information
by certain large undertakings and groups (2014) which emends the Directive
2013/34/EU.
The document requires large
enterprises to publish nonfinancial information, including social and
environmental issues. In other words, it’s an attempt to move towards the
harmonization of nonfinancial reporting (Aureli, Salvatori &
Magnaghi, 2020). Mandatory disclosure is necessary
because the voluntary corporate social responsibility reporting (CSR) creates
significant space for the ‘symbolic’ reports (Stittle, 2002).
Torre et al. (2018) claims that the
directive is an act of policy to legitimize nonfinancial reporting which
encompasses two major theories: the theory of improving the comparability of
information and the theory of strengthening of corporate responsibility.
The interest in corporate disclosure
of ‘nonfinancial information’ is increasing with the help of Directive 2014/95/EU. However, there is no
generally accepted definition of this term. Prior to the EU directive it often
meant the information about society and the environment, although a majority of
scholars define and understand it differently – as a matter of corporate social
responsibility, information about intellectual capital (Tarquinio & Posadas,
2020).
The implementation of the EU
Directive has crucial importance for improving of nonfinancial disclosure, as
Francesca Manes-Rossi claims (2018). Disclosure of nonfinancial information, risk
management and sustainability issues improves the firm valuation processes and
has a positive impact on market price and equity cost of capital (Michelon, Pilonato & Ricceri,
2015;
Krištofík, Lament & Musa, 2016).
However, Aureli, Salvatori and Magnaghi (2020) notes that states are characterized by different levels of
understanding and experience of corporate social responsibility due to the fact
that different national laws of corporate social responsibility reporting had
appeared before the implementation of the Directive and have different levels
of compliance with new legislation requirements (Venturelli et al., 2019). In
particular, analyzing the nonfinancial information, disclosed in mandatory and
voluntary reports of 223 large companies that are considered as the subjects of
public interest for 2015, the average level of compliance was determined
(Venturelli et al., 2017).
And in the case of Polish companies
(Dyduch & Krasodomska, 2017), to examine the level of nonfinancial
disclosure, required by the Directive, 60 annual reports were explored. It was
revealed that more than half of companies do not disclose any environmental
information in their annual reports.
Consequently, as Popescu (2019)
emphasises equitably, it is necessary to strengthen a corporate governance and
a corporate social responsibility with the purpose of creating the appropriate
balance between sustainability, competitiveness, productivity, financial and
non-financial measures of business, taking into consideration the financial and
intangible (eg. brand name, consumers’ experience, intellectual capital,
organizational culture and reputation) benefits.
In Ukraine the problem of
preparation of nonfinancial reporting and the Management Report, which appeared
as a result the directive implementation, is quite new. Therefore, the issues
of structure, content and principles of preparation of the Management Report
are underexplored by domestic scientists. However, some elements of the
management report problematics were examined in the works of Ukrainian
scientists.
Bezverkhyi and Pantelejev (2018) and Bondar (2017) made an in-depth study of the
report structure, its content and compared with foreign counterparts.
Ozeran (2017) pointed to terminological inconsistencies between domestic
legislative acts (specifically between the Law of Ukraine On Accounting and
Financial Reporting in Ukraine, which provides for the preparation of a
management report, and the Law of Ukraine On Securities and Stock Market),
according to which a management report should be prepared as part of the annual
and interim information about the securities issuer. It can be regarded as an
interpretation of the same report, which should reflect the management
opinion about the state and the
development of an enterprise.
Lovinska and Oliinyk (2018) explored the regulation of nonfinancial
reporting in Ukraine, particularly the management report. Also there is no
consensus among scholars about the type of the report.
Onyshchenko (2018) claims that the
management report is not an accounting one, unlike Ozeran (2017) who considers
it as a component of the financial reporting.
1.
RESEARCH PROBLEM
The necessity of a management report
implementation in Ukraine is caused by the processes of introduction of
European Union legislation on accounting in the national regulatory framework.
