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The future of corporate reporting: Discussion paper published by the FRC

  • United Kingdom
  • Corporate
  • Financial services disputes and investigations

20-10-2020

The Financial Reporting Council (FRC) has published a discussion paper which sets out a number of proposals for the future of corporate reporting. The discussion paper is part of a wider review of financial reporting and audit following reviews such as the independent review of the FRC by Sir John Kingman and the independent review of the effectiveness of audit by Sir Donald Brydon. One of the objectives of the FRC’s proposed new model for financial reporting set out in the discussion paper is to establish a reporting framework consistent with the recommendations of the Kingman and Brydon recommendations.

The FRC believes that, in response to increased demands, the annual report has become a document that is confused about its intended audience and purpose. Instead, the FRC proposes a network of interconnected reports centred around a Business Report to ‘unbundle’ existing reporting to create a series of interconnected disclosures and reports, each which has a clearly defined communication objective.

Whilst the discussion paper goes into a considerable amount of detail on what the FRC proposes the future of corporate reporting will look like, the key elements of the FRC’s proposals are discussed below. The paper sets out the FRC’s initial proposals, and stakeholders are invited to comment.

Reporting network

The FRC proposes a reporting network structured around a Business Report, which would be stakeholder-neutral. The Business Report would provide information that enables users to understand how the company creates long-term value in accordance with its stated purpose. It would be based on the Strategic Report, and would include both financial and non-financial information, and should:

  • Focus on matters that are of strategic importance to the company.
  • Provide the board’s view of the development, performance, position, cash flows and future prospects of the company.
  • Have a forward-looking orientation, whilst still providing historical information.

There would be a series of additional ‘network reports’ which sit alongside the Business Report, consisting of both mandatory and voluntary reports. The FRC proposes that in addition to the Business Report, there would also be as a minimum the Financial Statements and a new Public Interest Report, which is commented on further below.

Framework for corporate reporting

The FRC’s multi-report model is intended to be:

  • Objective driven, taking account of the different communication objectives which stakeholders have when considering corporate reporting.
  • Communication focussed. The proposals are intended to emphasise the role of reporting as effective communication.
  • Based on a common set of principles that would apply across the network of reports.

Other matters covered

The discussion paper also comments on the following areas:

Materiality – this will be judged by reference to the communication objective of the specific report, rather than a single definition of materiality that applies across all the reports.

Content – a survey conducted by the FRC of its stakeholders highlighted that reporting on financial performance is, unsurprisingly, still paramount and the content elements in the strategic report are also considered very important.

Non-financial reporting – the FRC supports calls for a single set of global standards to increase the comparability of non-financial information. The FRC envisages the introduction of a Public Interest Report. This is in part a response to the growing importance of non-financial reporting, and the FRC believes that some of the current challenges around non-financial reporting can be overcome by setting regulatory standards for non-financial reporting. The FRC believes that the new standalone Public Interest Report will enhance accountability in this area.

Technology – a future model of corporate reporting will improve the accessibility of information for users and will focus on electronic communication.

Proportionality – although the FRC’s proposed model of a reporting network was developed with public interest entities (PIEs)[1] in mind, the FRC believes that the model can be applied by entities beyond this group by considering the objective of each report, and its relevance for entities of different sizes.

Next steps

The FRC has requested comments on the discussion paper by 5 February 2021.

Comment

The FRC considers that as a system for corporate reporting underpins audit, it is the right time to discuss what the future of corporate reporting should look like. Fully implementing the FRC’s proposals set out in this discussion paper would require regulatory and legislative change so is unlikely to be achieved in the short-term, although the FRC believes that many of the aspects of its proposals are within the spirit of encouraging improvements to the quality of reporting and can be achieved within the existing framework.

As the FRC highlights, the discussion paper explores a number of areas that are linked to the proposals for audit reform in the Brydon Review. The timing for taking forward the recommendations set out in the Brydon review remains uncertain. The FRC is bringing forward a number of initiatives with major accountancy firms on a voluntary basis but many of the significant recommendations require legislation. Any new model of corporate reporting will require consideration of the role auditing has to play in providing assurance on the information being reported on.

Useful links

A Matter of Principles – The Future of Corporate Reporting (FRC Discussion Paper, October 2020)

FRC press release

 

[1]                 PIEs currently include UK companies with equity or debt admitted to trading on a regulated market (ie the London Stock Exchange Main Market but not AIM) and credit institutions and insurance undertakings.