Narrative reporting the right way

Narrative reporting

– whether in the form of an Operating and Financial Review (OFR), Management Discussion and Analysis (MD&A), a Business Review or other management commentary – is vital to corporate transparency. Key performance indicators (KPIs), both financial and non-financial, are an important component of the information needed to explain a company’s progress towards its stated goals, for all of these types of narrative reporting.

But despite this fact, KPIs are not well understood. What makes a performance indicator “key”? What type of information should be provided for each indicator? And how can it best be presented to provide effective narrative business reporting?

Setting the stage – two quotes

Although narrative reporting requirements remain fluid, reporting on KPIs is here to stay. I welcome any publication as a valuable contribution to helping companies choose which KPIs to report and what information will provide investors with a real understanding of corporate performance. Using management’s own measures of success really helps deepen investors’ understanding of progress and movement in business. Whether contextual, financial or non-financial, these data points make the trends in the business transparent and help keep management accountable. The illustrations of good practice reporting on KPIs shown here bring alive what is required in a practical and effective way.

KPIs – a critical component

Regulatory environment

The specific requirements for narrative reporting have been a point of debate for several years now. However one certainty remains: the requirement to report financial and non-financial key performance indicators.

Reliable non-financial information to progress sustainable finance By Vita Ramanauskaité

Quoted from –

By proposing to cut greenhouse gas emissions by at least 55% by 2030, the European Commission (EC) sets Europe on a responsible path to become climate neutral by 2050. To achieve this goal, we need high-quality non-financial data to assess businesses’ impact on environmental and social matters.

Non-financial information (NFI) is crucial for companies and investors to make sustainable business decisions. NFI is not sufficient though, it needs to be reliable to strengthen confidence in companies and in markets and to progress sustainable finance objectives.

Independent assurance on NFI is necessary to enhance its reliability. Join our 26 November webinar The path to high-quality non-financial information assurance to debate this with us, the EC, businesses and investors.

The demand for assurance on NFI has been growing steadily, but the practice still varies across Member States. In February 2020 we set out how European countries have dealt with relevant requirements in the Non-Financial Reporting Directive (NFRD) and which voluntary assurance practices exist.

The EC is currently reviewing the non-financial reporting directive (NFRD) (which includes the link to the full directive) and summarised over 600 responses to the public consultation. Respondents agreed that consistent NFI assurance requirements were needed across Member States and companies and 2/3 of respondents indicated that stricter audit requirements were needed for NFI.

Companies that must comply

EU rules on non-financial reporting only apply to large public-interest companies with more than 500 employees. This covers approximately 6,000 large companies and groups across the EU, including:

  • listed companies
  • banks
  • insurance companies
  • other companies designated by national authorities as public interest entities

Information to be disclosed

Under Directive 2014/95/EU, large companies have to publish reports on the policies they implement in relation to

  • environmental protection
  • social responsibility and treatment of employees
  • respect for human rights
  • anti-corruption and bribery
  • diversity on company boards (in terms of age, gender, educational and professional background)

How to report

Directive 2014/95/EU gives companies significant flexibility to disclose relevant information in the way they consider most useful. Companies may use international, European, or national guidelines to produce their statements – for instance, they can rely on

Something else -   Contingent consideration

In June 2017, the European Commission published its guidelines to help companies disclose environmental and social information. These guidelines are not mandatory, and companies may decide to use international, European, or national guidelines according to their own characteristics or business environment.

In June 2019 the European Commission published guidelines on reporting climate-related information, which in practice consist of a new supplement to the existing guidelines on non-financial reporting, which remain applicable.

How many KPIs and which ones?

As stakeholders engage with companies around narrative reporting and how they might best respond, the same questions keep arising around KPIs. In this section we answer each in turn.

What is “key”?

The starting point for choosing which performance indicators are key to a particular company should be those that the Board uses to manage the business. In general, it is noted in financial research, that many Management Boards tend to receive financial performance indicators, even though they may be communicating strategies such as maximising customer experience, or attracting and retaining the best and brightest people.

A challenge is whether the KPIs currently presented to the Management Board are those that allow them to assess progress against stated strategies, and when reported externally, allow readers to make a similar assessment. If not, is this because the information is simply not available or because it is not yet escalated to the Board but may instead be assessed by management of individual business units?

