Shanghai Stock Exchange specifies narrative information disclosure in annual reports

Shanghai Stock Exchange specifies narrative information disclosure in annual reports


In order to enhance the validity and usefulness of information in annual reports of listed companies, the Company Management Department of the Shanghai Stock Exchange (SSE) has recently issued the "No. 5 Memorandum on Annual Reports of 2011 for Listed Companies – Requirements for Compiling the Management's Discussion and Analysis (MD&A)" (the Memorandum) which stresses the importance of narrative information disclosure in annual reports of listed companies and further standardizes the disclosed information in the MD&A. An SSE principal told that the MD&A would be of the highest importance in the after-action check on annual reports this year.

The narrative information refers to all the non-financial information in annual reports. The MD&A, a core of non-financial information, is a necessary and beneficial supplement to financial reports. It could strengthen the transparency and validity of information disclosure.

In the Memorandum, the SSE enumerates the main objectives of the MD&A, the overall requirements of compiling the MD&A and the important points in compilation. According to the document, a listed company is required to specify the significant change of the profit composition or source when compiling the Overview on Overall Operation during the Reporting Period. Besides, the company should make a summary on the development strategy and the completion of, the progress in the implementation of or the adjustments to the business plan disclosed previously; it should account for the discrepancy if the actual business performance is over 20% lower or higher than the publicly disclosed profit prediction or business plan of this year.

Meanwhile, a listed company should elaborate on the compositions of the incomes and profits in the reporting period on the basis of the classifications of industry, product and area according to its own conditions. It should itemize the income, cost and gross profit margin and analyze the changes as for the businesses accounting for over 10% of the total business income or business profit and its industry as well as the main products under the same circumstance. Moreover, the company should disclose the changes in the market and the compositions of operating costs in terms of its main businesses; it should explain the reasons if relevant data are over 20% lower or higher than those during the reporting period in the year before.

Based on what have been mentioned above, as required in the Memorandum, a listed company should disclose the information about main suppliers and clients; it should expound major factors for significant changes in the compositions of its assets on a year-on-year basis and the reasons for the significant discrepancy between the cash flow accruing from business operations and the net profit during the reporting period. In addition, the Memorandum stipulates in details the compilation of the information about the business operations and the analysis of performances related to major subsidiaries and stake-taken companies of listed companies, the subjects controlled by listed companies with special purposes, the prospect for future development, and so on.

Detailed requirements for compilation are specified in the Memorandum in addition to the defined contents.

Firstly, listed companies are required to provide dynamic information. Namely, a listed company should carry out all-round discussion and analysis on the major businesses, the capital use and sources and the major financial issue from the perspective of its management. It should provide the dynamic information from which investors could correctly understanding the corporate financial status, operational performance and cash flow, so that investors could learn from the company's management more about its current situation and the trend of its future development as well as the possible risks and uncertainties.

Secondly, more importance should be attached to key information. Namely, a listed company's compilation work should cover the short-term and long-term analysis on its future, release the most important information from the company's management's perspective and focus on the major issues and uncertainties that are known by the company's management and might lead to difficulty in displaying the company's future operational performance and financial situation in the company's financial report, including the issues that have exerted major influence on the reporting period but with no impact on the company's future growth and the issues that have exerted no influence on the reporting period but with major impact on the company's future growth.

Moreover, a listed company is required to do more analysis work and show its individuality while compiling in a simple approach with practical work from its management.

Both the market insiders and investors sing high praise for the Memorandum. "The stress on the narrative information disclosure will be conducive to enhancing the utility of annual reports for investors' decision-making," said an expert, "A financial report reflects historical information, while the MD&A emphasizes the disclosure of forward-looking information. The latter will build a bridge between the history and the future by analyzing relevant financial data in a company's financial report, reminding of the intrinsic risks and uncertainties in its operation, elaborating on the trend of the industry that the company belongs to, the company's measures, development strategy and operational plan, as well as disclosing the company's management's appraisal and analysis on the company's previous business performance and its judgment and prediction on the company's development trend and prospect".

However, several investors held that a financial report reflects quantitative information, while the MD&A features qualitative information. The latter further analyzes relevant information disclosed in a company's financial report. Especially, it fully reminds investors of risks by making remarks on the risks and uncertainties in the company's operation. More importantly, all the above information is conducive to boosting the fairness of information disclosure by shrinking the information asymmetry between institutional investors and retail investors. Furthermore, it provides a platform for listed companies to disclose their information on their own initiatives, enhances the pertinence of information disclosure and make the market fully reflect corporate value.