The UK Financial Reporting Council (FRC) has published guidance on the strategic report as the first of a series of initiatives to promote clear and concise corporate reporting, which is beneficial to investors.
Since 1 October 2013 UK based companies are required to prepare a strategic report as part of their annual report. The strategic report requires companies to report on the way the business is run and its strategic direction as well as some non-financial information such as environment, employees, social, community, human rights and gender diversity issues.
The FRC guidance aims to serve as a best practice statement by giving companies an overview of the various components of an annual report and considering where information should best be placed.
"The guidance also encourages companies to focus on ensuring disclosures are material, as a key step towards concise reporting," the FRC said in a statement.
The regulator considers the information to be material if "its omission or misrepresentation could in?uence the economic decisions shareholders take on the basis of the annual report as a whole".
FRC executive director codes & standards Melanie McLaren said: "The new legal requirements for the strategic report have already made a positive impact, with a number of companies focusing on clarity of communication rather than a compliance-driven checklist approach to reporting. We hope to encourage that trend."
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The guidance was also drafted with the recent developments such as the EU Directive on Non-Financial Reporting and the work of the International Integrated Reporting Council in mind, McLaren continued. "Reports that follow the guidance should result in reporting that is consistent with the <IR> framework."
Commenting on the launch of the FRC guidance on the strategic report, KPMG UK head of audit Tony Cates said: "The business-centric focus of the guidance is an opportunity for companies to focus their reports on those factors that are most important to the long term prospects of their business."
Coincidentally KPMG also released a survey on corporate reporting. The survey entitled, KPMG Survey of Business Reporting, looked at 90 companies’ annual reports from around the world and revealed a disconnect between the key drivers of business value and the content of annual reports.
"Management teams are telling KPMG member firms that they are frustrated by apparent investor short-termism. I believe that better business reporting could provide investors with the objective information they need to take a longer term view," KPMG international global head of audit Larry Bradley said.
BDO audit partner James Roberts said the FRC guidance was timely and important as "corporate reporting should be the currency of trust in capital markets but this trust is being steadily eroded".
"In Genesis, God created heaven and earth in less than 1,000 words. So why should the length of just the corporate governance section in one company’s annual report be 14,000 words," he continued. "Companies need to demonstrate risk and opportunity in a clear, simple and concise manner."
To serve this purpose the FRC launched a programme of initiatives to be delivered during 2014, of which the guidance on the strategic report is the first step.
At the time of publication the programme had not been made public yet, but in a statement the UK FRC announced three more initiatives for the coming months:
– The publication of review of progress towards clear and concise reporting in the 2014 reporting cycle;
– The publication of Financial Reporting Lab case studies setting out investor feedback on how well companies have addressed clarity and conciseness;
– And finally, reporting by the Corporate Reporting Review team on reports where it commonly observes "clutter", contrary to the objectives of clear and concise reporting.
"Investors still express concern that the key messages about the business are buried in too much verbiage of little value or are obscured by boilerplate," FRC chief executive Stephen Haddrill said.
"The programme we launch today is designed to tackle this persistent problem and promote clear and concise reporting."