Reporting for the post-­pandemic future

How to cope with the differing objectives in the longer run

The impact of the COVID-19 pandemic on reporting will be significant: the larger-than-expected downturn of economic activity, ‘the uncertainty about the further development of the pandemic and the widespread effect on sales, supply chain and financial markets and other areas add significant uncertainties to the financial results and outlooks which need careful consideration in investor communication'.1 That rather understates the case with debt by UK companies heading towards £100+ billion and similar amounts of new equity. It could even be much higher. (UK government net borrowing is heading towards £250 billion [£215 billion by the end of November 2020]). One might even venture to say that nothing will be the same again - a new normalcy with a focus on risk and uncertainty is likely to become the norm.

Risk versus uncertainty’

Risk assessment has been with us for some time. Risk can be said to be an uncertain event with chances of occurrence that can be predicted and measured. Uncertainty is an uncertain event whereby the chances of occurrence cannot be predicted and measured. COVED-19 is an example of an uncertain event when examining the future in 2020. The possible outcomes were not predictable or quantifiable before the coronavirus hit globally. Even post-pandemic they are not. So 'uncertainty' assessment takes us into a new reporting development. We think it important to separate risk and uncertainty in separate reports.


Let us assume that there exists advanced IT systems and specialised reporting Al systems familiar with the underlying raw or semi-structured data and imbued with multiple valuation rules and multiple accounting rules. Such assisted Al systems will aid anyone with suitable permissions to extract data. Add to these assumptions is the important issue the aftermath postpandemic of 2020 - especially stretching into 2021 and beyond. Even if the vaccines work efficiently, the post-pandemic economy will suffer markedly and cause as yet unknown economic damage. The issue of ‘going concern' and (the longer-run) viability will be treated more seriously: the aftermath of job reductions, collapsing retail high streets, knock-on effects on manufacturing, and rising unemployment in the pandemic’s wake. In addition, the public perceptions will change - what is regarded as private will change. Generations Y, Z, and beyond will have a different view compared with Baby Boomers and Generation X persons. This is discussed in Appendix 3.09.1.

Possible framework for professional and institutional investors

We believe that one set of financial statements cannot meet the objectives of all the groups of professional or institutional investors. This is our working assumption and also lately the FRC’s.2 And we have found that one uniform valuation method is not necessarily appropriate. For comparative purposes, we agree that there should be at least one universal standard for the CORE report; but others may form part of the CORE report with subtable justification (and that justification being confirmed by the auditors as valid). However, it is clear that fair value/mark-to-market, historical cost, and current value all have their place.

As with Rolls-Royce, a financial case might be made to have more than one set of accounts based on different valuation criteria - subject to an external check from the auditors. It may be appropriate to have the IFRS valuation in the CORE report with three sets of summary accounts for each group of reporting objectives, with detailed financial statements, reconciliation, and explanations in three separate MORE reports. That is probably going too far, as we may be able to segment reports to their primary investor focus.

Remember, too, that we have to be aware that a wider set of stakeholders will use these reports. So we need some balance. A market capitalisation growth company might have to produce something more mundane for its wider set of stakeholders.

Revenue recognition under multiple reporting objectives

As we saw earlier, the recognition of revenue under IFRS 15 companies only allows the recognition of revenues when they are actually received. This is not necessarily appropriate for all business models. See Box 9.1.

Box 9.1 Revenue recognition under multiple reporting objectives

Early revenues and later expenditure

(To illustrate this forcefully we have moved back in time. So please assume,pretend this scenario takes us back to early 2018.) Software companies and companies selling intellectual property generally have early revenues and later expenditure. Tesla has probably received more than 500,000 deposits of S1,000 for their lower-priced Model 3 but production is pitifully slow (only 16,000 for 2017 and up to March 2018). hi these cases, revenue recognition should be spread over several years.

Later revenue and early expenditure

For example, subscription companies, Rolls-Royce, construction companies, and indeed Carillion. In these cases, a proportion of revenue not yet paid might be brought forward.

In theory, we like the concept of being able to have a set of accounts produced under different valuation models. For the report users, this could be with the consent of the external auditors, as we commented earlier. In practice, we think we probably have to restrict the number of choices.

