Narrative reporting areas of focus
Regulatory messages continue to emphasise the need for authentic, balanced and comprehensive disclosures in annual reports to satisfy the needs of investors. To achieve this, information in the annual report should be integrated and connected between the strategic report and the rest of the annual report.
In its Annual Review of Corporate Reporting, the FRC raised more questions on the strategic report and non-financial reporting requirements of the Companies Act 2006 than in previous years. In some cases, it raised challenges over whether the strategic report was fair, balanced and comprehensive, noting that the financial review should address not only financial performance but also significant changes to the financial position of the company (i.e. the balance sheet) and significant movements in the cash flow statement. It also noted that where matters appear significant, such as prior year restatements, use of government funding and climate-related risks, companies need to ensure that these matters are discussed in appropriate detail and in a balanced manner in the strategic report. In the current uncertain economic environment, the FRC particularly expects companies to use the strategic report to articulate clearly the risks and uncertainties the business faces as a result of economic pressures, together with mitigation strategies and any effects on the strategy and business model. These discussions should be consistent with disclosures made in the financial statements, particularly regarding sensitivities, assumptions and sources of uncertainty.
The FRC noted that the Section 172(1) statements of large private companies were not always complete, missing information about the directors’ engagement with suppliers, customers and others in a business relationship, and the effects of that engagement on the principal decisions taken by the directors during the year. A Financial Reporting Lab report sets out what investors are looking for in this area and how companies can improve their reporting to better meet investor needs.
2022 sees the third year that companies are required to comply with the Streamlined Energy and Carbon Reporting Regulations (SECR). Following its 2021 thematic review of reporting under the SECR regulations, the FRC continues to monitor energy and carbon disclosures as issues continue to arise around SECR compliance, including failure to include required metrics such as energy consumption, and failure to disclose the methodology used. In its reviews of the accounts of unquoted companies, the FRC found that energy and carbon disclosures required by SECR were omitted, in some cases entirely. The FRC encourages companies to consider the guidance in the 2021 thematic review for the forthcoming reporting season.
Below is a comprehensive collection of resources — organised chronologically — on narrative reporting areas of focus. Click for direct access to specific narrative reporting resources:
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