FRC publishes FAQs on non-financial reporting

The Financial Reporting Council has published Frequently Asked Questions to assist companies in complying with new requirements to disclose nonfinancial information in the strategic report.

The FAQs are intended to serve as a guide in the interim period whilst the FRC finalises its guidance on the strategic report. The FRC plans to publish this guidance after the Government has published legislative changes in respect of reporting on Section 172 Companies Act 2006 in 2018.

Key points covered by the FAQs are as follows:

• The new non-financial reporting disclosures do not have to be a discrete statement within the strategic report or a separate statement.
• Disclosures are only required where material. When determining whether information is material, a qualitative assessment may be more important than quantitative factors. Companies should consider short and medium-term effects and whether the fact or circumstance could affect the ability of the company to generate or preserve value in the long term.
• The most significant changes in disclosures are reporting on the impact of the company’s activities, disclosing information relating to anti-bribery and corruption, disclosing business relationships, 6 UK Corporate Update products and services likely to cause adverse impacts and disclosures regarding policies and due diligence.
• The board should consider the impact of the company’s activities on the five stakeholder matters noted in the legislation and then report on aspects that are material to the long-term success of the company. The FRC encourages companies to give particular focus to impact in respect of disclosures relating to the business model, policies, the principal risks and the Key Performance Indicators of the business. This may also result in the inclusion of KPIs which measure impact.
• Descriptions of policies in relation to the stakeholder matters should be clear, concise and proportionate to the risks to the company and the potential impact of its activities. If no policy is disclosed, there must be a clear and reasoned explanation as to why the company does not pursue a policy in that area.
• Disclosures of due diligence undertaken in pursuit of the policies should explain the steps taken by the company to ensure the policies are adhered to and the outcome of that due diligence. The FRC encourages companies to ensure that their disclosures are clear and concise and proportionate to the underlying risks.
• In the FRC’s view, the existence of principal risks in relation to stakeholder matters that the company poses to the outside world should already have been considered as part of the risks facing the company because they will affect reputation. The FRC anticipates that the introduction of the requirement to provide information on the impact of the company’s activities will help boards to think more broadly about the effects that those impacts could have on the longterm success of the company and that this broader thinking could result in the identification of more risks.
• Companies are also required to look beyond their own operations and consider risks arising from business relationships, products and services in relation to the stakeholder matters. If these risks are principal risks, or contribute to principal risks, then companies should describe the relevant business relationships, products and services.
• The auditor is required to read the whole of the strategic report, including the non-financial information, and state in the auditor’s report whether the information given in the strategic report is consistent with the financial statements and whether the strategic report has been prepared in accordance with applicable legal requirements. The auditor will also need to report on whether it has identified any material misstatements in the strategic report.
The FRC’s FAQs can be found here.