The financial statements and other information in the CORE report might include:

  • 1 A central IFRS - based set of financial statements obeying all current accounting standards, regulations, guidelines, and laws
  • 2 A set of standard reports using one or two (preferably) of the bases of the three objectives already stated (if different from item 1):

a Performance of management as epitomised by growth (revenue and profit)

b Stewardship equating to maintenance of assets and perhaps modest but steady dividends. Emphasis on assets and liquidity

c Share valuation where market capitalisation and its growth are all that matters and, as a secondary consideration, the value of net assets.

Any one of these or all three sets would be subject to some external assurance but maybe not comprise a full audit.

  • 3 A set of measures that identifies the most important conventional financial figures and KPIs and APMs relevant to each class of objectives and externally audited to the secondary (as defined in item c above) external audit standard, also encompassing any industry or sector KPIs in common use or offered by third parties. Appendix 3.09.2 discusses KPI and other measures in hotels and coffee shops.
  • 4 The availability of raw or semi-structured data that can be used by professional investors to undertake self-sendee the type of reports based on whatever valuation method they choose. This would be deduced with the aid of an Al assistant (provided by the firm in question with knowledge of the firm's underlying data and conversant with a variety of different valuation and accounting rules). Such reports tailored and pulled from granular data would not be audited and would be used at the investors’ risk. But the Al would be able to testify to the level of accuracy.

Possible framework for preparers in the long term

We propose that preparers can produce in the CORE financial reporting system as follows, but some of this, such as the forecasting model and data and assumptions, will be kept on the website (but subject to audit or a level of reassurance). The full set of components of the financial statement section is shown in Appendix 3.09.3.

In this appendix we also map the proposed FRC structure in their future of corporate reporting3 with our framework below. Essentially our CORE report could include the three main FRC network of reports: Financial Statements, Business Report and Public Interest Report. Our scheme equates our CORE report with a subset of the FRC’s three reports.

So the structure could become:

CORE report

  • • Financial statements as per Box 9.2 with the model and assumptions on the website and downloadable in Excel
  • • Narrative sections (summarised): see next section

MORE financial statements reports

  • • Alternative valuations and accounting rules producing different sets of accounts in full with reconciliations and explanations in full
  • • Additional explanations, information, and details of the financial model to produce forecasts. With the model in Excel and all data and assumptions
  • • Other financial and important non-financial information

MORE reports extensions of the CORE reports

  • • All the narrative reports - only a summary in the CORE report
  • • All the committee reports - only a summary in the CORE report
  • • Other material
  • • Simulacra and marketing material
  • • PR material

MORE reports for each class or group of stakeholders including:

  • • Employees
  • • Customers
  • • Suppliers
  • • Human rights advocates
  • • Investors
  • • Lenders and banks
  • • Environment, sustainability analysts
  • • Government
  • • Local and national society and externalities
  • • Analysts
  • • Potential investors
  • • Hedge funds
  • • Others . ..

Box 9.2 Suggested proposed CORE report for the financial statements

1 UK GAAP'IFRS as modified by our quick fixes with a primary external audit (that is a full and complete audit of all information). Optional: the same set of financial statements produced according to US GAAP (whatever that will become if significantly different from the UK/EU [and we assume it will be]). All to be externally assured in some way.

a Consolidated income statement

b Consolidated statement of comprehensive income

c Consolidated balance sheet (opening, closing, and average)

Opening, closing, and preferably two other time periods (but at least one) to provide an average balance sheet. We still advocate the opening, closing, and average balance sheets. For the CORE annual report:

d Consolidated cash flow statement

e Consolidated statement of changes in equity

f Notes to the consolidated financial statements

g And other information as per current and future regulations.

  • 2 A set of financial statements but using a preferred valuation method and accounting rules, to better show die true underlying nature of die business - if permitted by die external auditors. For example, they could adopt different revenue recognition schemes. The differences could be explained and a resolution between IFRS and dieir favoured revenue recognition shown. Both sets would be externally audited to the most complete auditing standard whatever that becomes.
  • 3 To be agreed with the external auditors, a minimum set of KPIs and APMs relevant to the company or group and the industries in which it operates. These to be assured.
  • 4 A 10-year history as per quick fix. Tertiary standard of external reassurance
  • 5 A 7-year forecast (current year plus 6 forecast years) plus a 5-year history with actuals against forecasts shown. These annual forecasts should include:

a Cash flows

b Simplified income statement

c Simplified balance sheet

d Principle assumptions about exogenous4 variables and macroeconomic indicators

e Principle assumptions about endogenous5 variables (to be explained)

f Publication of a simplified financial model in an Excel spreadsheet (or equivalent) incorporating a simplified financial model that produces an equivalent forecast to the described data. Together with any assumptions as to exogenous and endogenous variables. All physical variable assumptions to be stated. These data sets would be included with the published model. If the model changes, a set of reconciliations to previous history should be provided.

