Narrative reporting areas of focus
The FRC continues to find areas for improvement with regards to the strategic report and the non-financial information statement as indicated in its Annual Review of Corporate Reporting. Challenges will continue to be raised where these are not a fair, balanced and comprehensive representation of the performance and position of the business and where the non-financial information statement provides cross references to information elsewhere in the annual report which does not contain the required information.
Regulatory focus has highlighted how central the Section 172 statement is to UK reporting. This has been amplified by the COVID-19 pandemic, with investors asking for information that is company-specific and describes how the directors have engaged with stakeholders to understand the relevant issues, and how they have had regard to those issues in their decisions and strategy. In particular, investors are interested in how the directors have balanced the short-term financial threats with the longer-term business resilience.
The FRC indicates, in its year end letter to Audit Committee Chairs and Finance Directors, that many companies are failing to explain how their directors discharged their section 172 duty and in particular the responsibility to have regard to the consequences of decisions in the long term. Additionally whilst companies are reporting on the methods of engagement with stakeholders they are not reflecting how the feedback affected decision making. Some companies are treating the statement as one of compliance.
The FRC encourages companies to disclosure:
- The effectiveness and outcomes of their engagement.
- The oversight that boards have over delegated engagement.
- How feedback has been used within the decision-making process.
- Difficult decisions, rather than just focusing on positive engagement.
- How stakeholders are considered strategically and how such consideration is contributing to companies’ long-term success.
- Implications of the decisions on both long-term success and on stakeholders themselves.
The FRC has published a set of tips intended to help companies consider what content to include in a Section 172 statement, how to present it and how to facilitate the process of preparing the statement.
2020 sees companies having to comply with the Companies (Directors' Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018 - the Streamlined Energy and Carbon Reporting Regulations - for the first time. These Regulations broaden greenhouse gas reporting and energy efficiency disclosure requirements in the directors’ report for quoted companies and extend this reporting requirement to large unquoted companies and LLPs with at least 250 employees or annual turnover greater than £36m and a balance sheet total (gross assets) greater than £18m. They are effective for financial periods beginning on or after 1 April 2019. The Department for Business, Energy and Industrial Strategy (BEIS) has published guidance to assist companies to comply.
Below is a comprehensive collection of resources — organised chronologically — on narrative reporting areas of focus. Click for direct access to specific narrative reporting resources:
Related Resources
