Narrative reporting has reached an important stage in the UK. The FRC’s Guidance on the Strategic Report, released in June, makes good on the need to provide companies and their advisers with a principles-based approach to implementing the legislative corporate reporting reforms introduced last year.
Many UK companies have already had to square up to the task of including a strategic report within their annual report and accounts, mandatory as of September last year under the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013.
The earliest reports – those with 30 September year-ends in particular – made do with the legislation and draft guidance. With the government
Deepa Ravel, FRC
We want to move people away from boilerplate reports
publishing its regulations in August with an effective date the following month, the FRC had little time to deliberate and publish guidance the Department for Business, Innovation & Skills requested.
However, the regulations themselves introduced little in the way of surprises. Debate on corporate reporting has focused on the need for concise, more streamlined reports that include points on company strategy, business models and risk. And the new regulations reflect this.
“If we’re honest and stand back, there weren’t any bombshells in the introduction of strategic reports in the UK,” says KPMG partner David Littleford. “It did provide an opportunity for a rethink, however,” he says.
In publishing the guidance, the FRC developed key themes around clear, uncluttered reporting. It wants narrative material on strategy and operational matters to be clearly linked to the relevant figures.
Deepa Raval, lead project director on the guidance at the FRC, says that a key point for the FRC was to encourage clarity and innovation. “Companies should set the strategic report in the context of the annual report as a whole,” she says. “The annual report is primarily a document for shareholders and investors and there is a need for it to be more clear and concise. We want to move people away from boilerplate disclosures.”
Another key emphasis is an improved structure so that the annual report as a whole is more understandable.
“Where permitted within the legal framework, we are encouraging people to move information not necessary to the report itself elsewhere,” says Raval.
“So with CSR-type information, for example, many companies have quite a large amount and while this information is important, it is material that could be published elsewhere.”
The FRC has also taken the opportunity to reinforce the notion that the annual report and the strategic report in particular need to be “fair, balanced and understandable” – a principle set out in the 2012 UK Corporate Governance Code.
“So there’s little change in the rules,” says Littleford, “but the guidance is seeking a better explanation of strategic and narrative reporting with an emphasis on linkages – the idea that you explain the link between KPIs and your strategy, the business model and performance, your KPIs and remuneration policy and so on.” Along with the FRC’s user-friendly approach, the bringing together of the broader themes of the narrative reporting debate have been applauded.
Jonathan Cobb, governance and stewardship director at Standard Life, says: “From our point of view as investors the key point is the encouragement given to companies to ensure that the report and accounts and narrative reporting section actually reflects the conversation that has gone on around the boardroom table that year.”
Within the profession too, auditors have struggled to find practical difficulties with the guidance. James Roberts, audit partner at BDO, says that with the exception of the odd dissenting voice, practitioners have been encouragingly positive on the subject of the guidance.
“It’s a practical document that people will be able to understand and work with,” he says. “Someone could read this Guidance and come away able to apply it in a way that’s been more difficult when working with draft guidance, for example.”
Sallie Pilot, Black Sun Research
It's about helping companies tell their stories
So what have reports under the new regime looked like? As Nigel Sleigh-Johnson, head of the Financial Reporting Faculty at ICAEW points out, we have now seen strategic reports for the majority of companies with September, December and March year-ends. “What’s notable is the variety of approaches in terms of display and even content,” he says.
Corporate reporting specialists at Black Sun Research looked at the first 20 reports compiled under the new regime and found that, in line with the FRC’s aim of moving companies towards a best practice approach, firms have worked hard to embrace the spirit of the reforms.
Director of research and strategy Sallie Pilot says companies have viewed the legislative changes as positive, against a background of change in the way regulators and governments talk about corporate reporting. “Generally, it’s been about helping companies to tell their stories. They are trying to give them a framework,” she says.
Already, companies have put a great deal more into producing concise and meaningful writing within the front end, she believes. “We have had a lot of companies that wanted to tell their story a lot more clearly. Companies are giving a much more cohesive and well-rounded sense of their business with a greater level of connectivity and accountability. There is now more insight and personality in the narrative,” she argues.
Behind that lies a shift in the quality of the debate within companies and an evolution in the processes behind compiling reports and accounts.
“We’ve seen a lot more discussion around the role of companies in society and we’ve seen a lot of companies try to articulate that in all sorts of areas – how they educate employees, the role they play locally, how they contribute to society,” says Pilot.
Already, compiling company reports has become more of a commitment for companies, she adds, and that applies both to the companies covered by Black Sun’s early research and those the organisation has reported on since. The work begins earlier, teams are bigger and the overall approach is more integrated across the whole of the organisation.
“The front-end reporting, governance, financial statements – we used to have very separate contexts for these areas. Now we have steering committees, project boards – there will be one advocate, but they will participate in all these different areas, particularly in relation to strategic reporting. We’re definitely seeing a lot more collaboration.
“We’re also seeing a lot more engagement from auditors at the beginning of the process and throughout. Generally there has been a push towards getting things done much earlier so audit committees and boards have more time to reflect.”
The emphasis on the idea of “fair, balanced and understandable” has also prompted companies to devote more time to consideration of the annual report. “Those three words have caused significant thought on their meaning but also about how to manage the process in a way that the result meets those ambitions,” says Littleford.
“Some companies have used the opportunity to pause and to amend timetables for the drafting of the annual report so as to allow time for reflection and review – more time to stand back from the end result and ask whether the report reflects the issues that occupied the board during the year.”
So are there omissions? Sleigh-Johnson suggests that companies looking for detailed practical help on particular disclosures – for example how to report on HR or gender issues – might be disappointed. “Quite deliberately, probably, it doesn’t provide detailed guidance,” he says.
There may also be an issue around the fact that the guidance is primarily written for quoted companies when the regulations apply to all companies except for small ones. “If you are not a quoted company [the guidance] is quite extensive.”
And there is still the question of how we will determine which reports are good – or compliant – or not. The guidance definitely discourages legal-speak and rubrick, says Roberts, “but someone is bound to do it”. It will also be interesting to see, he points out, what the review panel makes of the tenets of “fair, balanced and understandable”.
There is scope for corporate reporting to evolve and improve and companies won’t have to do that in isolation. The FRC Lab will release research on digital reporting and separately on accounting policies later in the year.
However, the guidance does also point auditors in the right direction in terms of a future requirement to give an opinion on the front end of the annual report, explains KPMG’s Littleford.
“Based on yet-to-be-implemented changes to EU audit and accounting requirements, 2016 will see auditors reporting positively on the compliance on narrative reporting with applicable legislation.”
Changes in policy rarely stand unaffected for long.