6 A set of physical variables that align to the underlying physical variables in the published financial model

  • 7 Notes and reconciliations
  • 8 Shareholder information
  • 9 Subsidiaries and joint ventures
  • 10 Advisers
  • 11 More narrative in non-technical terms about the data
  • 12 Technical notes and glossary of terms used in report

This is not pie-in-the-sky or blue-cloud thinking. Neither are these fixed or inflexible - these are suggestions which can be modified and/or trimmed or expanded upon. We think and believe this is realistic given the progress in technology. We defend our assertions being entirely attainable, reasonable, and feasible as a suggested guide for the way forward. In Appendix 3.09.3 (Possible framework for preparers in the long term), we provide a proposed set of elements for the CORE report.

CORE narrative and other reports

With possible expansions by the FRC/ARGA new governance code and other additions and extensions - especially risk and uncertainty statements/ assessments - the approach perhaps should be one page per committee and extend this to the remuneration report and independent auditor’s report. A one page summary should suffice. Further and full details for each subreport and committee can occupy a MORE report.

Only the CORE narrative (equivalent to the FRC’s Business Report and Public Interest Report - but may be more concise with the greater amount of data in separate sub-reports) and financial statements as described are to be included in the CORE report as a single entity on a website and also downloadable as a single PDF file and Excel file or equivalent. Wherever possible, Excel files or equivalent should be available on the site and for download. Also when downloading a set, the default naming convention should include the name of the company, the type of report, and the year. So many companies still do not do this.

All other MORE reports can be shown on the website with a possible PDF download facility. A level of assurance should be attached to each.

Separate out the sustainability and environment report into a MORE report. For the CORE report, produce one-page summaries if possible (order not important) and then the detail in further MORE. Not every firm will want to populate all the headings that follow; however, these are a suggested possible list:


Vision and business model (more detailed optional)

Objectives and constraints (as defined earlier and more detailed optional).

Markets and products/services

Our principle competitors

Our resources

Sustainability and environment (enhanced over current in a MORE report) Business overview

Overall performance review including such issues as market share, sales volumes, pricing mix, expansion, or contraction

What diverged from the plans during the year (new)

We would like to see a statement forcing management to identify events and performance that did not go to plan or was below budget or standard.

What went right during the year; better than planned? (new)

We would like to see a statement forcing management to identify events and performance that went better than planned or budgeted.

Unexpected events or issues (new)

We think it would be useful to identify any factors or circumstances which affected the performance or otherwise of the company during the year being reported on.

Financial highlights/overview and APMs

Chairman's statement

Chief executive’s statement/review

Divisional performance (if necessary); several pages

KPIs and non-financial information (as relevant)

New investment, acquisitions, mergers, and takeovers

Human resources


Subcontractors and/or contractors


Supply chain

Human rights, slavery, and child labour


Marketing and PR - several pages

Financial review - possibly two pages

Principle risk and uncertainties

Risk assessment (briefly with a fuller report in MORE)

Uncertainty assessment and stress testing (briefly with a fuller report in MORE)

Going-concern report over the next 12 months

Viability and survivability longer-term report

Financial model details and explanations

Profit and cash-flow forecasts

Summary of cash-flow forecast and explanation

Viability report covering the next 7 years or possibly 7 years

Corporate citizenship and public interest

Externalities report (possibly)


Board of directors

Audit committee report

Summary of communications between external auditors and the audit committee

Shareholder complaints as per the new governance code (forthcoming) Nomination committee and remuneration policy report

Remuneration report (possibly combined with above) Independent/external auditor’s report

Financial statements (several pages)

using CORE assumptions, accounting rules, and valuation methods guide and summary to alternative financial statements

Summary of guide to notes

Shareholder information

List of subsidiaries and ownership levels

History ( 10-year record)


A CORE report for the non-institutional investors, shareholders, and stakeholders needs to be simplified and geared towards the non-expert, using where possible a set of common terms and layouts - as shown in Appendix 3.09.3.

