Financial Reporting Brief     

March 2019

This month’s article 'Reporting on Success – Getting the Balance Right?' comments on the need for clear and balanced strategic reporting and appropriate disclosure and explanation of performance metrics.

Reporting on Success - Getting the Balance Right?

A primary objective of standard setters, is to promote transparency and integrity in business.

Management commentary provides users with historical explanations of the amounts presented in the financial statements, specifically the entity's financial position, financial performance and cash flows. It also provides commentary on an entity's prospects and other information not presented in the financial statements. Management commentary also serves as a basis for understanding management's objectives and its strategies for achieving those objectives. The objective of the IASB’s Practice Statement ‘Management Commentary’ is to provide support and guidance.

In the UK, this aspect of reporting may be seen as being at a more advanced level with the Strategic Report being a  legislative requirement for UK listed companies. While Ireland does not quite have equivalent legislation, the combined impact of IFRS requirements and Irish legislative provisions mean that the strategic report is very relevant for Irish listed companies and other large organisations. The principles and content requirements being applied substantially help towards providing the platform for entities to inform their investors and other stakeholders on performance and management stewardship.

Developments in the UK in 2018, the Companies (Miscellaneous Reporting) Regulations 2018 have extended, requirements of Section 172 to all large companies, private as well as public. Similar requirements apply to corporate governance arrangements. Comments and observations on the Regulations are here.

The Strategic Report
The purpose of the Strategic Report is to provide information for shareholders and help them to assess how the directors have performed their duty under Section 172 of the UK Companies Act 2006, the key objective of which is to promote the success of the company. In doing so, the company would have regard to a series of factors listed in the section, which refer to the promotion of economic, social and governance factors, taking into account other stakeholders.

The Strategic Report should reflect the Board’s view of the company and provide context for the related financial statements. The Report should be based on the fundamentals of:

  • Fair, balanced and understandable
  • Clear, concise and comprehensive
  • Forward-looking orientation
  • Entity-specific information
  • Link related information in different parts of the annual report
  • Remain relevant to the current period

The content of the Strategic Report should include

  • A description of the entity’s strategy, objectives and business model
  • An explanation of the trends and factors affecting the entity
  • A description of its principal risks and uncertainties
  • An analysis of the development and performance of the business, including key performance indicators
  • Disclosures on gender diversity
  • Disclosures on ESG factors including the environment, employees, social, community, human rights, and anti-corruption and ant-bribery matters when material.

Progress with Strategic Report

The implementation of the EU Directive on disclosure of non-financial and diversity information has led to the FRC publishing amendments to its Guidance on the Strategic Report, originally published in 2014.

Some of the main developments to the Guidance, as previously published are:

  • to consider broader non-financial matters that may impact company performance over the longer term – the FRC has amended the Guidance to encourage best practice reporting
  • to consider that relevant non-financial information should be integrated with financial information in the Strategic Report
  • to strengthen the link between the purpose of the Strategic Report and section 172
  • to clarify that the primary audience remains the shareholders but that directors are encouraged to consider how they have had regard to the interests of wider stakeholder groups

The Guidance continues to build on promoting the overall objective of the Strategic Report, which is to provide a company’s shareholders with a holistic and meaningful overall picture of a company.

Insights into Strategic Report
The Financial Reporting Lab (the Lab), which is part of the FRC, has produced in recent years a number of reports related to the Strategic Report. These reports began in 2016 with a rethink on Clear and Concise reporting, followed by a report on how best to describe Dividend Policy and Practice.

In more recent times, reports have been issued on Business Model Reporting and Risk & Viability Reporting, and in June 2018 the Lab released a Paper which concerned an Investor Perspective on the Reporting of Performance Metrics.

The reporting of performance metrics continues to be of significant interest to investors. A view of performance is important for a number of reasons with, generally, investors most often seeking to understand how a company has performed in order to assess its future prospects. Investors are also concerned about the quality and sustainability of reported performance.

