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15 January 2018
On August 15 2017 the Financial Reporting Council (FRC) launched a consultation on amendments to its Guidance on the Strategic Report, which encourages businesses to consider a number of issues, including non-financial reporting.
The obligation to provide non-financial reporting comes from the Companies, Partnerships and Groups (Accounts and Non-financial Reporting) Regulations 2016, which implement into UK law the EU Non-financial Reporting Directive. Non-financial reporting is compulsory for companies that are:
A company may be exempt if it qualifies as small or medium, or if it has fewer than 500 employees.
Comments and feedback on the FRC's draft were invited by October 24 2017. The new FRC guidance will remain non-mandatory, but will be intended to encourage best practice.
The guidance was first published in 2014, but is being revised in light of new regulations that came into effect for reporting periods commencing January 1 2017.
The EU Non-financial Reporting Directive states, among other things, that organisations must provide enough information to allow for an understanding of the group's development, performance, position and the impact of its activity relating to environmental, social and employee matters, respect for human rights and anti-corruption and bribery matters.
Guidance on this requirement will be valuable in helping companies to meet a range of diverse and somewhat exacting obligations. Qualifying companies seeking to comply will have to provide a description of the group's policies on the relevant matters, including due diligence, the outcome of policies' implementation of and the assessment of risks in these areas, relevant to the business. Any deficiencies or deviations will require a clear and reasoned explanation.
The FRC has stated that the regulations reflect its plans to improve the effectiveness of Section 172 of the Companies Act 2006. This section requires a director to consider factors including the long-term impact of their decisions, the stakeholders' interests and non-financial matters in upholding their duty to promote the long-term success of the company.
The FRC's proposed amendments demonstrate how the language of long-term value creation is becoming embedded in UK corporate reporting practice. In an environment where investors increasingly assess the quality of corporate reporting as a proxy for the quality of management, the strategic report is likely to become a valuable investment tool.
It also means that certain companies' anti-corruption procedures may come under public scrutiny for the first time. If they wish to maintain their stakeholders' confidence, they will need to be able to point to an adequate compliance programme. Guidance on how the FRC expects this to be done in practice would therefore be helpful, and would need to be closely scrutinised by the affected organisations.
For further information on this topic please contact Kathleen Harris, Sean Curran, Oliver Cooke or Melissa Dames at Arnold & Porter Kaye Scholer LLP by telephone (+44 20 7786 6100) or email (email@example.com, firstname.lastname@example.org, email@example.com or firstname.lastname@example.org). The Arnold & Porter Kaye Scholer LLP website can be accessed at www.apks.com.
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