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FRC updates Guidance on the Strategic Report

09 October 2018

In June 2014, the Financial Reporting Council (FRC) issued Guidance on the Strategic Report, which provided some useful material on how to approach the drafting of a strategic report. However, since it was first published, the focus on narrative reporting, and the expectations of investors and other stakeholders using it, has significantly increased. Added to that, legislative changes such as the introduction of the Non-financial Reporting (NFR) disclosures which apply to Public Interest Entities with more than 500 employees (large PIEs) from 1 January 2017 and the Section 172 Statement, which will apply to all large companies from 1 January 2019, have significantly increased the complexity of the legal landscape. Against that background, the FRC has sought to update its guidance.

The original guidance had a single section that set out best practice for all companies preparing a strategic report, which was based on the requirements that applied to a quoted company. However, the complexity of the interaction of the NFR requirements with the pre-existing strategic report requirements has resulted in the FRC creating two separate sections: one for a company applying the NFR requirements and one for a company that does not. The revised guidance also has much stronger focus throughout on directors’ statutory duties and, in particular, their duty to have regard to the consequences of their decisions beyond those directly related to the success of the company for the benefit of its shareholders. This is reflective of the public and political focus on the conduct of directors following some high profile business and governance failures.

There are two important changes between the August 2017 Exposure Draft and the final document:

  • Firstly, it was the FRC’s initial position that the NFR disclosures should be integrated into the wider strategic report. This was a sensible approach, which reduced the potential for duplication and allowed companies to “tell their story” in a coherent and ordered way. However, during the comment period, it became apparent that the legislation requires the NFR disclosures to be included in a separately identifiable statement. The FRC has, therefore, been forced to revise its guidance to suggest ways in which companies might achieve legal compliance whilst still retaining the benefits of an integrated strategic report.
  • Secondly, the FRC has introduced a new section that deals specifically with the Section 172 Statement, for which final legislation was not available at the time the Exposure Draft was published. That section includes useful guidance on how the new requirement applies to subsidiary companies as well as the nature, focus and detail of the information that should be included in the new statement.

The revised guidance is available on the FRC’s website.

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