The Verkhovna Rada, the unicameral
parliament of Ukraine, implementing the provisions of Directive 2013/34/EU of
the European Parliament on the annual financial statements, consolidated financial
statements and related reports of certain types of undertakings and Directive
2014/95/EU, which amends Directive 2013/34/EU on disclosure of non-financial
and diversity information by certain large undertakings and groups, established
the concept and the purpose of preparing a management report in the Law of
Ukraine On Amendment of the Law of Ukraine On Accounting and Financial
Reporting in Ukraine to improve certain provisions of 05 October 2017 № 2164-VIII.
Such report is prepared in any form
but the Order of the Ministry of Finance of Ukraine of 07 December 2018 № 982
On approval of the Methodological recommendations for the management report to
ensure the comparability of the report approved the main content of the
information that a company should display (Table 1).
The information requirements in the
Management Report for the banks are also reflected in the instruction On the
procedure for compiling and publishing of financial statements of banks of
Ukraine, approved by the National Bank of Ukraine Resolution of 24 October 2011
№373 with the conforming amendments of 01 January 2019 (Table 1).
Table 1:
Format for the information displaying in the Management Report according to the
approved recommendations and instructions
|
Management
report
|
|
Reporter
|
Large and
medium-sized businesses
|
Banks
|
|
Regulatory
document
|
Methodical recommendations for compiling a
management report, affirmed by the order of the Ministry of Finance of Ukraine 07 December 2018 № 982. Amended 18 January 2019
|
Instruction on the procedure of compiling and publishing of financial
statements of Ukrainian banks. Affirmed by the National Bank of Ukraine
Resolution 24 October 2011 №373. Amended 01 January 2019
|
|
Main content of information
|
Organisational
set-up and a description of activities of an enterprise
|
Nature of the
business (description of the external environment bank operates in)
|
|
Operating
results
|
Management goals
and strategies to achieve these goals
|
|
Liquidity and liabilities
|
Resources, risks and relations
|
|
environmental
aspects
|
activity results
and prospects of the further development
|
|
social aspects
and personnel policy
|
key performance indicators
|
|
risks
|
|
|
research and innovation
|
|
financial investments
|
|
development prospects
|
|
corporate
governance (consists of enterprises-issuers, which securities are admitted to
trading on stock exchanges or in respect of securities of which public
offering has been made)
|
Source: “Methodical recommendations for compiling a management report”
(2019), “Instruction on the procedure of compiling and publishing of financial
statements of Ukrainian banks” (2019)
According to paragraph 7 of article
11 of the Law of Ukraine On Accounting and Financial Reporting in Ukraine large
and medium-sized businesses must prepare the management report and provide
together with the financial statements.
So, as we see, there is a normative
basis for the report formation, but the quantity of the questions about its
methodology and organization of its preparation is not decreasing.
The practical recommendations for
the preparation of the Management Report developed by LLC CRESTON GCG deserve
attention. They are based on international experience and take into account the
requirements of international and domestic legislation. According to these
recommendations, the management report should contain the following sections
(Table 2).
Table 2: LLC CRESTON GCG
practical recommendations on the structure and content of the Management Report
|
№
|
Section name
|
Characteristic
|
|
1
|
Reference of the management
|
This section is a ‘preface’ to the entire Report, in which the Company's senior management
refers to the users of the Report and in a narrative form informs its users
the most important, in their opinion, information that should set the tone
and the frames of perception of the Report.
|
|
2
|
About a company
|
General info.
Management and organizational structure.
Key indicators.
Main events and achievements of the reporting period
|
|
3
|
Strategy and
business model
|
Mission, vision, values.
External opportunities and risks.
Strategy. Business model.
Development plans
|
|
4
|
Operation of the company
|
Product description.
Target and sales markets.
Production and technology.
Investment projects.
Financial
review
|
|
5
|
Corporate
management
|
Corporate governance structure.
Corporate governance policy
|
|
6
|
Sustainable development
|
Activities in the field of research and development.
Participation in global initiatives.
Protection of labour.
Environment preservation
|
|
7
|
A company’s risks
|
Risk
identification.
Risk
management.
|
|
8
|
Financial
reporting
|
Independent auditor's report.
Financial Statements.
|
Source: LLC CRESTON
GCG practical recommendations (2018)
The proposed structure of the report
is enough detailed and contains the vast majority of indicators that should be
disclosed in the Management Report. Therefore, following the recommendations
will help to prepare the Report as an integral and balanced document with the
necessary information for users.
