How Narrative Reporting for IP Group's Financial Report Impact Corporate Performance - Case Study Example

How current narrative reporting for IP Group Plcs financial report impact the messages received by users regarding corporate performance Introduction The need for improved corporate disclosures has led to the suggestion that the narrative reporting under the financial statements of corporations should be reformed, to reflect a more usable narrative system that can enable the users of the financial reports to make decisions easily. Further, the suggestion for the improvement of the narrative reporting in the financial statements of corporations has been informed by the need to enhance comparability between companies, based on the narrative reporting of non-financial information presented (FRC, 2009:1). The improvement in the narrative presentation of the corporations will make it easier for potential investors to make investment decisions easily, while at the same time enabling the public to be able to hold the corporations to account. This can be achieved through the reduction of the information in the narrative reporting to make it less complex and more understandable and useful for decision-making by the users of financial statements of companies (FRC, 2009:3). On the other hand, the improvement of the narrative reporting can be achieved through the re-arrangement and streamlining of the manner in which the non-financial information in the narrative reporting is presented. Thus, this discussion seeks to compare the narrative reporting presentation of IP Group Plc in the 2013 annual financial report against the 2014 annual financial report, to establish how the narrative reporting reflects challenges for accounts users. Discussion The presentation of non-financial information for IP Group Plcs financial report in 2014 differs from the presentation in 2013 in several aspects. First, a rearrangement of the ‘Welcome to IP Group’ section of the 2014 annual financial report for IP Group Plc has been done, to include a new segment titled ‘Investor proposition/key strengths’ (IP Group Plc, 2014:2). This segment presents the major strengths of the company, highlighting the major aspects of the company that can easily attract investors to the company. Some of the major strengths of the company as highlighted under the segment include a strong senior management team, access to a wide range of capital funding, a proven track of sustained growth and long-term partnerships that create barriers to entry for competitors into the markets that the company serves (IP Group Plc, 2014:2). This narrative re-arrangement done in the 2014 annual financial report of IP Group Plc makes the narrative reporting of the company in 2014 more useful compared to the narrative reporting of the company in 2013. The rearrangement makes it easier for the stakeholders to the organization, most especially the potential inventors, to easily access useful information for decision-making, through indicating the areas of major strength of the business of the company. The financial overview section of the narrative reporting of the IP Group Plc annual financial reports has changed its structure from the manner in which it was presented in 2013 to the presentation done in 2014. The statement of the Chief Financial Officer contained in the 2013 annual financial report of the company specifically mentioned the exact amount of net profit that the company made in that year, which was £77.6m, a notable net profits growth compared to the previous year, where the company had made a net profit of £46.7m in 2012 (IP Group Plc, 201327). This specificity has been abolished in the narrative reporting on the financial overview section of the 2014 annual financial report of the company. The Chief Financial Officer merely states that the company made a net profit in 2014 that was lower than the profit made by the company in 2013, without being specific on the amount of net profit made in 2014 (IP Group Plc, 2014:30). This change decreases the usefulness of the 2014 annual financial report of IP Group Plc and increases the risk of the users of the financial report not understanding the position of the company. This is due to the fact that the 2014 narrative reporting on the financial overview section does not offer immediate net profitability information to the users of the financial report, as was the case with the 2013 financial report. Therefore, the change in the presentation of the financial overview section reduces the ability of the users of the financial report to make immediate decision related to the company based on the presentation of non-financial narrative reporting. The users will need to read the financial section to obtain the exact amount of net profit made by the company, which is complex for users who are not acquainted with accounting procedures. The other notable rearrangement done in the 2014 annual financial report for IP Group Plc is the transfer of the ‘Disclaimer’ section of the financial report from ‘Welcome to IP Group’ section in the first page of the 2013 annual financial report, into the ‘Highlight’ section in second page of the 2014 annual financial report. This narrative reporting rearrangement strategy by the IP Group Plc is a wise move, since it seeks to remove the ’Disclaimer’ section bearing contradictory information from the first page of the annual financial report, so that the first page remains just a welcoming page, and the contradicting information follows in the second page of the financial report. The disclaimer states that the financial report contains some forward-looking statements from the board of directors of the company, which are subject to change in the course of the business running (IP Group Plc, 2014:2). Such information is very useful for the users of the financial report of the company, so they can understand that the forward predictions can be affected by the future business environment, and thus make decisions based on full realization that some changes might occur. However, this information may not be appropriate in the welcoming section, since the welcoming section is meant to convey positive attitude and information. Thus, the rearrangement of the narrative reporting in the 2014 annual financial reporting of IP Group Plc, placing the ‘Disclaimer’ section on the ‘Highlight’ section is suitable to make the overall presentation of the financial statement appealing to the users of the financial report. However, the major risk associated with this rearrangement is that it places the disclaimer in a position that is not as conspicuous as it was in the first page of the 2013 annual financial report, increasing the chances of the disclaimer not being easily seen by the users of the financial statement. The other notable difference between the narrative presentation of the 2014 annual financial report from the 2013 annual financial report is identifiable in the ‘Key performance indicators’ section. There has been a change in the presentation of the ‘Key performance indicators’ in the annual financial reports of 2014 for IP Group Plc, where the segment has been subdivided into two segments, referred to as the Financial KPIs and the ‘Non-financial KPIs’ (IP Group Plc, 2014:14). This segmentation was not present in the 2013 annual financial report. Thus, while the 2013 annual financial report for the company presented the key performance indicators in general, the 2014 annual financial reports of the company differentiates the financial from the non-financial key performance indicators. This change reduces the risk of not understanding whether the performance indicators present in 2013 were financial or non-financial, by ensuring that the users of the financial statements are now able to understand this difference perfectly, and thus enhance their decision-making. IP Group Plc 2013 Annual Financial Report ‘Key performance indicators’ section IP Group Plc 2014 Annual Financial Report ‘Key performance indicators’ section 1section:KPIs Total equity Profit/(loss) Number of new portfolio companies Purchase of equity and debt investments Change in fair value of equity and debt investments Proceeds from sale of equity investments Cash, cash equivalents and deposits IP Group share price performance (% change) 2 sections: Financial KPIs Total equity Profit/(loss) Purchase of equity and debt investments Change in fair value of equity and debt investments Proceeds from sale of equity investments Cash, cash equivalents and deposits IP Group share price performance (% change) Non-Financial KPIs Number of new portfolio companies The Chairman Statement section of the 2014 annual financial report has also been rearranged, such that it has now been included under the ‘business Strategy’ segment of the financial report. Further, the name of this section has been changed from the ‘Chairman Statement’ as it was known in the 2013 annual financial report of the company, into the ‘Chairman Letter’ in the 2014 annual financial report. These changes as made in the 2014 financial report are meant to make Chairman Statement more meaningful, by including it as part of the business strategy of the company, rather than merely treating it as an individual statement. Conclusion The narrative reporting of IP Group Plc indicates some changes that have been introduced in the 2014 annual financial report, which were not present in the company’s 2013 annual financial report. While some of these changes have reduced the challenges associated with the understanding of the narrative reporting by users of the financial report of the company, other changes have increased the challenges, making it difficult for users of the financial statements to make decisions easily. However, overall, the 2014 annual financial report has less risks of misinterpretation by the users of the financial report. References Financial Reporting Council (FRC). (2009). Rising to the challenge: A review of narrative reporting by UK listed companies. Beacon Press. IP Group Plc. (31 December 2013). Annual Report and Accounts. IP Group Plc. IP Group Plc. (31 December 2014). Annual Report and Accounts. IP Group Plc. Read More