Narrative reporting – 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 indecipherable.

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 one.

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 future prospects. 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 practices.