The Financial Reporting Council has published a report by the Financial Reporting Lab on how companies can apply a materiality mindset to improve their reporting.
The report encourages companies to think holistically when preparing their annual reports about what information is material to stakeholders. It includes practical suggestions and examples for identifying material issues in the form of a three-part toolkit:
- Investor needs and decision-making. The Lab spoke to investors to understand the core information that investors look for and how they use it for decision-making. Key areas of interest were how the business generates value, future strategy and potential risks. It also considers for what purpose investors use the information in annual reports and accounts.
- Holistic approach to materiality. The Lab found that materiality is typically considered by companies and their advisers through three separate lenses: quantitative financial thresholds, qualitative financial aspects and sustainability-related information. Investors, however, want to understand the business model and strategy in a more connected way. Suggestions to help companies take a more holistic view and align with investor information needs include, among others: challenging the results of the materiality assessment; documenting and communicating the assessment; and regularly horizon scanning.
- Embed a materiality mindset. Suggestions include: creating a common understanding of key messages among contributors to the report; getting senior buy-in to remove legacy pages or content; starting from scratch on occasion rather than adding to the report from the previous year; taking a critical look at accounting policies to determine if any have ceased to be material; ensuring material information is not obscured; avoiding duplication; reflecting on how the report works as a package; engaging the auditor early; and considering whether certain information can be moved to the company’s website or communicated in a different way.
Click here to view the report.
For further information, please contact:
Judy Pink, Linklaters
judy.pink@linklaters.com
