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Narrative Reporting

Collection of narrative reporting news and publications

Background

All companies (except those that qualify as micro-entities from 1 January 2016) are currently required to prepare a directors’ report containing certain basic information. Companies which qualify as small, or which would do so other than because they are members of an ineligible group are eligible for certain exemptions from disclosures in the directors’ report. 

Additionally all companies other than those qualifying for the small companies exemption in the Companies Act 2006 must also include a strategic report, setting out a review of the company's operations.  Most listed companies are required to prepare an annual 'management report' to accompany their financial statements, which in almost every respect matches the requirements of the strategic report and directors’ report. However, some listed companies are required to include additional disclosures in their directors’ reports.  Quoted companies as defined in s385 of the Act are required to include additional information in their strategic report and are also required to prepare a directors’ remuneration report.

Some companies within the scope of the requirements of s414C (i.e. to prepare a strategic report) are also required to include a non-financial information statement in their strategic report. The non-financial information statement should contain the relevant information or include cross-references to where such information can be found in the main body of the strategic report. 

Directors’ report

The requirement to produce a directors’ report is contained in s415 of the Companies Act 2006 (“the Act”). The information required to be disclosed is detailed in s416 to s419 of the Act and Schedule 7 of the Accounting Regulations.

  • Companies may wish to include  information the directors consider is of strategic importance to the company or group in the strategic report rather than the directors’ report. 
  • Where a company chooses to set out in the company's strategic report information required by the Accounting Regulations to be contained in the directors' report it shall state in the directors' report that it has done so and in respect of which information it has done so. [Acc Regs Sch. 7: 7 (1A)].
  • The Disclosure and Transparency Rules (DTR) of the Financial Conduct Authority require most listed companies to prepare an annual 'management report' to accompany their financial statements.  Section 9.8 of the Listing Rules sets out further disclosures required by listed companies, most of which are normally included in the directors’ report.
  • The directors’ report should be approved by the board of directors and signed on behalf of the board by a director or the secretary of the company. [CA 2006 s419(1)]

Greenhouse Gas emissions (GHG)

Quoted companies also need to include information on greenhouse gas emissions in their directors’ report. 

The directors' report must state:

  • the annual quantity of emissions, in tonnes of carbon dioxide equivalent, from activities for which the company is responsible including:
    • the combustion of any fuel; and
    • the operation of any facility; and
    • the annual quantity of emissions in tonnes of carbon dioxide equivalent resulting from the purchase of electricity, heat, steam or cooling by the company for its own use; and
  • at least one ratio which expresses the quoted company’s annual emissions in relation to a quantifiable factor associated with the company’s activities.

The first two requirements apply only to the extent it is practical for the company to obtain the information in question. Where it is not practical to obtain some or all of the information the report must say what hasn’t been included, and why. [Acc Regs Sch. 7: 15(4)]

Companies are required to present comparative information for these figures. [Acc Regs Sch. 7: 18]

In addition to this numerical information, the directors’ report must state the methodologies used to calculate the information disclosed. [Acc Regs Sch. 7: 16]

These requirements represent the culmination of a project which was begun by the Climate Change Act 2008, and use the terminology defined in that Act.

The UK Department for Environment, Food & Rural Affairs (DEFRA) has published regulations governing how companies should report their greenhouse gas (GHG) emissions in their publication 'Environmental Reporting Guidelines: Including mandatory greenhouse gas emissions reporting guidance' (link to DEFRA guidance).  This publication provides guidance for companies on how to measure and report greenhouse gas emissions and discusses the requirements for carbon reporting in more detail.  Further DEFRA guidance is on greenhouse gas emission factors is provided in their publication '2013 Government GHG Conversion Factors for Company Reporting: Methodology Paper for Emission Factors' (link to DEFRA guidance). 

