Business Implications of the new Narrative Reporting

The Department of Business, Innovation & Skills is planning to change what they call “Narrative Reporting” for accounting periods starting on or after 1 October 2012. This is the Directors’ Report and other narrative typically placed at the front of annual published accounts.

A consultation took place in late 2011, which closed in November. The final proposals are awaited. But given the short timescales, it’s worth looking at what was put out for consultation..

Although the new disclosure requirements are aimed mainly at larger companies and groups, the business management principles are relevant to all businesses. The topics are therefore of relevance to all directors.

APPLICABILITY

The proposal is to consider companies in three groups:

1. “Small” companies, presumably those that are exempt from audit
2. “Quoted” companies, such as on the main London stock exchange
3. Other larger companies, both private and presumably including AIM and PLUS-SX

Subsidiaries in groups appear to be considered in the same way as independents.

For small companies, it will simply be a matter of changing the title of the Directors’ Report.to “Annual Directors’ Statement”.

For all larger companies there will be two reports:

1. “Strategic Report”, replacing the Business Review and similar
2. “Annual Directors’ Statement”, replacing the Directors’ Report

BASIC PROPOSAL

For all companies the “Strategic Report” will need to contain information on :

• Company performance
• Principal risks and uncertainties
• Key Performance Indicators (KPIs), as in KRMs (Key Results Measures)
• Key financial information (similar to that currently required for the Summary Financial Statements

For quoted companies (but presumably not those on AIM and PLUS-SX unless they wish to) there should also be information on:

• Business strategy
• Business model (or presumably models)
• Environmental and social information
• Key information on executive remuneration and its link to performance

It is also proposed that all directors sign off the Strategic Report and possibly the Directors’ Statement.

Further details on the BIS website

IMPLICATIONS

Quoted or not, it is a timely reminder that all businesses should be clear about:

1. The business strategy
2. The fundamental business model(s): What are the profit sensitivities? What are the cash flow implications of growth or contraction?
3. Principal risks and uncertainties
4. Key Performance Indicators

 Key Performance Indicators are of two types:

• Key Performance Drivers (KPDs) - what is actually driving your business?
• Key Results Measures (KRMs) - how well are you doing?

What do you need to address for your business?