In addition, the KPIs will to a degree be conditioned by the industry in which a company operates. So, for example, a company in the retail industry might use sales per square foot and customer satisfaction as key performance indicators, whereas an oil and gas company might opt for measures of exploration success, such as the value of new reserves.

However, management should not feel compelled to create KPIs o match those reported by their peers. The overriding need is for the KPIs to be relevant to that particular company. Management should explain their choice in the context of the chosen strategies and objectives and provide sufficient detail on measurement methods to allow readers to make comparisons to other companies’ choices where they want to.

As our ongoing research has expanded across industries and as our experience in applying our knowledge to the real world of corporate reporting has grown, we have tailored our underlying Corporate Reporting Framework to reflect the elements and measures n that are most important for a particular industry. Examples of the measures that matter to a sample of industries are shown in the below table.

Banking Oil & Gas Retail
Customer retention Capital expenditure Capital expenditure
Customer penetration Exploration success rate Store portfolio changes
Asset quality Refinery utilisation Expected return on new stores
Capital adequacy Refinery capacity Customer satisfaction
Assets under management Volume of proven and probable reserves Same store/like-for-like sales
Loan loss Reserve replacement costs Sales per square meter

How many KPIs?

Giving the reader multiple performance measures without explaining which ones are key to managing their business does not aid transparency. As noted previously, the choice of which ones are key is unique to each company and its strategy; it is therefore impossible to specify how many KPIs a company should have. However, experience suggests that between four and ten measures are likely to be key for most types of company.

Segmental or group KPIs?

Management needs to consider how KPIs are collated and reported internally – whether they make sense when aggregated and reported at a group level, or would be more usefully reported at business segment level.

In some instances, it may be more appropriate to report separately KPIs for each business segment if the process of aggregation renders the output meaningless. For example, it is clearly more informative to report a retail business segment separately rather than combining it with a personal financial services segment.

Something else -   Financial statements

How rigid is the choice of KPIs?

Management should reflect on whether the KPIs chosen continue to be relevant over time.

Strategies and objectives develop over time, making it inappropriate to continue reporting on the same KPIs as in previous periods. Equally, more information may become available to management, facilitating reporting of new KPIs that provide a deeper understanding of the business, or changing how an existing KPI is calculated.

The choice of KPIs is not set-in stone for all time: but the reason for, and nature of, changes in KPIs and how they are measured and reported should be clearly explained.

Does reliability matter?

Management may sometimes be concerned about the reliability of some of the information reported on KPIs, particularly as they are encouraged to move beyond the more traditional financial KPIs which are usually the output of established systems and controls processes and routine audit. Whilst there is no specific narrative reporting requirement for KPIs to be reliable, it is understandable that management want the nature of the information to be clear to the users of narrative reports.

In order to address this issue and provide readers with useful information, it is more important that the limitations of the data and any assumptions made in providing it are clearly explained. Readers can then judge the reliability for themselves and make any necessary adjustments in their own analysis. Where data has been specifically assured by independent third parties, identifying this may also assist the reader.

It is also worth noting that experience shows that readers are often as interested in the trend of a KPI as the absolute performance being reported.

Other performance indicators

Management may also disclose other quantified measures which they use to monitor trends and factors, and which can provide further context to their narrative reporting.

However, if they are not deemed by management to be KPIs and/or are outside the control of the entity, the level of information about each one will generally be less than for a KPI. In general, this would, at a minimum include: its definition and calculation and, where available, the corresponding amounts for the preceding financial year.

Examples of such measures, which are typically outside management’s control, include:

  • Advertising industry – advertising growth rates
  • Insurance industry – life expectancy demographic data
  • Oil and gas industry – commodity prices and supply/demand data

Reporting key performance indicators

A model for effective communication of KPIs

Consider the following guidance from the ASB Reporting Statement to communicate effectively with stakeholders:

