CIMA Sri Lanka recently presented to the Colombo Stock Exchange, a Discussion Paper on the subject of 'Introducing a Management Review in the Annual Report of Listed Companies'.
In June 2006, CIMA Sri Lanka submitted a proposal to the CSE/SEC to initiate a project to study the feasibility of introducing a Management Review in the Annual Reports of listed companies in Sri Lanka. Following approval of this proposal by the CSE Board, the CSE requested CIMA to appoint a Committee consisting of the key stakeholders to study and report on this subject. In July 2007, CIMA Sri Lanka in consultation with the CSE appointed a Committee tasked with this mandate. The Committee was supported by the Technical Committee of CIMA Sri Lanka.
There is growing recognition internationally of the importance of narrative reporting to be considered as an integral part of financial reports. This is evidenced by the requirements and regulations governing narrative reporting in different jurisdictions.
Commenting of the Discussion Paper, Mrs Gowri Shankar,President of CIMA Sri Lanka stated that CIMA was very pleased to partner with the CSE in this national initiative, which will contribute to improving financial reporting beyond the financial statements. She states it is the understanding how businesses and markets work where rational analysis support the dynamics of an organization. She also noted CIMA's active involvement in the international narrative reporting agenda through its extensive work on the OFR and the much acclaimed Report Leadership initiatives. Chairman of the CSE Nihal Fonseka thanked CIMA Sri Lanka for giving leadership to this initiative, which will once adopted after due process involving consultation among all the stakeholders, will provide much needed guidance to local listed companies on the scope and content of Narrative Reporting.
The Annual Report is the premier business reporting document of a listed company, which is relied upon by the shareholders/investors to get detailed information on a company's performance, development, position and its value creating activities. The Financial Statements, contained in the Annual Report, form the core of financial reporting. While the Financial Statements and the related disclosures have developed significantly over time, they are by themselves not sufficient to address the full requirements of financial reporting and to provide investors with all the information they require. The Committee found that while there was general acknowledgement that guidance on the Management Review would indeed be useful and desirable, there was a wide spectrum of divergent views on what the content of the Management Review should be in the Sri Lankan context.
The Committee has recognized the vital need to customize the content of the Management Review to suit the operating context of a developing country such as Sri Lanka, being mindful of the argument that disclosure of certain information would place public quoted companies at a disadvantage over the substantially larger number of their unlisted competitors, who are not obliged to publish an Annual Report.
The Management Review is proposed as recommended practice (not mandatory) for listed companies and excludes small companies. The Committee recommends a principles based approach to the Management Review and has strived to strike a balance between international best practice on the subject and legitimate local concerns based on the overriding principle of whether it meets the information requirements of members/investors and whether benefits outweigh the costs.
CIMA Sri Lanka recommends that adoption of the guidelines on the Management Review should follow due process with maximum opportunity provided for extensive consultation/discussion among all the stakeholders involved, thereby ensuring the required 'buy-in' of both users and preparers of Annual Reports. With this in mind it has been proposed to issue 'exposure draft' and organize discussions to get input/comments from the stakeholders, prior to finalization.
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