Narrative reports

Solutions to neutralise and give a really balanced appraisal of the business in the narrative section of reports, we believe, require some sort of independent assessment. These are explored in Appendix 3.09.4. In this appendix, we deal with a variety of possible ways of coping with problems of biased narrative reports or those written in a way to influence in a more positive way than could be justified neutrally.

About the financial and cash-flow models

The coronavirus and the latest financial failures have given rise to more importance for the going-concern and viability statements - not only those provided by management but also those given the seal of approval by the auditors. So we postulate that there should be several sets of forecasting models.

  • 1 One that the firm uses and might be made available to professional investors with or without management’s assumptions and forecast exogenous variables.
  • 2 The second would be a simplified one made available to all and published in the CORE report and on the website with all the simplified assumptions and exogenous variables and data. This would allow any stakeholder to run the model with their own assumptions and perform their own sensitivity analysis and stress tests.

We think that we should probably enforce no questioning of the model, the assumptions, any exogenous data, or the results except by the auditors (obviously) and at the AGM. Otherwise we could imagine management time taken up with many questions on the model, the modelling process, and the assumptions.

So the actual forecasting model used by the company in its published forecast may be based on a more complicated model. The one that is published for users to run can be much simplified. However, it should be capable of producing a similar forecast (say a profit or turnover figure within 10% or so for at least 3 years out). If the model cannot, then there should be an adjustment factor and some explanations of why the two models could not produce results within the 10% margin.

Of the elements in a forecast, the most important element is the cash-flow forecast. We have used the term ’physical variables’. By that we mean items such as units of production, units of sales; these might be by type or line, sector/segment, operating units, or broken down into something that makes sense for that particular company. It also would encompass raw material costs of the same items, headcount by classes of wage range, and the price cost data on a unit basis. Of course, some companies, services, would need to fashion a typical project (e.g. a building project) and then gross up from that typical project. Cost would be subject to a mix variation. Prices too - if there is a more expensive set of products or sendees being sold, then that would be a higher unit price and perhaps margins.

This is not a book about financial modelling, so we are not going to dwell on the mechanics. However, we believe that every director on a board should be capable of building and running a financial model - however simple.

In addition, understanding the financial consequences when the financial model is stress tested and systematic sensitivity analysis is undertaken.

What we have done is to provide more information about financial models for forecasts in Appendix 3.09.5. We explore the fundamentals of the basic set of variables, and financial parameters are specified. These are presented in this appendix (Whitbread revenue buildup for financial modelling and forecasting purposes) with links to other sites. This uses Whitbread as an example when it owned both Costa Coffee and the Premier Inn hotel chain. In this appendix, we focus on the build-up of the revenue figures of Whitbread's Premier Inn hotel division, and the Costa Coffee division provides some flesh from which a financial model could be derived. The accuracy of forecasts is considered in Appendix 9.03.6.

NEDs to develop their own spreadsheet models

We also suggest that each NED (non-executive director) run and document their own version of the simplified model with their assumptions and stress tests. These should be documented in board meetings and available for the external auditors to examine. If these are not run properly with differing assumptions, then this should be stated in the annual report under the name of each non-executive director via a statement such as, ‘We certify that XX non-executive director has undertaken a range of forecasts under different assumptions from that of management and have performed some stress tests’.

The auditors should check that these assumptions are sensible and ensure they show a range of forecasts which are different from those of management. They might also say something like ‘When interviewing the nonexecutive director on these forecasts, XX has shown an understanding of the relationship between the variables and the possible impact of profits, assets, cash inflows, cash outflows, and net borrowing and finance requirements. They are aware of any funding problems discovered in the process of understanding their forecasts and sensitivity analysis, including their own personal stress test’.

Other communications

Distress messaging signalling a change in strategy

Companies may have to make distress messages to fend off the effect of activist shareholders on company decisions and reports. The recent (2018/9) case of Whitbread and shareholder pressure to hive off a major subsidiary (Costa Coffee) meant the Whitbread board felt the need to bring forward the divestment decision and make a public statement, which is certainly, a ‘disruption’ to the normal internal decision making process.

