Narrative reporting is undergoing a period of increased regulatory focus. There is widespread recognition that it has an essential role to play in providing a broader perspective on business performance alongside the financial statements. The FRC’s Guidance on the strategic report is the latest in a series of regulatory initiatives aimed at improving the relevance of narrative reports for shareholders.

Approached positively, the guidance could help companies look beyond current year earnings to provide a broader picture of shareholder value creation in their annual reports. The business-centric focus of the guidance is an opportunity for companies to focus their reports on those factors that are most important to the long term prospects of their business. This will require a different approach from report preparers, placing the emphasis on explaining the business story and understanding shareholder needs, rather than meeting a checklist of disclosures.

Key areas of change that we expect the guidance to drive include:

• More rigorous descriptions of business model and strategy that provide shareholders with an understanding of the processes, relationships and resources that the business depends on – and the strategy for developing and preserving business capability over the longer term;
• Renewed focus on the strategic report complementing the financial statements by explaining past performance to support shareholders’ assessment of future prospects;
• Greater use of non-financial performance measures that are relevant to an understanding of business prospects and capabilities – and how they have been developed and protected; and
• Better linkage between elements of the report, including performance measures that relate to the identified risks and opportunities to shareholder value.

KPMG offers a strategic report health check service that can help to highlight the key areas to develop in your report.