A possible narrative section harmonization? The role of Practice Statement Management Commentary

The Practice Statement provides a flexible approach to preparation of the management commentary, generating more meaningful disclosure and discussing those matters that are more relevant to the company’s individual circumstances. In this direction, the International Accounting Standards Board (IASB) has highlighted some content elements recognised as being fundamental for guaranteeing the usefulness of the management commentary. With reference to these elements, it is interesting to analyse the level of disclosure of the financial reporting. These analyses aim to identify the themes dealt with most extensively by the companies and those that require greater attention so that the narrative section of the financial statement is, on the one hand, at least consistent with the suggestions of the guideline and, on the other hand, contains information that is useful for the users. Lastly, in the light of the relevant European Union (EU) directives, the results of the analysis will help to formulate considerations on the ability of the IASB guideline to improve the completeness of the narrative section. This paper will contribute to the studies on disclosure and usefulness of the information provided by companies. The content analysis methodology is applied. Disclosure is studied in particular since, according to a widely-held opinion, financial communication does not represent a neutral process but affects the behaviour of the users and consequently that of the preparers. Within the financial reporting, the management discussion is examined in particular. This choice stems from the debate on improvement of the financial reporting model via the introduction of narrative reporting which is particularly topical at the international level. All this is examined in a cross-country dimension: the study compared a sample of 20 Italian and 20 United Kingdom listed companies, belonging to different manufacturing sectors, in view of the profound differences existing at the level of economic environment. The companies were selected among the population of non-financial companies listed as of December 31, 2008. With reference to the documentation analysed, the consolidated financial reports for the periods 2008 were collected. The results emerged from the research have highlighted that among the content elements suggested by the Practice Statement, there is a modest communication of the most interesting and innovative information categories: Strategies, company objectives, and performance measures are all present to a minor extent. With reference to the latter type of information, the comparative analysis between the two countries did not highlight significant differences in behaviour attributable to their particular economic-social systems. For the remaining information categories, the results of the empirical analysis confirm that the content elements presented to the greatest extent are mainly connected with the nature of the business and description of the results achieved, elements which traditionally represent the central part of the narrative section and which have been widely regulated. The results connected with risks and social and environmental disclosures are also positive. The analysis of the regulatory provisions concerning management commentary has highlighted a relative overlap between the content elements emphasised in the Practice Statement and those required by the European directives. Evaluating jointly the aspects discussed, it can be concluded that the strength of the Practice Statement lies in the flexible approach proposed, which allows firms to adapt and model the narrative section of the financial report to their specific characteristics. The publication of a guideline adapts well to the entity-specific approach promoted. The aspects of flexibility and, in certain respects, innovation in content require the management to pay adequate attention to the information needs of the users of the financial report.