Whitbread as an example

The reason we used Whitbread as an example earlier is that we feel strongly that there are certain negative features to current capital markets. We liked the original company's strategy. We liked their report. We think they were doing well, although the margins on the hotel business were much higher than the coffee business. Then along came two US-based hedge funds -Sachem Head and Elliot Advisers (the latter mentioned by Wikipedia as a vulture fund6). The latter also built up a shareholding of 6% prior to a possible takeover bid. To us, Whitbread was a healthy and growing company with an impressive long-term strategy.

Alison Brittain, Whitbread’s chief executive, had to give way in the face of a possible takeover bid. So she announced the sale of the Costa Coffee division to head off such a bid. However, the two hedge funds wanted a sale within six months; Allison Brittan wanted to finish development and sell Costa within 2 years. In the end, Whitbread sold Costa Coffee to Coca-Cola for a good price (£3.9 billion) ahead of their CEO's desired timetable.

Alison Brittain had previously declared herself open to the idea of a sale but maintained that both businesses needed more investment first. After amiouncing the demerger, she said, ‘We have always said you wouldn't sell your house at a time when you’ve got the roof off and you're doing all the rewiring - and that is what we are doing at the moment’.

The reasons for the pressure for splitting the assets and then selling the Costa Coffee division, retaining the Premier Inns, are:

  • 1 Elliott’s position is understood to be that Costa should be a separate entity from the Whitbread group, as Costa and Premier Inn are largely run as separate businesses with minimal overlap in the management teams - something that need not be the case. They argue that Whitbread is trading at a discount as one corporate entity, and creating a standalone Costa would boost the value of both relatively painlessly by up to 40%, or £3 billion - in the end, Whitbread got £3.9 billion, which, in our view, is an exceptionally good price.
  • 2 Scott Ferguson, managing partner at Sachem Head, told a hedge fimd conference in New York why he thought Costa would be better off as an independent business: ‘When management no longer has a big brother to lean on, problems tend to be solved'. The authors disagree; there is no evidence that this is so, especially if the spin-off is saddled with debt.

3 Laith Khalaf, a senior analyst at the investment company Hargreaves Lansdown, said, ‘Coffee shops and hotel rooms don't make natural bedfellows, so splitting off Costa Coffee from Premier Inn makes sense for Whitbread'. We disagree. Both serve drinks and food snacks as well as some commonality with meals. There is enormous scope for economies of scale in supply and also in distribution logistics. Cross-brand loyalty schemes are also possibilities as well as crosspollination of online sites. Provisional analysis by the authors put this advantage to be as much as 23p per cup of coffee. In terms of savings in hotel rooms, this comes to significantly more. We believe that our numerical estimates show that hotels and coffee bars do make good bedfellows.

See Appendix 3.09.7 (Distress messaging signalling a change in strategy) for a full list of references and any further comments and analysis we may have on this issue. What the Whitbread management may have done in staving off a takeover bid is to redistribute overhead allocation to balance the returns (if warranted) rather than have the hotel group very much more profitable than Costa. That said, we do not know the underlying details.

Entropy and messaging

The value of a message or the informational content can be varied depending on circumstances. Often it is the unexpected message or information that has most value terms for decision making (i.e. buy or sell shares). The message ‘it is going to rain today’ means vastly more, if accurate, in the Sahara desert than in the UK. Entropy and the informational content of messaging is further discussed in Appendix 3.09.8. We postulate an entropy measure for forecasts, with illustrative examples in Appendix 3.09.8a.

The issue of how to obtain consistency in the longer term in reporting is discussed hi Appendix 3.09.9.

Delivery systems

At the moment, the annual report is either on paper or downloadable as a PDF file on the web. Those are the two audited documents. Other pieces of information on the web or interim reports, messages, or announcements are not audited. However, this may change. Increasingly we believe that the delivery system, of the MORE reports and other isolated but important pieces of data (e.g. number of users) might be reported on the company's website alone. The mam CORE report can always be a PDF file. There needs to be a hierarchy of level of assurance for the increased information in the numerous MORE reports. External audit will, we advocate, have to cover some of the MORE reports on the website.

