Introduction
Corporate Narrative Reporting (CNR) is the collection of qualitative and forward-looking disclosures as enclosures to a company's formal financial statements and it forms a crucial part of the annual report, found in sections like the Chairman’s Statement, Strategic Report, and Management Discussion & Analysis (MD&A). The primary purpose of CNR is to explain the business. While financial statements provide a snapshot of historical performance, traditional accounting models often fail to capture the full picture of a company's health and future potential. CNR defines strategy, objectives, and business model; key risks and opportunities; non-financial performance measures and Key Performance Indicators (KPIs); intangible assets like customer loyalty and manpower.
Principles and practice of CNR
The principles and practice of CNR explain the importance of CNR. These indicate the function and performance. The primary function of the CNR is to promote transparency and remove communication distortion. The second purpose is to bridge the gap between the perception and practice for the members, investors and analysts facilitating their financial decisions. In fact, thirdly it is an improvement to the traditional financial statements.
There are several theories gained from accounting, finance, and social science that have contributed to the CNR. One of the theories is the Agency Theory which deals with the potential conflict of interest between management and the principals, owners and it acts as a buffer to benefit both of them. The second theory is the Signalling Theory which promotes window dressing of the Company. The third important theory is the Legitimacy Theory which outlines the formal conduct of the company without violating norms and must work within the framework specified in the License. The fourth theory is the Stakeholder Theory which attaches importance to a wide range of stakeholders who are employees, customers, suppliers, and the society.
These theories and principles help considerably on the implementation of corporate social responsibility (CSR) even though it is not directly discharging the purpose and function of CSR.
Nature and Contents of CNR
The major components of CNR include mostly the Chairman’s Statement and CEO’s Letter, Strategic Report, Management Discussion and Analysis (MD & A) or Operating and Financial Review (OFR), Risk disclosures, Corporate Governance Report, and Sustainability or CSR Report. In addition to them there are certain types of information that include Forward Looking Information (FLI), Risk Reporting, and Sustainability and ESG Reporting. There are also elements of Costs of Disclosure that include Preparation Costs on collecting, preparing and disseminating information, Preparatory Costs on market development and competitive advantage, Political Costs that associate with the critical examination pertaining to reporting of controversial issues reported in CNR, and Litigation costs.
Benefits and Limitations
There are several benefits of CNR. It builds trust among the stakeholders. Due to accurate details of the CNR, the decisions are made effectively. It attracts talents and capital for investment. It presents a forward-looking insight. It promotes good corporate governance. There are certain limitations which are accidental and incidental.
CNR in Developed and Developing Economies
Most of the developed economies attach importance to the demand and expectations of market and stakeholders as in EU, UK, and USA while Developing nations do it as a part of regulatory compliance and the conditions of foreign investment. The developed economies attach importance to Economics, Social and Governance on the management functioning while the developing economies carry out in accordance with the financial compliance. Developed economies are following well defined regulations and well balanced on the risks and challenges while Developing economies prefer promotional.
Conclusion
The development of CNR has a very recent origin as a result of global integration and economic competition. The priorities are varying according to market competitions, legislations and rules and regulations.