ICAEW has requested a ‘streamline, align, refine’ approach to developing non-financial reporting in its response to a call for evidence from the Department for Business and Trade (DBT).
The overall quality of non-financial reporting has improved in recent years, starting with the introduction of the strategic report in 2013. However, the complexity of the underlying legislative framework has also increased, and requires rationalisation.
ICAEW stated: “We believe that this complexity has reached a tipping point, and risks compromising both progress made to date and the UK’s position as a global leader in this space.”
The Institute called for existing thresholds for non-financial reporting information to be simplified and streamlined. The size categories used to determine the type of accounts that need to be prepared and filed with Companies House should also be reviewed.
Duplication and overlap of non-financial reporting requirements across the different components of the annual report has built up over time, and ICAEW has emphasised the urgent need for this to be eliminated: “The legislative drive to introduce new requirements has not always been matched by a commensurate drive to remove or amend redundant requirements.” There is now a clear need to rationalise and streamline reporting requirements across the strategic report, directors’ report and directors’ remuneration report.
DBT should also review how non-financial reporting requirements are applied within groups of companies. As well as addressing a number of specific issues as highlighted in the response, ICAEW believes that a more holistic review is needed to ensure that reporting requirements are matched to the appropriate level of company within a group.
The government should move swiftly to endorse the IFRS Sustainability Disclosures Standards for use in the UK. ICAEW said: “There should be one source of sustainability disclosure requirements in the UK, ie, UK-adopted International Sustainability Standards Board (ISSB) standards. Companies that are, in time, required by law or regulation to report under the ISSB standards would then refer to the disclosure requirements as set out in those standards.”
Legislation for companies not required to apply ISSB standards should, as soon as practicable, be aligned to the ISSB baseline to the extent proportionate unless there are strong reasons to deviate from the requirements of those standards.
ICAEW also called for DBT to discuss with the ISSB the possibility of an ISSB standards equivalent for SMEs, perhaps to be overseen by the future Auditing, Reporting and Governance Authority (ARGA). This would help simplify the underlying legislation and enable reporting requirements for companies outside of scope of the full ISSB standards to remain proportionate and updated to reflect changes in reporting best practice.
Another demand from ICAEW was for more radical reform in the longer term to ensure that the UK framework for non-financial reporting is “truly streamlined and world leading”. In particular, it focused on the importance of having clarity over the purpose of the annual report. This is critical as it provides an organising principle that can be applied when taking decisions over the need for – and subsequent location of – non-financial information and the associated scoping requirements.
The response outlines ICAEW’s view that the purpose of the annual report is to provide material information about a reporting entity that is useful to existing and potential investors, creditors and other lenders in making decisions relating to the provision of resources to the entity. If the purpose of requiring certain information is not to provide material information to the primary users, it should be presented outside of the annual report. “There is a real opportunity for innovative thinking in this respect, with a particular focus on the role that technology might play with regards to reporting developments more broadly.”
Sarah Dunn, Senior Manager, ICAEW’s Corporate Reporting Faculty, said: “ICAEW welcomes this comprehensive and timely review of the UK non-financial reporting regulatory framework. This is a historic opportunity to stand back and consider what changes are needed to ensure that the UK legislative framework is able to accommodate developments in sustainability reporting and to minimise the risk of complexity and confusion re-emerging over time.
“We urge DBT to move ahead as soon as possible to address the urgent issues identified in our response. These short-term changes have the potential to significantly improve the non-financial reporting framework. We also encourage DBT to consider the non-financial reporting framework more broadly. We believe this bigger-picture thinking is necessary to ensure that the UK’s framework remains world-leading and sufficiently robust over the longer term.”
ICAEW Know-How from the Corporate Finance Faculty
This guidance is created by the Corporate Finance Faculty – recognised internationally as a centre of professional excellence in corporate finance. The Faculty is the largest network of professionals involved in corporate finance and represents the interests of its members with policymakers and facilitates a highly effective business development network.
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