Article:

FRC consults on updated guidance on the Strategic Report

20 September 2017

The requirements in the Non-Financial Reporting (NFR) Directive were brought into UK law in December 2016, with an effective date of financial years beginning on or after 1 January 2017. The approach taken to the introduction of the NFR Directive’s requirements into UK law has resulted in an additional set of requirements that apply only to the strategic reports of companies that have over 500 employees and which meet the Companies Act 2006 definition of a “traded company”, “banking company”, “authorised insurance company” or “company carrying on an insurance market activity” (otherwise known as Public Interest Entities (PIEs)).

It is essential that companies consider carefully which rules apply to them as the requirements that have been introduced as a result of the NFR Directive (the NFR requirements) partially overlap, and in some cases expand, those that continue to apply unchanged to Quoted companies. This can cause an additional complication for some companies with listed securities because the definition of a “traded company” is different to that of a “quoted company” and a company may find itself falling into the scope of one, both or neither of those definitions. For example: A company that has its equity shares listed on the NASDAQ is a Quoted company but not a Traded company, whereas a company whose equity shares are privately held but that has listed its debt securities on the Main Market of the London Stock Exchange is a Traded company but not a Quoted company. A company that has its equity shares listed on the Main Market of the London Stock Exchange meets both the definition of a Quoted company and of a Traded company.

Broadly, the principal additional disclosures resulting from the NFR requirements compared to those that already apply to Quoted companies are:

  • The addition of “anti-corruption and anti-bribery matters” to the list of matters on which a company must include information
  • A requirement for a description of any due diligence processes implemented by the company in pursuance of policies on those matters
  • A need to identify any principal risks that relate to those matters
  • A requirement for a description of the company’s business relationships, products and services which are likely to cause adverse impacts in the areas of risk identified.

The changes resulting from the NFR Directive also resulted in the addition of some board diversity disclosure requirements into the Disclosure Guidance and Transparency Rules (DTR). Once again, care should be taken about the applicability of these requirements as the scoping is different again to those that apply to the strategic report and other parts of the DTR.

The Financial Reporting Council (FRC) has published a short document, which highlights some of the complexities that exist in this new legislation and provides a high level summary of the new requirements. It has also published an Exposure Draft for an updated version of its Guidance on the Strategic Report. It should be noted that the original Guidance on the Strategic Report was developed whilst the NFR Directive was being drafted and so already goes some way towards addressing the new requirements.

The European Commission has also recently published Guidelines on Non-financial Reporting (the Guidelines). The Guidelines are non-mandatory and note that companies may use other frameworks including, among several others, the FRC’s Guidance on the Strategic Report.

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