These greenhouse gas reporting requirements currently apply only to quoted companies. However, following its consultation on a “streamlined and more effective energy and carbon reporting framework” for the UK, the Government has taken the decision to broaden the greenhouse gas reporting requirements for quoted companies and extend the reporting requirement to all large companies. In November 2018 The Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018 (SI 2018/1155) were made. The following additional requirements will apply to quoted companies for periods beginning on or after 1 April 2019: [Acc Regs Sch. 7: 15(3A – 3D)]

The report must state a figure, in kWh, which is the aggregate of:

  1. The annual quantity of energy consumed from activities for which the company is responsible, including the combustion of fuel and the operation of any facility; and
  2. the annual quantity of energy consumed resulting from the purchase of electricity, heat, steam or cooling by the company for its own use.

The report must state what proportion of the carbon dioxide emissions and energy consumption figures reported relate to emissions in the United Kingdom and offshore area.

If the company has in the financial year to which the report relates taken any measures for the purpose of increasing the company’s energy efficiency, the report must contain a description of the principal measures taken for that purpose.

These new regulations also bring in certain unquoted companies and LLPs into scope. Unquoted companies and LLPs which are not parents are exempt if the company or LLP satisfies two or more of the following: not more than £36 million turnover, not more than £18 million balance sheet, and not more than 250 employees.  Unquoted companies and LLPs which are parents are exempt if the group satisfies two or more of the following requirements: not more than £36 million net (or £43.2 million gross) aggregate turnover, not more than £18 million net (or £21.6 million gross) balance sheet total and not more than 250 employees.

Those unquoted companies and LLPs in scope will also need to present the following information regarding energy and carbon in their directors’ report for periods beginning on or after 1 April 2019:

  1. the annual quantity of emissions in tonnes of carbon dioxide equivalent resulting from activities for which the company is responsible involving the combustion of gas or the consumption of fuel for the purposes of transport;
  2. the annual quantity of emissions in tonnes of carbon dioxide equivalent resulting from the purchase of electricity by the company for its own use, including for the purposes of transport;
  3. a figure, in kWh, which is the aggregate of:

a.       the annual quantity of energy consumed from activities for which the company is responsible involving the combustion of gas or the consumption of fuel for the purposes of transport; and

b.       the annual quantity of energy consumed resulting from the purchase of electricity by the company for its own use, including for the purposes of transport;

4. the methodologies used to calculate the information disclosed above; and

5. at least one ratio which expresses the company’s annual emissions in relation to a quantifiable factor associated with the company’s activities.

These figures may exclude emissions and energy consumed outside of the United Kingdom (and outside the offshore area, for offshore undertakings). [Acc Reg Sch.7: 20D(5)]

The requirements apply only to the extent it is practical for the company to obtain the information in question. Where it is not practical to obtain some or all of the information the report must say what hasn’t been included, and why. [Acc Regs Sch. 7: 20D(6)]

Other than for the first year that this information is disclosed, the comparative information must be given. [Acc Reg Sch.7: 20H]

Strategic report

In addition to the directors’ report the directors of a company other than those qualifying for the small companies exemption in the Companies Act 2006 are required to prepare a strategic report for each financial year.

The overall purpose of the strategic report is to inform members of the company and help them assess how the directors have performed their duty under s172 (the duty to promote the success of the company for the benefit of its members whilst having regard to the matters set out in section 172(1) (a)-(f)). [CA 2006 s414C(1)]

When preparing a strategic report, directors are encouraged (but not required) to follow the best practice recommendations set out in the FRC’s Guidance on the Strategic Report ('FRC Guidance').  In July 2018 the FRC published an amended version of its Guidance, following consultation. The amendments predominantly enhance the link between the purpose of the strategic report and the matters directors should have regard to under section 172 of the Act as well as reflecting the disclosure requirements arising from the UK implementation of the EU Non-Financial Reporting Directive

In November 2014 Directive 2014/95/EU (‘EU NFR Directive’) came into force, which amends the EU Accounting Directive (Directive 2013/34/EU) as regards disclosure of non-financial and diversity information by certain large companies and groups. In 2017 the UK Government enacted The Companies, Partnerships and Groups (Accounts and Non-Financial Reporting) Regulations 2016 (SI 2016/1245) which implements the EU NFR Directive in new sections of the Act, sections 414CA and 414CB.  The Financial Conduct Authority (FCA) has also made amendments to the Disclosure and Transparency Rules (DTR) to implement the EU NFR Directive requirement for issuers to disclose their diversity policy in the corporate governance statement.