According to the Law of Ukraine On
Accounting and Financial Reporting in Ukraine the Management Report is a
document that contains financial and nonfinancial information, which
characterizes the state and the prospects of the development of an enterprise
and discloses the main risks and uncertainties of its activities.
The purpose of this report is to
supplement the annual financial statements with the necessary information,
which should contain a reliable overview of development, activities and
condition, as well as a description of the main risks and uncertainties in the
work of an enterprise.
Considering the legal and practical
provisions for the preparation of the management report, in order to identify
the positive sides and problematic aspects it is advisable to analyze the
reports of the specific enterprises.
The reports of Ukrainian pharmaceutical
companies, that were available free, were selected to assess the practice of
preparing the Management Reports, as this industry is important not only for
economic but also for social and even political aspects of Ukrainian society.
The published reports are analyzed for compliance with the help of the
methodological recommendations for the preparation and the quality of
information disclosure. (Table 3).
Table 3: Analysis of the
reports on enterprises management of the pharmaceutical industry of Ukraine
|
Directions of assessment
|
Criteria
|
PrAT Fitofarm
|
PAT
Kyivmed-preparat
|
AT Halych-farm
|
|
Reporting form
|
Special management report
|
+
|
+
|
+
|
|
Within the annual statement
|
-
|
-
|
-
|
|
Compliance with regulatory requirements of the Methodological
recommendations of the Ministry of Finance of Ukraine
|
Ecological aspects
|
+
|
+
|
+
|
|
Social aspects and personnel policy
|
+
|
+
|
+/-
|
|
Risks
|
+
|
+
|
+/-
|
|
Specificity of disclosure of development prospects
|
+
|
+/-
|
+/-
|
|
Comparability
of performance
|
+
|
+/-
|
+
|
|
Comparability of liquidity data and liabilities
|
+/-
|
+/-
|
+
|
|
Disclosure of information criteria in the report
|
Quality and
accuracy of presentation
|
+/-
|
-
|
+/-
|
|
Informativeness
of the report
|
+
|
+/-
|
-
|
|
Data visualization (tables, graphs, charts, photos)
|
+
|
+/-
|
+
|
Source: own generalization based on
published statements
The studied companies applied almost
the same approaches to the information presentation. During the preparation of
the Report the companies followed the methodological recommendations on its
structure.
Thus, the PrAT Fitofarm management
report (2019) is the most readable and full of visual information. The report
is set out on 58 pages. Contains the tables and explanations to them,
performance indicators of the enterprise and ratings presented in comparison
with the previous years. The ratios of liquidity and financial stability are
also given in descriptive form but it worsens their comparability with the
previous periods. In terms of environmental aspects the company described
specific activities carried out during the year. However, the financial
investments and the enterprise risks are described quite briefly.
The PAT Kyivmedpreparat report
(2018) is set out on 22 pages. Generally, its structure is followed in
accordance with the current methodological recommendations. However, analyzing
this report, it is clear that it is made only to ensure compliance with
requirements of the Law of Ukraine On Accounting and Financial Reporting in
Ukraine, but not for investors and
ordinary users.
In particular, section 2
‘Performance’ contains a significant set of tables with indicators for
different periods, but there are no any comments or explanation. The
description of liquidity and liabilities was limited by the general
information, without specifying and describing the indicators, detailing the
company's liabilities. Financial investments are shown only in one table
without any explanation. Risks and prospects for the development of PAT
Kyivmedpreparat were also limited by the general information about business
rivals and legal instability in Ukraine. Summarizing the information mentioned
above, we may conclude that this report, although compiled in accordance with
the recommended structure, does not provide distinct and qualitative
information about the activities of the enterprise.
The AT Halychpharm report (2018) is
the smallest among the analyzed reports and is set on only 7 pages and has
mostly the text structure, except for financial results, which are presented in
the tabular form, but without proper interpretations for users of the Report.
Personnel policy and risks are revealed in the same style (the text form and a
lack of specification of indicators). The positive features include the
calculation of liquidity ratios and the disclosure of actual data on
liabilities, which is important, in particular, for investors.
In the research process of management reports it is also important to
analyze their content in terms of individual indicators.
