Narrative reporting – the story behind the numbers

What does the phrase ‘narrative reporting’ mean to you? Does it fill you with confidence because of the opportunity to tell the world all about your business or dread at the thought of trying to navigate the ever-increasing number of regulations and disclosure requirements? You are certainly not alone if you find yourself in the second bucket.

Narrative reporting comprises all the components of the annual report outside of the accounts - the strategic report, the directors’ report, corporate governance statements, the directors’ remuneration report and ESG and climate-related financial disclosures. Taken together these can represent a significant portion of the entire annual report, often taking up more pages than the financial statements themselves. Perhaps not surprisingly, many companies see narrative reporting as a compliance burden – a costly exercise that takes up valuable management time.

Add in the frequent changes to regulations and it’s easy to default to a ‘compliance checklist’ mindset. So, it’s worth taking a step back from the detail to consider the wider objectives and benefits of narrative reporting in providing relevant and useful information.

In 2019, BEIS (now, the Department for Business and Trade) commissioned a report into stakeholder perceptions of the non-financial reporting regime in the UK. More recently, in March 2024, the government published its summary of responses from their ‘call for evidence’ on non-financial reporting. The common finding from both these surveys was that narrative reporting does have significant value for a business, both from the perspective of the preparer and the user. However, it is also clear that there are factors which can diminish that value and reduce the usefulness of narrative reporting for stakeholders.

The benefits of good quality narrative reporting

Good narrative reporting allows management to ‘tell the story’ of their business. This notion flows through the FRC’s guidance on the strategic report. Narrative reporting within the annual report provides an opportunity to tell this story, in one place, to all stakeholders at the same time and for many businesses it may be one of the only formal means of doing so.

A good quality story, told in a way that is specific to the business, reflecting the company’s stage of development and explaining the business’s performance, actions and challenges in an open and transparent manner can bring significant benefits:

Understanding the numbers

Narrative reporting complements the information provided in the financial statements. It provides vital context for stakeholders to understand the story behind the numbers. Business performance, position and financial metrics are ever-changing and without the supporting narrative it is difficult for a user to understand what has happened and, perhaps more crucially, why. This is an opportunity to explain what the numbers alone can’t show.

Build trust and transparency

To gain trust with stakeholders, Boards must be open and honest. Narrative reporting that is balanced and explains the reasons for key decisions, alongside the impact of those decisions and the challenges faced, make the board accountable and indicate that they are not afraid to take responsibility. Acknowledging company specific risks and uncertainties and explaining with relevant detail how these are identified, managed or mitigated indicates to stakeholders that this is a business with good governance practices. This can all help to generate stronger relationships with key stakeholders.

Competitive advantage

Narrative reporting which goes beyond just a ‘tick-box’ exercise will provide a deeper understanding of the business. It will explain the ‘how’ and ‘why’ as well as the ‘what’. When stakeholders have greater insights, they can make better and more informed decisions. Understanding the business strategy, how it is managed and what drives its value, can make it more attractive to several key stakeholders including current and potential investors, existing and future talented employees, and potential new customers.

Opportunity to be forward-looking

The ‘back-end’ financial statements present historical information about the business and as a result, a significant amount of narrative reporting is providing an analysis and understanding of that historical information. However, even for the fastest reporters, time will have moved on and people are interested in what is currently happening and what the future may hold. Narrative reporting is an opportunity to look ahead – to tell the stakeholders the new plans for the future, exciting initiatives, key priorities and expected challenges. Setting out clear expectations in the final part of the ‘story’ is vital for key stakeholders to make informed decisions.

Improved governance and board effectiveness

The preparation of narrative reporting can also generate internal benefits for the business. The Board can take time to gather wider information across the business, giving them an improved awareness of not only the overall performance in the year but also broader corporate issues, for example, factors affecting employees, the environment and the community. It allows Boards to consider matters around viability, KPIs and the approach to corporate governance that they may not necessarily be able to devote significant time to when involved in the day-to-day details of the business. It can highlight new areas to focus on, for example to increase employee engagement or introduce new diversity policies. The process could also highlight areas of potential risk management weakness and provide new insights into the performance and health of the company. The objective of narrative reporting isn’t to change corporate governance behaviour, but this can be a positive side effect that Boards can take advantage of.

In summary, narrative reporting can be a powerful communication tool ensuring that complex information is presented in a clear, engaging, and insightful way. An effective narrative report can be as important as the financial statements themselves as it will enhance the understanding of the numbers together with providing a comprehensive analysis of the company’s risks, strategy, governance and outlook. Through narrative reporting the Board can tell one clear, engaging and truthful story of the business performance to all stakeholders and set out how they plan to build for future success.

BDO guidance on the strategic report and directors’ report

If you want to ensure your story also captures all the statutory requirements for narrative reporting, contact Laura Jackson, Nigel Harra or a member of the local audit team for more information.