20 Jun 2014
The Financial Reporting Council has published its final guidance on implementing the strategic report. The guidance, which accompanies the 2013 legislation requiring strategic reports, aims to encourage companies to innovate in how they draft and present information and promotes cohesiveness in the annual report as a whole.
The guidance is intended to be persuasive rather than mandatory and seeks to help companies in compiling and presenting the strategic report. It covers materiality, communication principles and content and also clears up some questions that have arisen from the first wave of company reports that have been issued under the new requirements.
The changes in the legal requirements have always been recognised as modest, but the FRC continues to position them as “a catalyst for entities to prepare clear and concise narrative reports that facilitate fair, balanced and understandable reporting”. The final guidance includes more definitive commentary on the application of materiality and sets out communication principles for the qualitative characteristics of the disclosures included in the strategic report – and annual report as a whole.
It also provides more comprehensive commentary on the various content elements required by the regulations. These are now grouped into three categories: (1) strategic management: how the entity intends to generate and preserve value; (2) business environment: the internal and external environment in which the company operates; and (3) business performance: how the entity has developed and performed and its position at year end.
The FRC emphasises that the primary audience for the strategic report is shareholders, emphasising their priority over other stakeholders in the UK legal framework. Only content that is material to shareholders should be included in the strategic report, so that it can be a concise document that gives easy access to all the key strategic information. Other layers of information, including elements that are aimed at other stakeholders, may be included in another part of the annual report or presented online.
Outstanding legal questions have been cleared up too, including matters around cross-referencing, approving and signing the strategic report, and safe-harbour protections for directors signing off the strategic report.
The FRC has also announced that the guidance is to be the first part of a wider programme of initiatives to “promote clear and concise reporting from which investors can, with justifiable confidence, draw conclusions about a company’s performance, position and prospects”.
“It was always planned that the guidance would be a necessary supplement to the legal requirements,” said Mark O’Sullivan, Corporate Reporting Director at PwC. “Companies took steps in the right direction in the first reporting season, but it will be interesting to see how the availability of the final guidance will affect year two strategic reports.”