Thus, the company PrAT Fitofarm (Table 4) provided a considerable list of
indicators that allow users to assess its performance and financial condition,
including indicators of income and liquidity. The information mentioned above confirms the conclusion about the formation of
positive trends in the growth of liquidity, financial investment, staff rates and salaries.
Table 4: PrAT Fitofarm
performance indicators
|
Indicators
|
PrAT Fitofarm
|
|
2019
|
2018
|
Deviation
|
|
Financial
results of activity
|
|
Production
volume at wholesale prices, thousands of UAH
|
542
882,30
|
570
386,70
|
95
|
|
Net revenue from product sales (goods, works, services), thousands of UAH
|
421
332,20
|
464
579,00
|
91
|
|
Gross
income, thousands of UAH
|
250 443
|
285 362
|
12
|
|
Share
of exports in sales,%
|
2
|
2
|
0
|
|
Financial leverage ratio (capital
structure)
|
0,74
|
0,73
|
0,01
|
|
Indicators
of financial condition
|
|
Total liquidity ratio (coverage
ratio)
|
2,02
|
1,7
|
0,32
|
|
Rapid
liquidity ratio
|
1,38
|
1,28
|
0,1
|
|
Financial
stability (or independence) ratio
|
0,42
|
0,38
|
0,04
|
|
Absolute
liquidity ratio
|
0,0025
|
0,001
|
0,0015
|
|
Financial
stability ratio
|
0,42
|
0,38
|
0,04
|
|
Other indicators
|
|
Financial
investments, thousands of UAH
|
4 128
|
-
|
-
|
|
The average number of employees, persons
|
430
|
452
|
95
|
|
One employee’s average
salary in a month, UAH
|
7
142,00
|
5
965,30
|
120
|
Source: PrAT Fitofarm management
report
The section on the financial results
of the PAT Kyivmedpreparat presents only
data on hospital segments without any explanation. Assessing these indicators,
we can conclude that the company took a good position in 2017 and in 2018. It
also reflects the average wage which according to the report was 21.5% higher in comparison to the previous
year.
The indicators of loss of working
time are given. However, such indicators as profit, liquidity, financial
stability are absent. So we can’t fully assess the financial condition of the
enterprise. Financial investments are presented in terms of data on enterprises
which securities were purchased but without comparisons with the previous
periods and generalizations, so it is difficult to assess such information.
The report of AT Halychfarm (Table
5) provides indicators of financial results. Analyzing them we can see a
tendency to increase of almost all indicators in 2018 in comparison with 2017,
but the company does not comment on the results of its performance. The report
also contains liquidity ratios, which value is within the norm, except the
absolute liquidity ratio. The normative value of absolute liquidity should
exceed 0.2, and in AT Halychfarm as well as in PAT Fitofarm it is much less.
However, this indicator does not immediately lead to negative conclusions about
the company's ability to repay its debts without delay.
Table 5: AT Halychfarm
performance indicators
|
Indicators
|
AT Halychfarm
|
|
2018
|
2017
|
Deviation
|
|
Indicators
of financial and economic activity (thousands, UAH)
|
|
Total number of assets
|
2072758
|
1809146
|
263612
|
|
fixed
assets (at residual value)
|
218566
|
180054
|
38512
|
|
Money supply
|
375353
|
347676
|
27677
|
|
Total
receivables
|
1171200
|
945541
|
225659
|
|
Money and its equivalents
|
9819
|
21316
|
-11497
|
|
Retained
earnings (uncovered loss)
|
503274
|
452655
|
50619
|
|
Equity capital
|
579874
|
529255
|
50619
|
|
Registered
(share / authorized) capital
|
76600
|
76600
|
0
|
|
Long-term
liabilities and providings
|
247742
|
257083
|
-9341
|
|
Current
liabilities and providings
|
1245142
|
1022808
|
222334
|
|
Net financial result: profit (loss)
|
53588
|
38515
|
15073
|
|
The average annual number of shares (units)
|
8511120
|
8510178
|
942
|
|
Net profit (loss) per 1 share (UAH)
|
6,29623
|
4,52576
|
1,77047
|
|
Indicators of financial condition
|
|
Total
liquidity ratio (coverage ratio)
|
1,251
|
1,286
|
-0,035
|
|
Rapid liquidity ratio
|
0,949
|
0,946
|
0,003
|
|
Absolute
liquidity ratio
|
0,008
|
0,021
|
-0,013
|
|
Financial
investments, thousands of UAH
|
278670,1
|
-
|
-
|
Source: AT Halychfarm
management report
It is unlikely that all the
creditors of the company would present their claims to it at the same time.
