Narrative reporting, where next?

To coin a phrase, the search goes on, although this time it’s good narrative reporting which is the quarry, not an apprentice. As preparers wrestle with the task of telling the company’s story in a way that is at once readable, targeted and compliant, new rules on annual reporting are once again on the horizon. In mid December, 2 key standard setters wrote about how best practice should evolve.

(NEWS FLASH – as I write, the FRC has just published its Effective Company Stewardship: Enhancing Corporate Reporting and Audit. Radio 4’s Today programme interviewed the FRC, which suggested auditor involvement in the totality of the report, not just the back end...oh joy.)

First up, the IASB, responsible for the IFRS accounting standards. Their Practice Statement on management commentary follows from various consultations over the recent months, and summarises their view on what good narrative reporting looks like. (They do make the point that theirs is non-binding advice, but FD’s will pay attention, given where it has come from).

Second, the BIS, reporting on their consultation, which closed last October. This collates the responses from the 85 organisations and companies that responded. The summary promises to provide its proposals on changes in the rules by budget day – March 23rd 2011.

There were a good number of consistent themes. Both reviews emphasised the importance of well executed and designed annual reports, describing them as providing a confirmatory and holistic review of the company.

Themes included in both:
• A nod to ‘audit’ or ‘assurance’ of non financial data provided. Both reports highlight the lack of verification. How do you audit text, however?
• There are suggestions for mandatory disclosure of how the company decides what is “material”. Echoes of what the banks do on risk these days.
• Also important is the need for KPI’s and risks to include a time horizon. When are the events considered to be relevant?
• Contractual relations – how should companies decide which relationship is essential? Client revenues? Unique source of key components? Guidance would be helpful, say many respondees.
• Analysis of cash flows. IASB notes that “Management commentary is a narrative report that provides a context within which to interpret the financial position, financial performance and cash flows of an entity. My italics. Does anyone do this effectively today?
• There should be discussion of how resources could affect the company’s operations. For example, some of today’s balance sheets are flush with cash. Does the strategy include share buybacks, special dividends or M&A deals?

There are also a few old favourites, a constant refrain from analyses such as Radley Yeldar’s (see disclosure) How does it stack up.

• Emphasis on forward looking information. The consistent beating of the drum says once again that companies need to bite the bullet on sharing their plans.
• A reaffirmation of the need to link strategy, risks and KPI’s, The IASB also focussed on linking IFRS financials to non financial data.

These indications are far from the finished article, but the themes are sure to be discussed in coming months.