How narrative reporting changed the business world: Providing a new measurement tool

Research on the quality of the narrative portion of the annual report has long been hampered by a lack of tools that permit an objective analysis of qualitative disclosure. This study is the first piece of accounting disclosure quality research which proposes a comprehensive index that uses Key Performance Indicators (KPIs) to enhance understanding of the quality of narrative information disclosure in a very important transitional period of 2002 to 2007. Our results show that after the adoption of IFRS, the level of narrative disclosure compliance with the IASB’s Management Commentary Framework (MCF) is medium, ranging from 8% to 75%, averaging 53% and this shows that there is much room for improvement with respect to the financial statements. Thus, despite the continued demand for better comparability in financial reporting practices, in our sample, a large number of firms do not seem to converge toward a single set of standards for both the narrative and financial disclosure. On the other hand, the region forced to comply with mandatory requirements (e.g., the US) will not provide a greater amount of disclosure information in their MCF reporting than the regions that are not required to comply with these disclosure guidelines (e.g., Western Europe and Northern Europe).