Within our time frame, we envisage:

  • • Al assistants and systems will be providing and interpreting the complete reporting environments. So extracting anything may involve interactions with the Al assistant and helper. Even to obtain the main CORE report and any standard MORE report will require interaction with the Al to understand the structure of the reports and to extract the most relevant one for the user and then to present it in a form that the ‘user’ likes together with any newly created graphs or tables - sometimes drawing upon additional data.
  • • Depending on permissions and privileges, some users may extract their information requirements from the raw or semi-structured data via a self-service application or Al system.
  • • Reporting of relevant information will be tailored to each class of user or stakeholder and possibly to each person who takes the time to define certain parameters - given sufficient permissions and privileges.
  • • The information will be received by your computer, smart watch/pen, your glasses, your wearable, or, just possibly, that 'old-fashioned' but much-enhanced smartphone.
  • • Those devices might then pass this information to the user directly to one’s ears, eyes, and even possibly directly to one's mind (discussed below). We know that it is probable that this will move from paper to electronic and web based. It is even possible, in the long term, for there to be direct input to the brain; Elon Musk’s company Neuralink is developing such a technique, for example,7 but that is in the very long term.

The intangibles issue

The period 2018 to 2021 has been a record one for mergers and takeovers. The FTSE 100, discussed earlier in Chapter 3 (and Appendix 3.03.1/2) will be very different by 2021 and then again in 2022. Many of the famous names of the FTSE 100 (such as GKN, Shire, EasyJet, British Gas, and even ITV) will have been taken over (possibly broken up) or suffered a reduction in their share price.8 In Chapter 4, we highlighted the problem of intangible assets (also discussed in Appendix 3.04.13).

Differentiation intangible types

Type 1 ‘valueless than their balance sheet numbers

As we saw in Carillion, intangibles formed a major part of the balance sheet. That is not unusual. Our research indicates that about 80% of the assets of leading non-tech businesses are intangible in nature and that many are nowhere near their balance sheet value. Every time a takeover happens, there will normally be an additional entry in intangible assets (normally under acquisition Goodwill). Though in theory the current safety valve is that an impairment review should be included routinely on acquisition goodwill. So the hectic takeover activity in the last few years and currently (new records being set) will lead to a larger set of intangible assets - many of which, as in Carillion, are not worth their book value in the balance sheet. Not every merger or takeover brings the wished-for synergies or benefits.

Type 2 market capitalisation greater than the total balance sheet asset value

However, there is the parallel and reverse phenomenon - the tech giants and start-ups, the unicorns, and successful disruptive companies (such as Tesla, Uber, Airbnb, Deliveroo, Snowflake, Doordash, etc.) are worth far more in market capitalisation than their balance sheet values. So there is a serious mismatch and possible reporting black hole. This type of intangible issue is characterised by high market capitalisation or P/E ratios that are massive. Such values are basically concerned with expectations or potential futures, or even forecasts of what might happen. Such characteristics might also determine how we might treat this phenomenon.

Increasing divergence between book and market values

For both types, one can observe the increasing divergence between book and market values and partially attribute that to information that is outside of the financial report. For Type 2, this can also attribute some of the gap to non-financial information either within the report itself or released to the market in other ways (press statements, on the website, and by third-party industry watchers or analysts).

The stock market value of the firm and its actual performance bear little resemblance to any conventional valuation formula. Multiples of profits or potential profits are sky high. Companies which make a loss can still be valued in billions. Often, as we said earlier, non-financial information (the product, subscribers, users, visitors, services delivered) are much more important than the pure financial statements. This type of non-financial information is important in the forecasting and modelling process, just as volume or changes in the shopping basket are for manufacturers/retailers.

For the social media companies and chat apps, what is important is the number and growth in those subscribers (with a view to selling advertising fees for access to those subscribers). As of 2020, Twitter fails with only 330 million., whilst WhatsApp (1.5 billion), Messenger (1.3 billion) and Instagram (1 billion) were bought by Facebook for enormous sums.9 They all had rapidly growing subscribers, whereas Twitter had little growth. Tencent owns the fast growing, QQ, WeChat, and Qzone (mainly Chinese). ByteDance owns TikTok, which has a rapidly growing number of subscribers (around 1 billion) but has been the source of political intrigue with former President Trump.


