The 2018 guidance has been strengthened to recognise the increasing importance of non-financial reporting while maintaining the key principles of existing guidance.

The FRC believes that the integration of non-financial information into the strategic report is a key part of communicating a company’s story to key stakeholders.

The revised guidance places a greater focus on the directors’ duty to promote the success of the company under section 172 of the Companies Act 2006 (CA 2006).

This is complemented by new legislation that introduces a specific reporting requirement on how directors take into account broader matters when performing their duty, including considering the interests of employees, suppliers, customers and other stakeholders as well as impacts on the community and environment.

The new legislation is applicable to large companies for financial years beginning on or after 1 January 2019.   

The FRC delayed publication until July 2018 so that the new legislative reporting requirement in the strategic report relating to reporting on s172 matters could be incorporated into the guidance.

This follows an exposure draft issued earlier in the year to which the regulator 58 responses from a range of stakeholders.

The overwhelming majority (93%) of those who responded agreed with the FRC’s approach to updating the guidance, indicating support for integrating non-financial information into the strategic report to ensure that it remains a cohesive document.

In general, respondents supported the principle of all companies providing non-financial information in their strategic reports. There was also support for the focus on long-term value creation and considering the interests of wider stakeholders.

However, some respondents did express concerns about the complexity of the legislative requirements and the additional complexity that has been created by the implementation of the non-financial reporting Directive.

As a result, the FRC has amended the scope and content elements sections of the Guidance so that it is clear that the Regulations that implement the non-financial reporting Directive only apply to public interest entities (PIEs) with more than 500 employees. Quoted companies that are not PIEs will continue to apply the pre-existing non-financial reporting requirements in the strategic report.

On the issue of materiality, the FRC stressed that the basic definition of materiality remains appropriate as it is generally well understood but has provided some additional guidance on its application in the context of the Strategic Report. It rejected calls to include disclosure information on the materiality process as it felt this could lead to a boilerplate approach to reporting.

Paul George, executive director corporate governance and reporting said: ‘The revised guidance underpinned by legislation will improve the effectiveness of section 172 and stimulate board discussions on how companies are considering various factors to ensure their business is sustainable over the long-term including the impacts on the company’s key stakeholders.

‘The revisions to the guidance on the Strategic Report complement the recent changes to the FRC’s Corporate Governance Code and as a package will contribute to enhancing trust and transparency in business.’

The FRC also confirmed that it had no plans to further amend the guidance on strategic reporting in the foreseeable future.

The 24-page FRC Feedback Statement Amendments to Guidance on the Strategic Report Non-financial reporting issued 31 July 2018 

Report by Sara White