the opinion of the FRC, or even that of the Lab. The reports we draft present the views of the participants in the project. Typically each project involves 20-30 companies and a similar number of institutional investors. The report reflects their views – not a regulatory or FRC view.
Having said that, the fact that the Lab sits within the FRC gives companies the confidence that, if we present an example as good practice, it is not going to breach any rules and regulations. But the purpose of the Lab is not to create rules; it is to promote good practice and find market-led solutions that investors want to see.
Who should read the Lab’s reports?
Our reports are targeted at those responsible for pulling together corporate reports – in particular, the annual report. This includes finance directors, company secretaries, investor relations departments, and so on.
They are also useful to others that have a role in the corporate reporting process, such as audit committee chairs and external third parties, including auditors and design agencies.
I think investors find them interesting, too. They want reporting to improve and so want to see practical examples of how different companies are tackling a specific reporting issue.
What sort of reporting topics has the Lab covered?
The projects we have undertaken fall into three categories.
- Firstly, there are those projects that address specific reporting issues. For example, we have covered a range of topics that address challenges with aspects of financial statement disclosures, including net debt reconciliations, operating and investing cash flows and accounting policies. We’ve also completed a number of projects around the front end of the report. These include projects on remuneration and on business model reporting. Most recently we issued a report on risk and viability reporting.
- The second category of project is the case study. These come about when individual companies approach us, keen to work closely with us on a specific area of reporting. One recent example of this is Morrisons, who asked if we could help them with their disclosures around commercial income. Other companies we have worked with in the past include William Hill and HSBC.
- The final category of reporting topic is typified by our work on digital reporting. Here the focus is not on what companies report, but how they report it.
What is currently on the Lab’s front burner?
We have done two major projects this year. The first is on risk and viability reporting. We started that in March 2017 and published the final report in late November.
The other major project that we have on the front burner at the moment is the digital reporting project. This has already been going for a number of years. The first report, published in 2015, looked at current practice in digital reporting. We concluded that investors prefer pdf reporting; it combines a degree of searchability with the advantage of providing a one-stop-shop for all reported information.
But since we issued that report, there have been significant developments in the technology available to companies, including XBRL, blockchain, artificial intelligence and both augmented and virtual reality. And so we are now looking at those technologies and seeing the extent to which they meet the needs of the users of accounts.
Any hints on what may be coming down the Lab’s project pipeline?
Our next project has just been announced. This will look at the use of performance measures – both financial performance measures (i.e. adjusted financial measures) and non-financial reporting measures. We will also be looking at how all these measures are used within other areas of reporting, such as prelims, investor presentations and to work out directors’ remuneration. We think there may be merit in doing this on an industry basis so that we can identify commonalities in the measures used in any given sector. Details can be found on the Lab's website.
How can companies get involved? And does involvement cost anything?!
Any publicly quoted company can get involved in the Lab. It doesn't matter if your company is large or small; if you are interested in participating in a project, we want to hear from you! And if you are nervous about coming forward because of time commitment, don’t be. We’ll work around the time that you have available.
And just to be clear, there is no cash cost to participation.
How do you get involved? At the start of a project, we send out a call for participants – for both companies and investors. Typically we will then interview each investor and someone from each of the companies that have volunteered to take part in the project. That interview usually lasts 1.5 to 2 hours – though if you have just 30 minutes to spare, that can be a really valuable input too. We may then have a round table that participants can join. We also invite all the participants to review the report before it goes out to confirm that they are happy to be named in the report. But none of this is a significant time commitment.
If you had to sum up the Lab in just three words….
That’s tough! But I think I would describe the Lab as Collaborative, Innovative & Challenging.
We are a small team at the Lab. We depend on the collaboration between companies and investors to develop innovative, market-led solutions to today’s reporting issues. Our reports are easily accessible and provide practical examples that we hope all companies will consider.