FRC guidance on the Strategic Report

The Financial Reporting Council (FRC) has updated its Guidance on the Strategic Report to reflect new requirements on compliance with Section 172  and to align with the 2018 UK Corporate Governance Code.

The guidance puts more emphasis on the directors’ duty to promote the success of the company under S 172, in recognition of the specific reporting requirements in new legislation which comes into force for large companies for years commencing on or after 1 January 2019.

As well as addressing compliance with the new reporting requirements, the FRC guidance clarifies and reinforces specific messages from its 2014 Guidance.

  • The strategic report should be a cohesive document which contains both relevant financial and relevant non-financial information.
  • The primary audience of the strategic report, in line with legislation, is still the shareholders. However, the FRC encourages companies to consider the interests of wider stakeholders when running the business and notes that in meeting the needs of shareholders, information in the annual report may also be of interest to other stakeholders.
  • The FRC believes that ensuring a business is sustainable over the longer term is important and encourages companies to consider matters such as climate risk and discuss them when material. 
  • Section 4 The strategic report: purpose has been updated:
    • Directors may need to include information additional to that specifically listed in the Act.
    • Companies need to build and maintain relationships with a range of stakeholders in order to generate and preserve value.
    • There are new objectives to provide relevant non-financial information and information to enable shareholders to assess how directors have had regard to stakeholders and other matters when performing their duty under section 172.
    • There should be adequate emphasis on other disclosures in the strategic report that are not related to environmental, employee, social, community, human rights, anti-corruption or antibribery matters. ie:
      • essential context to the financial statements to support an understanding of developments in the year and the future financial performance and position of the entity; and
      • information relating to sources of value that have not been recognised in the financial statements and how those sources of value are managed, sustained and developed, for example a highly trained or experienced workforce, natural capital, intellectual property or intangible assets.
  • The FRC believes that companies should consider materiality when considering their stakeholders. The basic definition of materiality remains the same because it is generally well understood, but some additional guidance has been provided on its application in the context of the strategic report.
  • The FRC encourages companies to consider the broader matters that may impact the generation and preservation of the value of the company over the longer term, particularly in relation to their strategy and business model. 
  • The FRC provides examples throughout the guidance to encourage the linking of related information in the annual report through the narrative. 
  • The FRC has made it clear that the Regulations that implement the non-financial reporting Directive only apply to traded, banking or insurance companies with more than 500 employees (public interest entities or PIEs). Quoted companies that are not PIEs will continue to apply the pre-existing non-financial reporting requirements in the strategic report.

For further information, please speak to your usual RSM contact.