Strategic reports: getting them right
The Financial Reporting Council’s latest guidance for directors on the Strategic Report will be useful to auditors too, explains Julia Penny.
In July the FRC issued its Revised Guidance on the Strategic Report. The original guidance was from 2014 and needed updating to:
- reflect changes arising from the implementation of the EU non-financial reporting directive;
- strengthen the linkage between the directors’ duties under s.172 and the report;
- reflect key developments in corporate reporting.
As previously, all companies that are not small are required to prepare a strategic report. Slightly different rules apply regarding the content depending on whether the company is a Public Interest Entity (PIE), a quoted company, large or only medium-sized.
Even within these categories there can be further differences in the reporting required; for instance PIEs with over 500 employees in the group must also include a non-financial information statement. Similarly, there are extra requirements for large and medium-sized companies with more than 250 employees.
There is a helpful table in Appendix II which sets out the requirements for the different entity types.
The strategic report has five main objectives:
- To provide insight into the entity’s business model and main strategy and objectives
- To describe the principal risks the entity faces
- To provide relevant non-financial information (newly added)
- To provide an analysis of past performance
- To provide information to shareholders on how the directors have had regard to stakeholders and other matters regarding their s.172 responsibilities (newly added)
New legislation in SI 2018/860, applicable from 1 January 2019, introduces a specific reporting requirement on how directors have had regard to broader matters when performing their duties under s.172. This includes considering the interests of employees, suppliers, customers and other stakeholders, as well as the community and environment. Appendix III of the guidance sets out the content requirements for the directors’ report of different sizes and types of company.
Although the guidance is aimed at directors it will also be useful for auditors. This is because the auditor must form an opinion on whether the directors’ and strategic reports are prepared in accordance with applicable legal requirements. It is also likely to be the auditor who points clients towards this guidance.
Julia Penny FCA is London ICAEW Council Member and Technical Director at SWAT UK @JSPenny
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