In our Trends publications over the years, we have frequently highlighted the continuing proliferation of guidance and regulations relating to ‘narrative’ reporting accompanying financial statements. This proliferation has continued during the past twelve months, both nationally and supra-nationally. Three developments during the year were particularly significant.
- In Germany, the Reform Act on Accounting Regulations was enacted in December 2004, in response to the EU Modernisation Directive. This legislation was supported by the adoption of GAS 15 Management Reporting, requiring annual reports to include a narrative analysis including both financial and non-financial key performance indicators.
- The UK also introduced new legislation in this area, supported by the Reporting Standard 1: Operating and Financial Review issued by the Accounting Standards Board in March and May 2005 respectively. The OFR, which came into force for UK listed companies whose financial years began on or after 1 April 2005. The UK government recently announced a review of this legislation.
- On the global stage, the International Accounting Standards Board (IASB) issued a Discussion Paper on Management Commentary in October 2005, inviting comments by April 2006. This paper was prepared for the IASB by the staff of its partner standard setters.
Here, we place specific emphasis on the IASB paper, since it is based on an in-depth review of the guidance and requirements currently in place across several jurisdictions.
Narrative Reporting
A note on terminology: narrative reporting
We use the term ‘narrative reporting’ to include the contents of the sections usually referred to as Management Discussion and Analysis (MD&A) or Operating and Financial Review (OFR) that are commonly located in the front sections of corporate annual reports. Our definition of narrative reporting, however, is broader than that type of information alone, since it also comprises quantified metrics that support the narrative commentary. Through our further discussion and review of the good practice examples on this website, the full meaning and scope of narrative reporting will become clearer.
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