The DTR require most listed companies to prepare an annual 'management report' to accompany their financial statements. However, with one exception, these requirements duplicate existing requirements within the law concerning the content of the directors’ report and strategic report. The exception relates to the disclosure of branches. The DTR require information about the existence of branches which goes further than the equivalent requirement in the Accounting Regulations, which is restricted to branches outside the UK.

The strategic report must be approved by the board of directors and signed on behalf of the board by a director or the secretary of the company. [CA 2006 s414D(1)].

Requirements for all companies (other than those qualifying for the small companies exemption in the Companies Act 2006)

The strategic report must contain:

[CA 2006 s414C(2)]

  • a fair review of the company or group’s business; and
  • a description of the principal risks and uncertainties facing the company or group.

These requirements are consistent with the requirements of DTR 4.1.8 in respect of the management report.

The Act specifies that the report should be a balanced and comprehensive analysis of:

  • the development and performance of the business of the company or group during the financial year; and
  • the position of the company or group at the end of that year,

consistent with the size and complexity of the business. [CA 2006 s414C(3)]

The report must, to the extent necessary for an understanding of the development, performance or position of the business of the company or group, include:

[CA 2006 s414C(4)]

  • an analysis using financial key performance indicators; and
  • where appropriate, analysis using other key performance indicators, including information relating to environmental matters and employee matters.

These requirements are consistent with the requirements of DTR 4.1.9(2) in respect of the management report.

The report must, where appropriate, include references to, and additional explanations of, amounts included in the company or group’s annual accounts. [CA 2006 s414C(12)]

'Key performance indicators' are defined, for this purpose, to mean "factors by reference to which the development, performance or position of the business of the company or group can be measured effectively". [CA 2006 s417(6)]

Medium-sized companies that qualify for the exemptions in s465 to s467 are exempt from the requirement of s414C(4) (business review to include analysis using key performance indicators, including information relating to environmental matters and employee matters) so far as they relate to non-financial information. [CA 2006 s414C(6)]

Additional requirements for quoted companies

Additional disclosure requirements in the strategic report are imposed on quoted companies.  The strategic reports of such companies must include:

  • the main trends and factors likely to affect the future development, performance and position of the company or group’s business; [s414C(7) (a)]
  • information about:
    • environmental matters (including the impact of the company or group’s business on the environment);
    • the company or group’s employees; and
    • social, community and human rights issues,

including information about any policies of the company or group in relation to those matters and the effectiveness of those policies; [s414C(7) (b)(i)(ii)(iii)]

Those quoted companies within the scope of the new s414CB are exempt from s414C(7) for all matters other than the consideration of “community issues”. [s414CB(7)(b)]

The strategic report must also include a description of the company or group’s strategy and its business model [s414C(8)(a)(b)].

A breakdown must also be included showing, at the end of the financial year:

  • the number of persons of each sex who were directors of the company;
  • the number of persons of each sex who were senior managers of the company or group (excluding directors of the company); and
  • the number of persons of each sex who were employees of the company or group. [s414C(8)(c)(i)(ii)(iii)]

Non-financial reporting directive

The EU NFR Directive applies to large public-interest entities with more than 500 employees.  Public-interest entities include listed companies as well as some unlisted companies, such as banks, insurance companies and other companies that are so designated by Member States because of their activities, size or number of employees. It is effective for periods commencing on or after 1 January 2017. Companies in scope of the EU NFR Directive are required to disclose information in their annual reports on environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters.  The disclosure must include a description of the policy pursued by the company related to these matters and any due diligence processes implemented by the company in pursuance of those policies, the results of these policies and the risks related to these matters and how the company manages those risks.  The EU NFR Directive complements the required disclosures under the narrative reporting regulations.  For affected companies, it extends the level of disclosures required on diversity (for example policies on age, gender, educational and professional background and professional background) and specifically requires reporting on bribery and corruption matters for the first time. 

