UK “strategic report” guidance targets clarity, usefulness

The UK Financial Reporting Council (FRC) issued guidance Monday for companies subject to the new “strategic report” requirement.

New UK regulations require certain businesses to prepare a strategic report as part of their annual report. The requirements apply for reporting periods ending on or after September 30th 2013.

Companies should use their strategic reports to give shareholders a holistic and meaningful picture of the way a business is run and its strategic direction, the FRC said, including information about the company  business model; strategy; governance; director remuneration; development, performance, and position; and future prospects.

The FRC’s new guidance provides best practices that are intended to be persuasive but are not mandatory. The guidance creates high-level principles designed to encourage companies to tell their story in a way that is understandable and clear to investors.

The guidance is intended to:

• Produce strategic reports that enable shareholders to assess how directors have performed in their duty to promote the success of the company.
• Ensure that information that is important to shareholders is prominent and accessible.
• Make it clear that only information that is material to shareholders should be included in the strategic report, and that immaterial information should be excluded.
• Promote strategic reports that describe an entity’s strategy, objectives, and business model. In addition, the FRC says the strategic report should include an explanation of the main trends and factors affecting the entity; a description of its principal risks and uncertainties; an analysis of the development and performance of the business; and an analysis using key performance indicators.
• Advise that disclosures about the environment, employees, social, community, and human rights issues are required in strategic reports when material, and that gender diversity disclosures also are required.
• Inspire companies to think in an innovative way about their communications.

FRC Chief Executive Stephen Haddrill said in a news release that investors have expressed concern that the key messages about the business are buried in verbiage with little value and obscured by boilerplate disclosures.

“The programme we launch today is designed to tackle this persistent problem and promote clear and concise reporting,” Haddrill said.

—Ken Tysiac (ktysiac@aicpa.org) is a CGMA Magazine senior editor.