Regulations on narrative reporting Flashcards
International comparison of narrative reporting (the USA)?
- The USA:
- Management Discussion & Analysis (MDA) Requirement - was imposed in the 1980’s under regulations S-K of the Securities and Exchange Commission (SEC)
- To encourage disclosure of forward looking information extended ‘safe harbour’ protection (1995)
- Very detailed proscriptive; has influenced other countries.
International comparison of narrative reporting (Germany)?
- Germany
- The origins of the Management Report can be traced back to the 1990s
- Subjected to audit.
- Requires to provide extensive employee related information.
International comparison of narrative reporting (Sweden)?
- Sweden
- The Management Report - content is often based on truncated (shortened in duration or extent) USA MD&A (voluntary)
- Many companies provide extensive disclosure of environmental impact
International comparison of narrative reporting (Japan)?
- Japan
- The Business Report - subjected to audit.
Explain financial information
- Financial information - comprises quantitative data related to an entity’s financial position and performance,
- including revenue, expenses, assets, liabilities, and cash flows.
- typically presented in financial statements (such as the balance sheet, income statement, and cash flow statement.)
- For eg: net income, profit margins, and return on investment, providing stakeholders with insights into the organisation’s financial health and operational efficiency.
Explain narrative reporting (general)
- It provides context, interpretation, and insights - into the organisation’s strategy, objectives, challenges, and performance drivers.
- often includes written explanations, descriptions, and analyses - to complement the quantitative data disclosed in financial statements.
- For eg: narrative reporting might discuss the organisation’s market position, competitive landscape, key risks and opportunities, sustainability initiatives, and corporate governance practices.
- Other examples exist within the annual reports such as the Strategic Report; the Director’s Report; and the Management Commentary
Two main issues on financial information and narrative reporting?
- Poor and insufficient accounting information can lead to poor and uninformed investment decisions.
- There have been global pressures for greater transparency when it comes to narrative reporting.
Regulations on narrative reporting (general)?
Hint: five (5)
- EU Accounts Modernisation Directive - aimed at modernising and harmonising accounting rules and practices across member states.
- The Companies Act 2006 (Strategic Report and Directors’ Report) Regulation 2013.
- Purpose of the Strategic Report: (under Company Act (2006). - Regulation: Safe Harbour (Companies Act 2006 (S463
- Business, Innovation and Skills (BIS) regulation (2011 & 2012) - Initiatives to replace the Business Review and Directors’ Report with the Strategic Report and the Annual Directors’ Statement.
- FRC Guidance - FRC Guidance issued in June, 2014.
- 3 main content-related objectives
- 3 broad categories
explain EU Accounts Modernisation Directive
- aimed at modernising and harmonising accounting rules and practices across member states.
- Under the directive, large companies, (as defined by specific criteria related to size, turnover, and number of employees), are required to prepare and disclose a Business Review as part of their annual financial statements.
- The Business Review typically includes information on:
# the company’s business model, strategy, objectives, risks, and performance, as well as non-financial information related to environmental, social, and governance (ESG) matters.
explain The Companies Act 2006 (Strategic Report and Directors’ Report) Regulation 2013
- All companies (except small, unquoted companies) have to prepare the Strategic Report separately from their Directors’ Report.
- Directors’ Report to contain the Business Review.
- New disclosures on gender diversity, human rights (in Strategic Report) and greenhouse gas emission (in Directors’ Reports).
- A description of a company’s business model and strategy in the Annual Report.
explain the Purpose of the Strategic Report: (under Company Act (2006).
- To inform the company and help them assess how the directors have performed their duty to promote the success of the company.
- Must contain a fair review of the company’s business.
- Must contain a description of the principal risks and uncertainties facing the company.
Regulation to protect directors’ statement in the narrative reporting?
Safe Harbour (Companies Act 2006 (S463))
Explain Safe Harbour (Companies Act 2006 (S463))
Directors will only be liable for statements or omissions in the Directors’ Report and the Strategic Report if they are untrue, misleading, made in bad faith or recklessly or if there is deliberate and dishonest concealment of material facts.
Explain Business, Innovation and Skills (BIS) regulation (2011 & 2012).
- Initiatives to replace the Business Review and Directors’ Report with the Strategic Report and the Annual Directors’ Statement.
- The Strategic Report is expected to be similar to the Business Review but quoted companies would have to report:
- On their strategy, business model, any human rights issues;
- On the number of men and women on their board, in executive committees and in the organisation as a whole.
Under BIS (2011 & 2012), Some reporting requirements will be removed from the Directors’ Report. Why and what are they?
Why: They are either superseded or already required elsewhere or do not provide meaningful information.
The removed requirements from the Directors’ Report:
1. About any essential contractual or other arrangements;
2. About the principal activities of the company in the course of the year
3. About asset values
4. About charitable donations
