The Strategic Report & the Directors' Report
The purpose of these ‘front end’ reports within a company’s annual report is to provide clear and coherent information to readers about the company’s activities, performance and position, including information on what they do, why they do it and, crucially, the risks that they face as a result of those activities.
Quoted companies, which are those with a listing on an EU-regulated market, the NASDAQ or the New York Stock Exchange, in particular have enhanced requirements for the strategic report and directors’ report including the disclosure of greenhouse gas emissions data and business model and strategy information.
Companies which have more than 500 employees and meet the Companies Act 2006 definition of a ‘traded company’, ‘banking company’, ‘authorised insurance company’ or ‘company carrying on an insurance market activity’ have additional strategic report requirements as a result of the Non-Financial Reporting (NFR) Directive.
These additional requirements only partially overlap those that apply to quoted companies but, in places, expand on them. Care must be taken to consider which strategic report requirements apply as the definition of a ‘traded company’, which is one whose transferable securities are admitted to trading on a regulated market, is different to that of a ‘quoted company’.
Additionally for periods beginning on or after 1 January 2019, all large UK companies (including large subsidiaries included in higher consolidations) will be required to include a ‘section 172 statement’ as part of the strategic report and also publish this on their website. This refers to large under the Companies Act definition, not just size thresholds i.e. applies if the company is large only because it’s an ineligible company. See our tips for preparing the section 172 statement.
There have also been two additional directors’ report disclosures introduced as discussed in the directors’ report section below.
We have provided guidance on the requirements for Narrative Reporting in the form of a Practical Guide to the Strategic Report, which includes the Companies Act 2006 legislation requirements for the Strategic Report and Directors’ Report identified by nature and size of the company.
Strategic report – all companies that are not small
The strategic report should provide the readers of the annual report with a fair review of the company's business and a description of the principal risks it faces. The review should be balanced and comprehensive and, to the extent necessary for an understanding of the development, performance or position of the business, include analysis using financial Key Performance Indicators (KPIs). Large companies should also include non-financial KPIs in their analysis, where appropriate.
The review should, where appropriate, include references to and additional explanations of amounts included in the annual accounts (eg ‘exceptional’ or other items separately identified on the face of the primary statements).
Whilst the Companies Act's requirements are set out as a prescriptive list, best practice will be achieved when the interrelationships between the matters described are drawn out in the strategic report (eg the review includes analysis of the effect of the entity's risks on its KPIs and business performance).
The strategic report is intended to be a separate discrete component of the annual report. Whilst the required information can be included by cross-reference, this method should be used sparingly. Due to the nature of the information included in it, the strategic report will generally be positioned close to the front of the annual report.
The strategic report must be approved by the board and signed on its behalf by a director or the company secretary.
A company has the option to send the strategic report and certain supplementary material to shareholders in place of the full annual report, however shareholders have the right to ask for the full annual report and accounts.
Where this option is taken, the full strategic report must be sent to shareholders, including any information that is intended to be included in it by cross-reference to another part of the annual report.
In addition, companies must also include certain specified supplementary information with the strategic report. This supplementary material includes information on the audit report and how to obtain a copy of the full annual accounts. For quoted companies, the supplementary material also has to include selected excerpts from the Directors’ Remuneration Report. No formal financial information need be sent, although directors may include it in the pack if they consider it appropriate.
Strategic report – small companies
Companies that qualify for the small companies' exemptions are not required to prepare a strategic report.
Directors' report – all companies
All companies, including those that qualify for the small companies' exemptions, must include a directors' report in their annual report.
An option to “up-grade” directors' report disclosure requirements to the strategic report is available where the directors consider that information is “strategically important". This approach is most likely to be considered for:
- Particulars of important events since the end of the financial year
- An indication of likely future developments
- An indication of activities in the field of research and development
Where directors choose to "up-grade" any information, the directors' report must state which information has been treated in this way.
The directors' report will generally be positioned further back in the annual report than the strategic report and there is no reason why it should not be positioned right at the back.
For periods beginning on or after 1 January 2019 there are two new disclosures required in the directors’ report:
- A statement summarising engagement with employees (for all large and medium companies with more than 250 UK employees this year and last year, or for the past two years).
- A statement detailing how the directors have had regard to the need to foster business relationships with suppliers, customers and others (for all large companies judged purely on the size criteria i.e. using only the Companies Act size criteria, not the ineligibility criteria).
These are similar to some of the requirements for the section 172 statement.
In addition, for periods beginning on or after 1 April 2019 there are new disclosures for emissions and energy consumption. Unquoted large companies and LLPs who consume more than 40,000 kWh annually will be required to disclose:
- The annual quantity of emissions and energy consumed within the UK and its offshore areas.
- The calculation method and details of any energy efficiency improvement measures undertaken.
- At least one ratio that expresses the company’s annual emissions in relation to a quantifiable factor associated with the company’s activities.
For quoted companies, there are new rules which add to and amend the existing mandatory greenhouse gas emissions disclosures.
The directors' report must be approved by the board and signed on its behalf by a director or the company secretary. The directors' report and the strategic report do not have to be approved by the same person.