In early September, the Department for Business, Innovation, Science and Trade (BIST) published a consultation paper outlining proposed reforms to corporate reporting.
The reforms are intended to reduce the administrative burden associated with reporting by removing duplication and simplifying complex requirements.
Instead, companies will streamline their reports to focus on the information that is financially material1 and decision-useful for investors and creditors – in other words, less box-ticking, more judgement and explanation.
This pivot will support narrative conviction, transparency and investment by allowing companies to re-focus their reports and their stories to specific stakeholder groups rather than a more general audience.
The structure of the paper
The paper is centred around 5 key principles:
- Clarity of purpose – All information that is not financially material or ‘decision-useful’ to investors and creditors is to be removed.
- Flexibility and trust – Companies should be trusted to tell their own story and to tailor disclosures to the needs of their investors and creditors.
- Simplicity and coherence – Duplication across various reporting and accounting standards is to be removed.
- Proportionality – Reporting requirements are to be relative to company size, ownership and structure.
- Fit for the future – The UK’s legal framework needs to be able to adapt to the changing world economy and should be geared to take advantage of emerging opportunities.
What are the main changes?
Reduced reporting requirements for SMEs, including extending many of the exemptions currently available to small companies to medium-sized businesses and certain subsidiaries.
Changes to company size calculations, replacing average employee headcount with a more flexible employee or full-time equivalent (FTE) measure better suited to modern workforce models.
Simplified reporting thresholds, including a single reporting threshold for very large companies and consolidation of non-financial reporting requirements.
A streamlined UK reporting framework, reducing legislative reporting requirements and relying more heavily on accounting standards as the primary source of reporting obligations.
Fewer mandatory strategic report disclosures, with narrative reporting focused on the baseline pages of the strategic report, (business model, strategy, performance, resources and principal risks), while many topic-specific disclosures such as environmental, employee, social, human rights and anti-corruption reporting would no longer be explicitly required.
Reduced remuneration reporting obligations, including the removal of CEO pay ratio reporting, annual shareholder votes on remuneration, and several remuneration committee disclosure requirements.
Greater use of digital reporting and communications, including electronic shareholder communications, virtual AGMs, structured digital reporting (iXBRL tagging), and moving certain disclosures to online portals.
A more risk-based approach to assurance, with proposals to expand audit exemptions where compliance costs outweigh benefits and greater use of voluntary assurance mechanisms.
Creation of a central Reporting Gateway, which would review and challenge new reporting requirements across government before they become law.
What this means in practice
In short: the creation of a proportional, narrative driven document that gives investors access to the information that matters most.
However, this does raise a question – what do investors and creditors actually need to see to make decisions?
The proposed changes to the strategic report mean the baseline pages (business model, strategy, performance, resources and principal risks) must tell a clear value-creation story whilst integrating the salient issues that can have a direct impact on financial performance, value drivers, or the business’ risk profile.
As such, the paper shouldn’t be interpreted as a license to stop reporting on specific topics or exclude information contained on pages no longer explicitly required, such as KPIs, market trends or S.172 statements. Instead, the content usually contained on these pages can be streamlined and incorporated within the baseline pages of the strategic, helping to frame the narrative around the information most material to performance or operations.
For example, a mining company which has large dependencies on natural resources as well as responsibilities toward the communities in which it operates, the environment and many more ESG considerations besides; would subsequently still be expected to report across all these topics as in previous years. This is provided these dependencies continue to prove financially material or decision-useful to investors and creditors, which they likely will.
Indeed, though KPIs and market trends are no longer explicitly required, as companies look to explain their story, in a decision-useful way, companies should look to illustrate how their strategy, business model and risk management approaches have evolved and adapted around external trends, supported by financial and non-financial KPIs.
Done well, the streamlining of the strategic report as set out in the consultation paper represents a significant opportunity to further emphasize the strength of the company’s investment case as well as ‘right to win’ within the sector – i.e. decision useful information.
The impact on sustainability disclosures
Though not focused on sustainability reporting, the paper does bear significant ramifications for the treatment of sustainability information within future reporting.
Sustainability disclosures are arguably the clearest illustration as to where overlapping requirements reduce content to box-tick exercises that add unnecessary length to reports, thereby diluting impact.
The proposed freedom for companies to use their judgement in moving away from a disclosing on broad range of topics, and instead focus on the financially material topics2, represents a clear step in the right direction on the journey toward simplifying and unifying sustainability disclosures around what actually effects the business model. Thereby bringing sustainability disclosures in line with the core messages and themes set out in the strategic report.
In other words, this pivot will help sustainability disclosures to move from being seen as an add-on requirement to an integral part of the companies’ story.
Having said that, the future of the application of regulations such as the UK SRS, climate-related disclosures are being examined independently of the consultation, and as such, complete guidance has not yet been given.
To sum up
I believe the proposed reforms represent a strong step in the right direction toward simplifying corporate reporting burdens whilst also giving companies the flexibility to tell their story in a more concise, compelling manner – encouraging both understanding and engagement.
There is of course more to do and the paper has a long way to go before it becomes actionable. However, leveraging the annual report to more powerfully impact key stakeholder groups is something that may prove pivotal for many entities during such a volatile economic and political landscape.
If you would like to hear more about what the consultation involves and what it may mean for your future reporting requirements we would be delighted to speak with you.
1. The FRC defines the conceptual boundaries of materiality stating that an omission or misstatement is material if it could reasonably influence the economic decisions of primary users (like shareholders).
2. According to the IFRS definition of materiality whereby an omission or misstatement could reasonably influence the decisions of primary users.