The Department for Business, Innovation and Skills has published the latest instalment in its narrative reporting proposals. This is a set of draft regulations which will amend the Companies Act and come into force for financial years ending after 1 October 2013. This means that the 2013 December year ends will be among the first who have to implement them.
The Future of Narrative Reporting – what’s new?
BIS’s original proposal to split annual reports into two – a strategic report and an online annual directors’ statement – has been abandoned. The strategic report will be a requirement but annual reports will remain one document, as now.
There will be a legal requirement for quoted companies to include a discussion of:
(a) strategy (amazingly this isn’t currently a Companies Act requirement)
(b) the business model (which is already a requirement under the Corporate Governance Code), and
(c) human rights issues and gender diversity.
Other than that, the changes are limited to a number of technical modifications to the directors’ report, none of which is very interesting.
Who does it affect?
The regulations apply to “quoted companies (those incorporated in the UK and listed on certain UK, EU or US markets)” (source: BIS).
What does this mean in practice?
First, all the overseas incorporated companies that are listed in London seem to be off the hook. However, they would be well advised to meet these standards if they want to attract investors.
Second, a quoted company is defined as one that is included on the Official List. This excludes AIM listed companies, who are among those who could most do with raising their game when it comes to reporting.
What’s the impact?
For most big companies, the changes are negligible as they’re already reporting on these things.
The impact for smaller companies might be more marked. In particular, it will force those who currently deliver little more than a nicely typeset version of their prelims to do more.
In the short term, the government is running a consultation (until mid November) on the draft regulations.
Then in the new year, the FRC will run a consultation on the style of guidance companies want for implementing the strategic review. This could throw up some new suggestions and provide a benchmark for best practice, in the same way that guidance on OFRs has in the past. In particular, it would be surprising if the guidance doesn’t clarify what is meant by a business model and how it should be disclosed – an area too many companies are struggling with.
Finally, the government intends to introduce its new requirements for reporting directors’ pay at the same time as the narrative reporting changes become law (i.e. October 2013). For many companies, this will be a much more substantial change to reporting practice.
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