The Financial Reporting Council (FRC) is seeking feedback on its draft guidance for producing strategic reports, which will become a legal requirement from 1 October.
Earlier this month, amended regulations for the Companies Act 2006 (Strategic Report and Directors' Report) legislation were issued and will come into effect in respect of financial years ending on or after 30 September 2013.
In addition to previous requirements, the strategic report will require descriptions of the company's strategy and business model, as well as narrative reporting on human rights issues and other factors that may affect a firm's development and performance. It will also need to include information on gender diversity and greenhouse gas emissions.
The FRC said the aim is to encourage companies 'to experiment and be innovative in the drafting of their annual reports, presenting narrative information in a way that allows them to "tell their story" to investors concisely', by linking related information in 'a fair, balanced and understandable way'.
The FRC's Guidance on the Strategic Report will ultimately replace RS1, Reporting Statement: Operating and Financial Review, and expands on the changes that the FRC made to the Corporate Governance Code in October last year. It was drafted in response to a request from the Department of Business Innovation and Skills to provide non-mandatory guidance on how to prepare strategic reports, with the aim of 'cutting clutter' and making corporate reporting more relevant to investors.
Melanie McLaren, FRC executive director codes and standards, said: 'While the new regulations represent a relatively modest change to the existing legal requirements, we hope that our proposed guidance will act as a catalyst for companies to publish more relevant narrative reports, facilitating communication and engagement with investors. Investors tell us that they want information to be forward-looking and focussed on strategy and the business model; highlighting relationships and interdependencies between information presented in different parts of the annual report; and with an emphasis on materiality and conciseness.'
In developing its guidance, the FRC says it took into account ongoing developments in Integrated Reporting, and the regulator met and shared ideas with the International Integrated Reporting Council (IIRC). Unlike an integrated report, however, the purpose and content of the strategic report is largely determined by legislation, but the FRC says it shares similar qualitative characteristics and content.
Ken Williamson, partner at EY responsible for corporate governance, said the guidance provided a 'particularly helpful' overview of how the different regulatory and codified requirements fit together, and should help directors ensure that the annual report meets its objective under the UK Corporate Governance Code of being 'fair, balanced and understandable'.
'This presents a big opportunity for companies to enhance further their annual reports. The guidance should be used to encourage boards to ask themselves whether the company portrayed in the annual report is the same as the one they discuss in the boardroom. Boards need to put themselves in the shoes of private shareholders with limited knowledge of the company, and ask whether the annual report makes it easier to understand what the company does and how it works,' Williamson said.
Consultation on the draft guidance closes on 15 November 2013 and comments should be sent to [email protected]
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