New UK Reporting Regulations- what is a strategic report? Does it link to Integrated reporting? August 2013

What’s happening?

• New Regulations for companies on how to report: in force from 1st October

• Strategic report required• Companies Act 2006 (Strategic Report and

Director’s Report) Regulations 2013 • Financial Reporting Council issued draft

guidance

Why is it happening?

• Government commitment to reinstate the Operating and Financial Review to ensure director’s social and environmental duties have been covered in company reporting

• Aims to promote cohesiveness• Putting the focus on the information being

strategic

What companies do the regulations apply to?

• Differing requirements according to whether the company is:– Listed– Large – Medium sized companies

What’s required?

• Section 414c requires:– description of principle risks and uncertainties (All

sizes)– analysis of Key Performance indicators (Large and

quoted companies for non-financial KPIs) – description of the entities objectives, strategy and

business model (Quoted companies)– explanation of main trends and factors affecting

the company (Quoted companies)

What about disclosures?

• For quoted companies, disclosures required around: – environment– employees– Social, community and human rights issues – Diversity

• If not disclosed, the company must state which of these disclosures are missing

What should the report do?

• Provide information and insight into the companies main objectives, strategies and principle risks

• Complement, supplement and provide context of related financial statements

• Provide an analysis of past performance• Signpost the location of supporting material

Materiality is key

• Organisations will have to understand what the key issues are to their business

• ‘Materiality’ is key. Defintion taken from International Financial Reporting Standard:

“Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions that users make on the basis of the financial statements. Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances”

How does it relate to integrated reporting?

• Both International Integrated Reporting Council and FRC want to improve the quality of reporting, with shareholders as the main focus.

• Strategic report, in contrast to Integrated report is governed by legislation

• Strategic report is required as part of the annual report

• Draft Integrated Reporting Framework provides more in-depth information about how non-financial issues might feed into a companies strategy

Are there consequences for directors getting it wrong?

• Section 463 of the Companies Act allows for directors to be held liable to compensate their company if it suffers any loss as a result of any untrue or misleading statement (or any omission) arising from the director’s report, the director’s remuneration report or the strategic report

• Directors knew that the statements were untrue or misleading, or if they knew that the omission was a dishonest concealment of a material fact

Getting it right

• Good reporting will lead to: – less exposure to penalties – greater transparency for investors or shareholders – better understanding and management of risks – improved governance

Solutions

• Find out what is ‘material’ to the company’s operations and strategy.

• Understand key risks through proper risk management. Has your company reviewed its risk register taking into account non-financial information?

• Have these been considered against both reputational and financial risk?

• What company engagement takes place? • Review supply chain management: do you know the

risks down your supply chain? E.g. working standards.

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