We believe that it should be accepted that the intangibles question will not be resolved through strict conventional financial reporting. Instead, it is part of the broader approach to reporting that looks beyond historical financial performance and deals with forward-looking statements and forecasts. One possibility is if companies can report authenticated (via blockchains or some other similar secure filing/ledger system) historical cash flow information on a disaggregated basis, does this permit valuations based on a more granular (albeit historical) set of data? And will this work to narrow the intangibles gap? Perhaps for Type 1 but not for Type 2 - the latter relies more on non-financial information and forecasts.

However, there is no clarity as to what external information is a driver of value, and there may be considerable differences between industry sectors. They rightly say that there is also a lot of noise, which may result in the information being visible only to those with the tools and skills to cut through the fog.

Type 1 scenarios

For Type 1, where the real value (sales value, discounted cash-flow net present value, breakup value, asset value in a forced sale, etc.) is less than the balance sheet, more light could be shed if there was some attempt to evaluate the real (and lower) worth of these divisions in a separate report -possibly audited. For those companies which have goodwill but have been completely integrated into the company doing the taking over, it may be more difficult to provide any basis for separate valuation. However, there should be a note on the contribution to current profitability in both non-financial and financial terms.

Type 2 scenarios

For Type 2, where the market capitalisation exceeds the balance sheet value, we propose that this should have a reconciliation-to-market value report. This should contain:

a The critical non-financial information should be published and a justification why these variables(s) are important.

b A valuation model that links market capitalisation or share price to the non-financial information in item a. This could be statistically by some simple formula such as least squares, a more complex econometric model, or other statistical or logical processes. It might be formed from a simple deterministic model.10

c A reconciliation between a and b back 2 or 3 years.

Where are we now?

Our central thesis is not to have one integrated report but a hybrid system in which there is a single CORE report (which could contain the FRC’s main network of reports - though perhaps shortened) and a number of MORE reports. We draw attention to the fact that the FRC is suggesting major change to reporting - with flexibility and adaptation to changing needs and events. Much of what the FRC suggest we would agree with. The one area of divergence is that one set of reports meets all the needs of stakeholders and users. We feel different classes of stakeholders will be interested in different information. We also go further in the use of multiple valuation methods and an emphasis on forward looking statements, forecast and predictions. We also add financial models and forecasts in a more major way.

Risks about known events and uncertainty (of the unknown, i.e. the pandemic) are contrasted. The conclusion is that there should be a set of financial models (published) with assumptions. Sensitivity and stress testing with a range of outcomes should be published, with any changes and discrepancies over time explained. We are also advocating that the independent NEDs run their own simplified models to assure themselves of the survivability of the company. Messaging between the company and anyone should be better documented and subject to tests including a content and entropy measure. Lastly, the divergence between the balance sheet and market capitalisation needs to be documented, and an attempt to explain any differences. This is the case in which intangibles have to be written down - but by which valuation method? Probably more than one with alternative assumptions. The more significant case is where market capitalisation far exceeds the balance sheet value. This needs ratifying and documenting - not something to be swept under the carpet from a reporting system designed in an age gone by. The situation over the next 50 years is going to provide many challenges, opportunities, and, above all, changes. The events of the last few years show that change is inevitable.


  • 1 How COVID-19 infects financial reporting and results presentations, Deloitte Website, 2020, available at: financial-reporting-survey-ql -2020.html, accessed September 2020.
  • 2 FRC, The results of the FRC’s initial survey from the online survey of FRC Stakeholders on the future of Corporate Reporting, FRC News, 8 October 2020, available at: getattachment/97c4336c-3cf2-4884-8bcf-lf9542572669/Survey-report-final.pdf, accessed October 2020.
  • 3 FRC,Thefutureofcorporatereportingdiscussionpaper,FRC,Vews,80ctober2020, available at:, accessed October 2020; and FRC, The future of corporate reporting discussion paper, FRC News, 8 October 2020, available at:, accessed October 2020.
  • 4 Having an external cause or origin - not something which can be controlled by management.
  • 5 Something that can be controlled or influenced by management.
  • 6 Available at:, accessed September 2020.
  • 7 See their website
  • 8 Similarly, GE, Exxon-Mobil, Pfizer, and Raytheon were dropped from the Dow Jones Industrial Average.
  • 9 Currently the subject of US anti-trust actions which may force the breakup of these constituent parts of Facebook.
  • 10 Uber provided a cogent argument in its IPO, citing 14 million trips a day and S78 billion paid to drivers with the possibility of 10+ billion trips.
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