Investment information is also provided, but without comparisons with previous
periods.
2.
DATA AND METHODOLOGY
The results of the study are based
on the analysis of regulatory documents, scientific literature and financial
and economic data, financial and non-financial reports of enterprises. The
following methods were used for the purposes of the article: systematization
and comparative method – for analysis of requirements and best practices for
the preparation of management reports; content analysis – to analyze the
content of management reports of the surveyed enterprises; tabular method – to
visualize the results of the study; critical analysis and abstract-logical
method – for theoretical generalization, conclusions, and definition of
principles underlying the management report.
3.
RESULTS AND DISCUSSIONS
Summarizing the results of the
study, it can be concluded that for domestic enterprises one of the main
problems, associated with the preparation of the Management Report, is the lack
of requirements for the information to be disclosed in the report. The Law of
Ukraine On Accounting and Financial Reporting in Ukraine does not contain
requirements and explanation regarding the structure, content and format of the
Report. It focuses on the fact that the company has to decide itself what
information needs to be disclosed.
The question of the responsibility
for its drafting is also an open issue, as it is not legally identified. This
work is predominantly in reliance upon an accounting department.
Considering the fact that the
purpose of this report is to afford users the financial and nonfinancial
information about the company's activities, it is necessary to decide a point:
how to display it properly and accessibly to users? According to Sonnerfeldt, Ling,
and Pontoppidan,
(2020), the corporate reporting’s role, function and limitations to strengthen
its role as an agent of change, must be well understood by managers,
regulators, corporations and their stakeholders.
All analyzed enterprises disclosed the
information on their financial condition and activities. However, the contained
indicators significantly differ and are not always given in comparison with the
similar indicators of previous periods. Such presentation of data significantly
impairs the analytical and informative reports, their comparability with other
companies. Also the reports do not contain
explanations and additional interpretations for most indicators, so users have to interpret the results themselves.
In our opinion, such information
should be presented in the form of analytical data with comparability with the
data of the previous reporting period; the dynamics of changes, deviations in
the achievement of goals should also be reflected. Any tendencies should be
described in detail. It will allow users to understand the real picture of the
enterprise’s activity. Information should not be only in numbers, it is
necessary to add its visualization: graphics, infographics, illustrations,
photos. Even the colors used are important, because they are methods of
managing the user's impression. As Garcia-Sanchez emphasizes (2019), even the
colours are important, because they are the methods of managing the user's
impression. It is necessary to describe all the information in a perceptible style
to ensure the clarity of the company's results for both specialists and a wide
range of users.
In the analyzed reports we can see
that the company's management is reluctant to disclose the information about
the development strategy, financial results for the specific products and
services, pricing policy, research and innovation, prospects for the further
development of the company taking into account risks and challenges, referring
to market competition and commercial confidentiality. This is because the
management accounting information is known as the commercial confidentiality.
Carini research (2018) is also confirmed that information on environmental
impact and issues, related to workers, social rights and human rights, risks
and KPIs against corruption and bribery are still disclosed enough in the
reports.
Currently, in Ukraine only large
domestic enterprises and foreign companies disclose such data and are ready for
even more detailed reporting (Table 6). An integral part of management in such
companies is the corporate social responsibility, which involves openness and
accountability to society.
