In October, the Department of Business, Innovation and Skills (BIS) published the draft Companies Act (Strategic Report and Directors' Report) Regulations 2013 for consultation.  These set out the details of the new structure for narrative reporting which will affect all companies, but particularly larger companies. 

The consultation is open until 15 November and, if approved, the draft regulations will come into force at the same time as the new remuneration reporting rules and will affect companies with financial years ending after October 2013.

We reported in detail on the proposals for changing the narrative reporting structure set out in BIS's consultation paper on the future of narrative reporting issued in September 2011 (click here for more information).  At that time the proposal was to replace the Companies Act 2006 requirement for a business review and directors' report with a strategic report and an annual directors' statement.

The final proposed position is a little different.  The new regulations replace the requirement for a business review as part of the directors' report with a requirement for directors to prepare a separate strategic report.  Small companies will be exempt from the requirement to produce a strategic report, as they were from the requirement to prepare a business review.

The content requirements for the strategic report largely replicate the requirements for the business review under section 317 of the Companies Act 2006 but for quoted companies (companies listed on the main market in London (but not AIM), officially listed in an EEA state or admitted to dealing on the NYSE or Nasdaq) there will be additional reporting requirements which did not apply in respect of the enhanced business review.

These are:

  • the need to report on the company's strategy and business model.  This mirrors the requirement in the UK Corporate Governance Code, so most quoted companies will already be doing this
  • an explicit requirement to report on human rights issues, as part of the consideration of relevant social and community issues, where this  is necessary for an understanding of  the performance, development or position of the company
  • a breakdown of the gender split, in numbers, of those who are directors, managers (excluding directors) and employees of the company. This implements one of the recommendations of the Davies Report on Women on boards and a number of FTSE 350 companies already disclose this information.

The current business review requirement to disclose persons with whom the company has essential contractual or other arrangements will not be required in the strategic report, as the view is that this is covered in the section which considers principal risks.

The proposal for an Annual Directors' Statement which was set out in detail in the September 2011 consultation paper has been dropped.  The idea behind this was that it would be an online document with a prescribed format with set headings which would allow easier comparability of information between companies.  BIS reports in this consultation paper that in practice it became clear that agreeing the best format for this was difficult and that there were concerns that prescribing an online template might fix the reports in time so that they would be unable to develop with technology.

Another proposal that has been dropped was the requirement for each director of the company to sign the strategic report on the basis that there was almost no support for this and that all the directors have collective responsibility for the annual report in any event.

Summary financial statements replaced by strategic report

Currently companies can ask shareholders if they would like to receive summary financial statements instead of the annual report.  Under the draft regulations a company may send a copy of its strategic report to shareholders instead of summary financial statements.  The consultation paper also states that shareholders who have already elected to receive summary financial statements will automatically receive the strategic report instead, although this is not covered by the draft regulations.  The current consultation paper does not address concerns raised by respondents to the earlier consultation that summary financial statements fulfil an entirely different role to that of the strategic report and should be retained

Consequential amendments to be made to Companies Act 2006

  • references to the directors' report will also mention the strategic report as it is a standalone document
  • the strategic report will have to be filed at Companies House
  • liability for false or misleading statements in reports will extend to the strategic report
  • the auditor's report will need to cover the strategic report
  • the Secretary of State will have the power to make regulations to require overseas companies to produce a strategic report.

Changes to the requirements of the directors' report

The September 2011 consultation paper also proposed certain simplifications to the content of the directors' report.  The draft regulations carry these through and propose the deletion of the requirement for the following disclosures:

  • charitable disclosures in excess of £2000
  • for private companies only, the requirement to disclose details of any acquisition of the company's own shares
  • for large and medium–sized companies only, disclosure of substantial differences between market and balance sheet values of land
  • policy and practice on payment of creditors.

Listing Rules overlap

The September 2011 consultation paper identified areas of overlap between company law and other requirements, particularly the Listing Rules.  BIS concludes in the new consultation paper that in reality there is little scope to change the position under company law as the company law requirements are implementing EU law.

As mentioned above, the consultation period closes on 15 November.  The BIS press release and the consultation paper are available here.