NARRATIVE REPORTING

Narrative Reporting

Narrative Reporting

Introduction

The purpose of this study is to expand the boundaries of our knowledge by exploring some relevant information relating to the analysis of Narrative reporting in financial accounting. Narrative Reporting is a function of preparing the information on the state of business entity to external customers. All economic data are derived from the accounting records clearly depicting the asset and income of the business. Narrative reporting is an important element for companies. These are the documents and records which companies put together in order to review the placement of invested funds and revenue generated from these funds. The main objective of this report is to convey the company's information to internal and external stakeholders and these people have direct interest in the company. This information should be presented fairly and properly. Currently, the impact of narrative reporting on economic performance continues to be one of the most debated issues among international economists. Theoretical models have identified a number of channels through which narrative reporting can promote economic growth and economic development in developing countries and countries in transition. However, in spite of its benefits, narrative reporting can also be dangerous, as it has been witnessed in many recent financial crises. Therefore, this paper discusses the potential benefits and potential costs of narrative reporting. This paper also discusses the current requirements of Narrative reporting with respect to the performance of UK companies. The author will also discuss the current value of narrative reporting in financial accounting.

Literature Review

In this section, we will examine a number of journal articles to assess the value of narrative reporting in financial accounting. According to Campbell (2008), the primary role of the financial analyst is to interpret the narrative content for the reason of altering financial forecasting. The qualtiy of the narrative report is largely dependent on the analytical skills of the financial analyst. Weetman (1994) and Weetman (1999) provide two applications in accounting. They show how the presence of two types of audiences (investors in the capital market and potential entrants in the product market) determines the credibility of narrative reports. By contrast, in this chapter the mechanism that sustains the credibility of reports is given by investors being uncertain about whether the firm's Internal control system is effective.

The dynamics of narrative reporting is also studied by Villiers (2006). They consider a disclosure model in which disclosures are costly as in Tate (2005) and the manager's endowment of information is uncertain as in Strong (2004) in which the likelihood that the manager receives some private information is serially correlated. They show that this inter-temporal linkage increases manager's propensity to withhold information because disclosing information results in an implicit commitment to disclose information in the future.

Stevenson (1998) also studies the credibility of narrative reports. Appealing to a folk theorem, in a repeated game setting with imperfect monitoring, Stevenson shows that under certain conditions the credibility of narrative reports can almost always be ensured by the implicit threat of losing access to capital ...