Table 6: Examples of the best
nonfinancial reports
|
Company
|
Report title
|
Reference link to report
|
Characteristics
|
|
Ukrtelecom
|
Company management report
|
https://ukrtelecom.ua/about/accounting/zviti-pro-upravlinnya/docs/%D0%97%D0%B2%D1%96%D1%82%20%D0%B7%20%D1%83%D0%BF%D1%80%D0%B0%D0%B2%D0%BB%D1%96%D0%BD%D0%BD%D1%8F%202018%20(%D1%83%D0%BA%D1%80).pdf
|
Contains the performance
results, strategic directions, description of corporate governance
|
|
Energoatom
|
Management report
|
http://www.energoatom.com.ua/uploads/2020/web_EA_19_s.pdf
|
Contains the information in
accordance with the legislative requirements
|
|
Oschadbank
|
Аnnual report (2018)
|
https://old.bank.gov.ua/doccatalog/document?id=93985600
|
An example of a
qualitative annual report of the bank
|
|
BASF
|
Management’s
Report (2018)
|
https://report.basf.com/2018/en/servicepages/downloads/files/management_report_basf_ar18.pdf
|
The report contains the information by segments and by regions. Includes information about work
in the company, trainings for employees
|
|
Coca-cola
|
Integrated
annual report (2017)
|
https://ua.coca-colahellenic.com/media/2665/2017_integrated-annual-report.pdf
|
Consolidated annual report which includes a management report
|
Source: indicated in the table
It should be noted that the selected Reports are not a set of dry
figures and tables. They contain the references of the management, graphs,
charts, photos and comments to them.
There are some research papers (Matuszak &
Różańska,
2017) in which it is confirmed that regulated disclosure leads to increasing in
the market value of the company. Nonfinancial reporting allows companies to
demonstrate that they are socially responsible. It is a powerful tool for
improving communication with stakeholder groups by increasing the transparency
and the accountability of nonfinancial information (Patten &
Zhao, 2019).
That is why the question of how companies should report remains opened.
Tsagas and Villiers (2020) fairly
points out that a clear guidance for what and how to report nowadays is needed.
A standardized and streamlined structure is necessary to focus companies on
something more specific, rather than giving them too much choice of what
guidelines, frameworks or recommendations they can choose. There is a need for
clearer and more specific definitions of key concepts, as well as a
clarification of the rights of stakeholders in this area.
Also it is necessary to pay attention to the
enterprise’s sectors of activity (Caputo, et al., 2019) because they can have
different effects on the economic, environmental and social spheres, and in
this sense a set of general rules may be insufficient to disclose nonfinancial
information.
In addition, it is necessary to pay attention to the enterprise’s
sectors of activity (Caputo et al., 2019) because they can have different
effects on the economic, environmental and social spheres, and in this sense a
set of general rules may be insufficient to disclose nonfinancial information.
To sum up, it should be noted that the organization of the preparation
of the management report is regulated by a number of regulations, in which
indicative structure and deadlines for submission of such kind of a report are
provided. However, based on the data of the analysis, we can conclude that
domestic enterprises still do not have the sufficient experience in compiling
such kind of reports and do not fully understand its benefits for the
enterprise.
4.
CONCLUSIONS
The Management report is a new phenomenon in the practice of reporting
in Ukraine, due to the adoption of amendments to the Law of Ukraine ‘On
Accounting and Financial Reporting in Ukraine’. Its inoculation will ensure the
implementation of European legislation into Ukrainian practice of reporting by
market participants. Ukraine is currently in the process of adapting to this
type of reporting of domestic enterprises, and scientists try to deepen the
methodological and organizational aspects of its formation.
Domestic entrepreneurs just begin to implement the preparation and
publication of the report and are not fully aware of all the benefits of a
well-prepared report.
The absence of regulatory qualitative characteristics of the report and
the requirements for it is the significant problem. The format, scope,
structure and accuracy of the information are determined at the discretion of
the company that causes the appearance of low-quality and uninformative
reports.
The management of the enterprise have to understand that, in fact, the
Management Report is a business card of the enterprise, in particular for
investors. That is why a qualitative analysis of the activities of any
enterprise should be reflected in a perceptible format. Thus, the Management
Report should be based on the following principles: reliability and
completeness, materiality, brevity, integrity and comprehensibility;
comparability of indicators. In its preparation it is necessary to apply a
risk-oriented approach and follow the logic of presenting the information with
the elements of its visualization.
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Roszkowska-Menkes, M. (2019). Integrated Reporting Narratives: The Case of an
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Aureli, S.,
Salvatori, F., & Magnaghi, E. (2020). A
Country-Comparative Analysis of the Transposition of the EU Non-Financial
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OF DRAFTING