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Narrative Reporting: Where Next for Business?

The debate on narrative reporting and its perceived value has never been greater than over the last few years.  In the UK the voluntary Operating and Financial Review (OFR) became mandatory only to then become voluntary once again.  In parallel, Europe pushed for greater shareholder engagement by enhancing the Directors’ Report requirements to compel boards to include a Business Review.  Companies are now left with the decision to produce a voluntary OFR or a Business Review to comply with narrative reporting legislation.  To help companies through this process we have produced guidance on this topic – The Directors' Report and the Business Review ( PDF 1551 KB).

What is the Business Review?
Essentially it is a narrative statement, within the Directors’ Report whereby directors are required to provide:

• a balanced and comprehensive review of the development of the company during the year and its position at the end of the year;
• detail on the company’s principal risks and uncertainties; and
• where necessary to give a balanced and comprehensive review, financial and non-financial key performance indicators (KPIs).

When do companies need to prepare a Business Review?
All companies required to prepare a Business Review need to do so for financial years beginning on or after 1 April 2005.

Challenges to business in getting the Business Review right
The Business Review should be viewed in the same context as the OFR: a vehicle for good quality narrative reporting.  Some of the key challenges are summarised below:

• Forward-looking information: although not currently required by the legislation the ASB’s Reporting Statement suggests that disclosure of forward looking strategy supported by KPIs would be best practice.  Many companies are reluctant to provide this information believing that this may require them to disclose commercially sensitive data.  There is also an issue regarding the current absence of a safe harbour provision. 
• Key performance indicators: are clearly required if one is to provide meaningful commentary on past, present and future performance.  Whilst many companies already provide financial KPIs there is a push for organisations to highlight those non-financial KPIs that are crucial to running the business. As well as ensuring that KPIs are comparable companies need to ensure that they are calculated consistently.
• Subsidiaries: all companies, other than those eligible for the small company exemption, have to include a Business Review within their Directors’ Report.  Questions arise as to the level of disclosure in subsidiary accounts – should this be a ‘watered down’ version of what is disclosed in the group accounts or should companies look at the specific issues facing the subsidiary? 
• Assurance: given the pressure to disclose forward-looking information and the absence of a safe harbour provision, directors may need to revisit the processes used to gain assurance over information. 

How can KPMG help?
When preparing for or reviewing your Business Review process, KPMG could assist you in the following areas:

• Understanding the practical implications of the Business Review.
• Improving existing reporting processes to include the key elements of the Business Review.
• Assisting in developing the underlying processes to support Business Review reporting.
• Highlighting areas where the Board may need to seek additional sources of assurance.

Business Review Team Contacts:

Richard Sharman	Partner	0207 311 8228
Andrew Fields	Principal Advisor	0207 694 3282

For further information about our services, or if you would like one of our professionals to contact you, please .