Narrative reporting, its purpose and future
The financial crisis has seen the issue of corporate reporting rise
up business and media agendas.
Unfortunately, this interest is not reflected within the reports
themselves, which can often be lengthy, unwieldy and sometimes
Over recent years, there has been a particular growth in types of
voluntary and narrative reporting, and many large companies now produce
elaborate, lengthy and detailed annual reports with narrative sections
the size and weight of phone books often extending to hundreds of pages.
One of the questions frequently raised but not well answered in
considering this growth is the actual usefulness of this surfeit of
narrative in annual reports.
Who reads it, is the information useful and is it material to fund
allocation decisions made by investors? And if not, what are the
implications for preparers of annual reports?
ACCA's report Narrative Reporting: Analysts' Perceptions of its Value
and Relevance found that analysts are dismissive of anything other than
directly value-relevant numerical data.
However, the belief that no narrative reporting is capable of
informing, amending or challenging a financial forecast is a curious
Narrative reporting, which can include such disclosure narratives as,
among other things, the chairman's statement, chief executive's review,
social and environmental reports, and risk disclosures, refers to
contextual and non-financial information reported alongside financial
information in order to provide a more thorough understanding of a
company's direction, strategic and market positions, performance and
It therefore contains useful and extremely important information.
However, there are steps that can and should be taken to make the
reports more accessible and relevant.
These could include: the usefulness, relevance and material use of
the reports to the investment community should be considered at every
point, narrative reports need to be streamlined to contain the most
helpful and pertinent information rather than every scrap of information
available, the reports should be written in plain English so that they
are easily understandable to the reader, XBRL (eXtensible Business
Reporting Language) offers a technological means of tagging keywords and
data-mining to find relevant information quickly and could be used to
reduce the length of some of the reports.
The greatest area of difficulty for companies when producing
narrative reports can often be the disclosure of forward-looking
information, but this is in some cases the most useful material.
Companies should try to include this as much as possible
Good narrative reporting is a means by which companies can achieve
effective, transparent and open communication with their shareholders.
ACCA feels that this is an important issue and will be contributing
to the debate on how to instigate better global narrative reporting