The Financial Reporting Council (FRC) is seeking views on plans to take a more agile, flexible approach to corporate reporting, based on a principles-based framework, to ensure information better meets the needs of investors and others
The regulator has published a discussion paper outlining its proposals which it now wants to test with stakeholders in order to stimulate the conversation about what the future of corporate reporting should look like.
The paper acknowledges a common criticism that annual reports are too long, and information difficult to access. It also points out that with companies and society at large facing significant challenges, heightened by the Covid-19 pandemic, there is greater interest than ever in companies’ wider actions and the reporting that supports these.
The FRC’s proposals include unbundling the existing purpose, content, and intended audiences of the current annual report by moving to a network of interconnected reports.
The reporting network would be centred around a stakeholder-neutral ‘business report’ designed to facilitate better communication with a range of users.
There would be two other mandatory elements - the full financial statements and a new public interest report, focused on how the business interacts with the ecosystem in which it sits.
The business report would provide information that enables users to understand how the company creates long-term value in accordance with its stated purpose. The FRC says it envisages this being similar to a concise strategic report, including financial and non-financial information.
The reporting network would include a series of additional ‘network reports’ sitting alongside the business report. They would be accessible on a standalone basis and could be a mixture of ‘mandatory’ and ‘voluntary’ reports.
The network reports would cover additional detail for the business report; information required for a specific purpose; standing data; and other periodic reports provided at a different time frame.
The discussion document states: ‘We believe that the objective of an individual network report should drive its content.
‘This is a move away from the distinction between different user groups and their needs.
‘Our evidence suggests that shareholder and other stakeholder expectations converge on many issues and that all users’ needs are best served by structuring reporting around the purposes for which they seek information from a company.’
The new public interest report would be a broader report akin to the current sustainability report but with a greater degree of rigour.
It would identify the key stakeholders, their relationship with the company and how the company interacts with them. Foreach area of stakeholder relationship it would provide metrics relating to external outcomes and analysis of the company’s policies, risks and mitigation in that area.
It would also be the place for companies to incorporate existing mandatory reports such as gender pay gap reporting, supplier payment and modern slavery with a view to bringing together all related information in one place.
There would be a new common set of principles that applies to all types of corporate reporting, with the aim of establishing coherence across all company reporting without stifling the ability to respond to different circumstances.
The discussion document states: ‘We propose four key attributes which apply to the system as a whole–accessibility, connectivity, consistency and transparency.
‘In addition, we include content communication principles that apply at an individual report level to provide guidance on how reports should be written so that they communicate effectively.’
In addition, the new approach would encourage companies to embrace the opportunities available through technology to improve the accessibility of corporate reporting; and move to a model that enables reporting that is flexible and responsive to changing demands and circumstances.
The FRC says the proposals are consistent with the themes in the independent Kingman and Brydon reviews.
Mark Babington, FRC executive director of regulatory standards, said: ‘As the UK’s corporate reporting framework has evolved, annual reports have become a vehicle of convenience for ever-more information, however, this has undermined their purpose and usability.
‘The future of corporate reporting discussion paper proposes a more agile approach that is responsive to the needs of users of accounts.
‘To build trust in business we need a modern corporate reporting system that is transparent, flexible and puts users of corporate reporting at its heart. We look forward to hearing views from our stakeholders.’