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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 reporting statement does not have to be a separate statement, the disclosures can be integrated with the other disclosures required in a 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.

  • The report should contain an indication of the likely future developments in the business of the company and its subsidiaries. [Acc Regs Sch. 7: 7 (1)(b)]
  • Companies may wish to include this information 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.  Companies which are not quoted are not required to present such information.  In October 2017 the Department for Business, Energy and Industrial Strategy (BEIS) issued a consultation proposing that certain large UK unquoted companies report GHG emissions.  Comments are requested until 4 January 2018.

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 although there was an exemption for the first year when the requirements were first introduced in 2013 . [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, it is the Government’s stated intention to review the first two years of GHG emissions reporting by quoted companies in 2015 and to take a further decision in 2016 on whether to extend the reporting requirement to all large companies, although no further decision has been announced at the time of writing this page.

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 (duty to promote the success of the company). [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 August 2017 the FRC published draft amendments to its Guidance. 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 and reflect the new disclosure requirements arising from the UK implementation of the EU Non-Financial Reporting Directive.  Final updated Guidance is expected at the end of the year/beginning of 2018, but is still a good source of guidance in its draft form.

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.  The new Directive, which amends the Accounting Directive (Directive 2013/34/EU), 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.  Such companies will be 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 will need to include a description of the policy pursued by the company related to these matters, the results of these policies and the risks related to these matters and how the company manages those risks.  This Directive complements the required disclosures under the narrative reporting regulations.  For affected companies, the new Directive will extend the level of disclosures required on diversity (for example policies on age, gender, educational and professional background and professional background) and will specifically require reporting on bribery and corruption matters for the first time.  

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 Directive.  The Financial Conduct Authority (FCA) has also made amendments to the Disclosure and Transparency Rules (DTR) to implement the new EU Non-Financial Reporting Directive (2014/95/EU) requirement for issuers to disclose their diversity policy in the corporate governance statement.

The new sections 414CA and 414CB of the Act require certain companies to include within their strategic report a 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 Disclosure Guidelines and Transparency Rules (DTR) of the Financial Conduct Authority 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 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 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)]

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.

For those companies within the scope of the new s414CB the non-financial information statement must also contain 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)]

Further, those companies within the scope of the new s414CB are exempt from s414C(4)(b). [s414CB(7)(a)]. However, those companies 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)]

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)]

Those quoted companies within the scope of the new s414CB are exempt from the requirement of s414C(12) 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)]

'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)].

Those 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)]

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)]

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.