The new sections 414CA and 414CB of the Act implement the EU NFR Directive and require companies in scope to include within their strategic report a non-financial information statement. The FRC Guidance recommends that the non-financial information statement be disclosed through a title and a series of cross-references, so as to maintain the coherence of the strategic report (i.e. without replicating information located elsewhere in the strategic report in the non-financial information statement). The content of the non-financial information statement is broadly similar to corresponding requirements in the strategic report and, as such, companies within the scope of the new sections 414CA and 414CB are exempt from corresponding sections of the strategic report requirements in s414C.

The requirement to describe the principal risks and uncertainties facing the business is expanded for those companies within the scope of the new section 414CB. The non-financial information statement should include principal risks relating, as a minimum, to the specified matters (i.e. environmental, social and employee matters, respect for human rights and anti-corruption and anti-bribery matters). These disclosures must include, where relevant and proportionate, the company’s business relationships, products or services which are likely to cause an adverse impact in those matters. The company must also disclose how it manages those risks. [s414CB(2)(d)]

Companies within the scope of the new s414CB must disclose in their non-financial information statement information necessary for an understanding of the impact of the company’s activity, as well as the company’s development, performance and position. [s414CB(1)]

While those companies within the scope of the new s414CB are exempt from s414C(4)(b) (analysis using other key performance indicators, including information relating to environmental matters and employee matters) they must include in their non-financial information statement a description of the non-financial key performance indicators relevant to the company’s business, which is a broader requirement. [s414CB(2)(e)]

Quoted companies within the scope of the new s414CB are exempt from the requirement of s414C(12) (the inclusion of references to, and additional explanations of, amounts included in the company or group’s annual accounts) so far as relating to the provisions mentioned in paragraphs (a) to (c) of s414CB(7) (being the requirement to disclose the company’s business model, information around environment, employee, social and human rights issues, and non-financial key performance indicators). [s414CB(7)(d)]

Quoted companies within the scope of the new s414CB are exempt from s414C(7) (information about any policies of the company or group in relation to certain matters and the effectiveness of those policies) for all matters other than the consideration of “community issues”. [s414CB(7)(b)]

Quoted companies within the scope of the new s414CA are exempt from the requirement of s414C(8)(b) to disclose a description of the company’s business model. [s414CB(7)(c)] Those companies do, however, need to include within their non-financial information statement a “brief description” of the company’s business model. [s414CB(2)(a)]

Reporting on Section 172

The Companies (Miscellaneous Reporting) Regulations 2018 have been approved by Parliament. These represent the legislative strand of the Government’s package of corporate governance reforms announced by BEIS in August 2017. 

The regulations broadly cover three different areas:

  • Executive pay (see directors' remuneration)
  • Section 172
  • Corporate governance arrangements of large privately-held businesses

Large companies (within the meaning under the Companies Act 2006) will need to include:

  1. A separately identifiable statement in the Strategic Report describing how the directors have complied with their duty to promote the success of the company having regard to the matters section 172(1)(a) to (f) of the Companies Act 2006.
  2. A statement in the Directors’ Report summarising how the directors have had regard to the need to foster the company’s business relationships with suppliers, customers and others, and the effect of that regard, including on the principal decisions taken by the company during the financial year.

All UK registered companies with more than 250 employees will have to include:

  • A statement in the Directors’ Report summarising how their directors have engaged with employees, how they have had regard to employee interests, and the effect of that regard, including on the principal decisions taken by the company during the financial year. This expands on the information about employee engagement matters that companies already have to include in their directors’ report.

Corporate Governance arrangements in large private and unlisted public companies

UK registered companies with either 2,000 or more global employees or a turnover over £200 million globally and a balance sheet over £2 billion globally will be required to include a statement as part of their Directors’ Report stating which corporate governance code, if any, has been applied and how. If the company has departed from any aspect of the code it must set out the respects in which it did so, and the reasons. If the company has not applied any corporate governance code, the statement must explain why that is the case and what arrangements for corporate governance were applied.

These new requirements will apply to company reporting on financial years starting on or after 1 January 2019

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.