  • Link to strategy – The primary reason for including KPIs presented in isolation from performance indicators in corporate strategies and objectives, or vice reporting is to enable readers to versa, cannot fulfil this requirement, assess the strategies adopted by the and will fail to provide the reader company and their potential with the level of understanding to succeed. they need.
  • Definition and calculation (1) – Given the rapidly increasing usage of industry-specific terminology, clear definitions of performance indicators add greatly to the reader’s understanding of exactly what is being measured and allows comparisons between companies within an industry. In the absence of standards for the measurement of many industry-specific indicators, and with many companies also applying their own indicators, an explanation of the components of a metric and how it is calculated is vital.
  • Purpose – It is important for management to explain why they believe a performance indicator is relevant. In many instances this will be because it measures progress towards achieving a specific strategic objective. The rationale for why certain quantified measures are considered “other performance indicators” should also be communicated.
  • Source, assumptions and limitations – To enable readers to make their own assessment of the reliability of the information, it is important to identify the sources of the data used in calculating performance indicators and any limitations on that data. Any assumptions made in measuring performance should be explained so that readers can reach an informed view of judgements made by management. An indication of the level, if any, of independent assurance of the data would also be valuable.
  • Future targets – Some performance indicators are best suited to a quantification of future targets. Expectations and aims for other indicators may be better explained in commentary. Either way, a forward-looking orientation is essential for readers to assess the potential for strategies to succeed, and to give them a basis against which to assess future performance.
  • Reconciliation to GAAP – Performance indicators may be financial or non-financial. Where the amounts measured are financial, but are not “traditional” measures required by accounting standards, eg GAAP, it is good practice to explain any differences. A reconciliation should therefore be provided between accounting measures and non-GAAP measures.
  • Trend data (1) – Measurement of performance in isolation over a single period does not provide the reader with very useful information. An indication of how performance has improved or worsened over time is much more valuable in assessing the success of management’s strategies. It is also beneficial to explain to the reader what a particular trend in the data means – for example, an increasing measure is not always a sign of strength – and to explain management’s actions to address or maintain such trends.
  • Segmental – Often KPIs make little sense when consolidated at group level. In those instances corporate reporting users want more detailed segmental information to assess progress towards specific segmental strategic aims. Performance indicators that are relevant to a specific segment’s industry or strategy should therefore be provided in addition to those with a more group-wide focus.
  • Changes in KPIs – Comparability over time is a key principle of good corporate reporting. It is recognised that KPIs may evolve over time as strategies change or more information becomes available. When such changes are made to the KPIs being monitored, either in terms of the KPIs used or how they are calculated, these changes need to be explained.
  • Benchmarking – Performance benchmarked against a relevant external peer group, with an explanation of why these peers were chosen, is considered extremely valuable to users. This provides a clear indication of who management believes the company’s competitors to be, as well as setting the company’s own performance in the context of a well-defined peer group.
Something else -   Exploration for and Evaluation of Mineral Resources

Note: (1) According to the ASB’s Reporting Statement, this information is also recommended disclosure for performance indicators other than KPIs. 

Content and presentation of key performance indicators

Bringing KPI reporting alive

Real-life examples of progressive companies’ reporting are valuable in demonstrating the breadth of content and quality of presentation that can be achieved.

The following examples were chosen on the basis of their ability to align their KPIs with specific group strategies and objectives and to illustrate a variety of content aspects and presentation styles.

Which aspect of the model for content does each example demonstrate?

ITV Plc – KPI’s relating to the core of their business segments Studios and Broadcast

ITV KPIs Broadcast

Non-financial reporting examples

Capita Plc –

Capita KPIs

HBOS, the UK mortgage and savings provider

Narrative reporting

Narrative reporting Narrative reporting Narrative reporting Narrative reporting Narrative reporting Narrative reporting Narrative reporting

Narrative reporting Narrative reporting Narrative reporting Narrative reporting Narrative reporting Narrative reporting Narrative reporting

Narrative reporting Narrative reporting Narrative reporting Narrative reporting Narrative reporting Narrative reporting Narrative reporting

Narrative reporting Narrative reporting Narrative reporting Narrative reporting Narrative reporting Narrative reporting Narrative reporting

Annualreporting provides financial reporting narratives using IFRS keywords and terminology for free to students and others interested in financial reporting. The information provided on this website is for general information and educational purposes only and should not be used as a substitute for professional advice. Use at your own risk. Annualreporting is an independent website and it is not affiliated with, endorsed by, or in any other way associated with the IFRS Foundation. For official information concerning IFRS Standards, visit or the local representative in your jurisdiction.

Something else -   IAS 1 Common control transactions v Newco formation

Leave a comment