On 1 October 2013 in the UK, Companies Act 2006 (Strategic Report and Directors' Report) Regulations 2013 were enacted, along with the Large and Medium-Sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 and the directors' remuneration provisions of the Enterprise and Regulatory Reform Act 2013. These provisions collectively bring the so-called "Say on Pay" legislation into effect in the UK.
The Companies Act 2006 (Strategic Report and Directors' Report) Regulations 2013 require certain companies to prepare a stand-alone strategic report as part of their annual report. The Financial Reporting Council (FRC) has now published non-binding guidance on the strategic report requirements, which it hopes will act as a catalyst for entities to prepare more concise and relevant narrative reports. The guidance is intended to encourage preparers to consider how the strategic report fits with the annual report as a whole and to enhance the quality of narrative reporting.
The guidance encourages directors to ensure that the information provided in annual reports be more relevant to shareholders. The FRC states that the guidance is framed in the context of the annual report as a whole, but that in practice, an annual report comprises a number of components. The information contained in each of these components has different objectives that should guide preparers to where disclosures could be located. The aim is to promote cohesiveness and enable related information to be linked together.
The overriding objective of the strategic report is to provide information for shareholders that will enable them to assess how the directors have performed their duty to promote the success of the company. The FRC goes on to state that it should reflect the directors’ view of the company and provide context for the related financial statements. In meeting the needs of shareholders, the information in the annual report may also be of interest to other stakeholders. The annual report should not, however, be seen as a replacement for other forms of reporting addressed to other stakeholders. The guidance includes sections on the application of materiality to the strategic report, communication principles and content elements. The guidance recommends that only information that is material to shareholders should be included in the strategic report. Immaterial information should be excluded as it can obscure the key messages and impair understandability.