The Financial Reporting Council has produced up-to-date guidance on putting together a strategic report that incorporates the requirement to include new climate-related financial disclosures.
Section 414A of the Companies Act requires all companies that are not small or micro-entities to prepare a strategic report, the purpose of which is to provide information to help shareholders assess how the directors have performed their duty to promote the success of the company.
New legislation introduced earlier this year requires companies within its scope to make additional disclosures in their strategic report about the climate-related financial risks and opportunities that they face. These disclosures are based on the Task Force for Climate-related Financial Disclosures (TCFD) framework – which premium-listed companies are all ready to adopt on a ‘comply or explain’ basis – and are required for financial years starting on or after 6 April 2022.
The FRC’s updated guidance is intended to encourage preparers to consider how the strategic report fits within the annual report and to improve the overall quality of corporate reporting, as pressure ramps up on certain companies to disclose more in this area. Companies not required to do so by law may also choose to voluntarily expand the scope of their climate-related disclosures.
In particular, the guidance reminds preparers of the key communication principles that should underpin the strategic report; notably that it should be fair, balanced and understandable, while also being clear and concise yet comprehensive. Where appropriate, information in the strategic report should be forward-looking and should provide information that is entity-specific.
The guidance also calls on preparers to review the structure, presentation and content of the strategic report annually to ensure that it continues to meet its purpose and only contains information that is relevant.
Marianne Mau, ICAEW’s Head of Corporate Reporting Strategy, said: “The FRC’s guidance serves as a best practice statement, which helps companies prepare their strategic reports. The updated version ensures that it reflects the latest changes in legislation and that it will continue to be a comprehensive and helpful resource.”
Speaking at a recent ICAEW webinar, Ollie Law, a senior manager at PwC, warned that many disclosures made to date by premium-listed companies had been process-driven and tended to focus on risk management and it was sometimes hard to see a thread between the TCFD’s pillars of governance, strategy, risk management, and metrics and targets and how they relate to each other.
“There is also a need to include the outcomes and detail on how it has affected the business,” Law said. “More companies are disclosing the underlying assumptions, but the next step will be to address the financial implications of their commitments and risk management.”
ICAEW’s Financial Reporting Faculty has produced further guidance to steer organisations through the process of preparing a strategic report. It includes advice on how information should be structured and reminds preparers of the need for appropriate explanations and definitions for technical terms and the need for consistency across the strategic report, the financial statements and information presented elsewhere, including KPIs, the overall objectives and strategy of the company, and any identified risks.
The strategic report should also, where appropriate, have comparatives and explanations of any changes from previous years. It should also contain information that is material to shareholders and helps them assess whether the directors have performed their duty to promote the success of the company.
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ICAEW’s non-financial-reporting hub offers support and help sheets on a range of subjects including climate and energy reporting, TCFD requirements and international sustainability reporting standards.
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