The paper published by the Lab in June 2018 ‘Reporting of Performance Metrics’ considers the investors’ use of performance metrics and how best they can be served by reporting entities. The principles of what investors seek in these disclosures include:

  • Aligned to strategy – provide insight into the company’s business model, strategy and overall position
  • Transparency – clear basis and assumptions underlying calculations with reconciliations from GAAP to non-GAAP metrics
  • In context – show how a company has performed with explanations where this is different from what it is trying to achieve, either good or bad
  • Reliable – help investors gain confidence on the process of developing, monitoring and reporting reliable metrics, and whether there are appropriate controls in place
  • Consistent – calculated consistently year-on-year and also presented consistently within different parts of the report

The Lab Paper also presents in each of these areas questions and proposals on how management and their boards should respond to meet investors needs regarding performance metrics.


Enhancement of Strategic Report

Since the Lab paper was published in June, three separate reports have been published which contribute towards responding to the overall issues raised in the June paper. These are:

  • October 2018 – Business Model Reporting : Risk and Viability Reporting – where are we now? 

Investors continue to believe that there is need for more consistent and clearly linked reporting throughout the annual report. Whilst there has been some innovation, many of the changes across the sample reviewed add neither broad understanding nor company specific detail and lack connections to wider information within the annual report.

To assist with enhancing the process, the report includes series of questions for boards and audit committees to improve the extraction of data and reporting of information. These address each of the following areas:

- Business model disclosures

- Principal risks and uncertainties

- Viability statement

- Linkage

  • November 2018 – Performance Metrics – Principles and Practice

This project follows on from that done in October, as above. The Lab takes on board the large amount of regulatory change, both at the EU and the UK levels, and also follows on from the June Lab Paper. The Report takes each of the five Principles enumerated in the June paper and presents proposals on how metrics can be identified and processes can be generated that help to comply with the five principles.

It is clear that performance metrics are essential to questions of value creation and ultimately the business valuation. Performance metrics presented in a fair, balanced and understandable way are key to the communication between the company and the investor.

  • January 2019 – Artificial Intelligence and Corporate Reporting – how does it measure up?

The Lab undertook a survey in 2016 which asked what technologies would be important for the future of corporate reporting. Respondents identified AI as important for the production and consumption of corporate reporting. The report considers the case for AI.

Currently, AI is considered best suited to certain situations and processes where the level of repetition/standardisation and information mean that it is difficult for the human to undertake the task efficiently or effectively. Areas where perhaps AI has the greatest potential include:

  • The efficiency of recording and aggregating transactions, across multiple entities, and then turning that data into an external communication
  • The efficiency and effectiveness of providing internal or external assurance over the resulting communication; and
  • The effectiveness of consuming the information reported by, and about, the company and translating information into insight and ultimately into action

Earlier, in June 2018, the Lab published a Report on Blockchain and the Future of Corporate Reporting.


Annual Report Insights

The Deloitte Annual Report Insights 2018 comments on its survey of FTSE reporting based on a review of the annual reports of 100 listed UK companies. The vast majority of companies evidenced consideration of their business impact on the community and the environment, with most providing information on their fostering of relationships with suppliers. The FRC and investors have indicated that they expect to see directors undertaking an assessment of a company’s prospects, including the resilience of the business model, over a lengthy time period.

The Insights report highlight matters to watch out for, as follows:

  • Review business model disclosure and challenge whether it describes what the company does and identifies who the key stakeholders are
  • Of those key resources, relationships and other off-balance sheet sources of value creation identified in the business model, consider how these are maintained and enhanced. Useful disclosure includes evidence and measurement of maintenance and a description of how this impacts value creation
  • Challenge whether the key stakeholders and the value created for them by the company are being reflected in the strategy
  • Consider how progress against strategy will be measured with clear links to the relevant KPIs



The requirements of Section 172 may specifically relate to UK companies, but its key principle which is to promote the success of the company must surely be seen as a fundamental objective of how all entities should operate.


What's New? Monthly Reporting Pack – February 2019

Irish/UK GAAP & Related Developments

FRC and BEIS publish ‘no deal’ Brexit accounting and audit letters

UK Government approves the Accounts and Reports (Amendment) (EU Exit) Regulations 2018

FRC consults on the reporting of intangibles

Environmental reporting guidelines published

Deloitte comment on FCA Discussion Paper - Climate change and green finance

IFRS & Related Developments

EFRAG and ICAS issue survey on discount rates as applied to pension accounting

Recent sustainability and integrated reporting developments

IASB decides on further potential amendments to IFRS 17

IASB concludes two projects by publishing project summaries

EFRAG early-stage analysis of FICE discussion paper

Accountancy Europe responds to EC expert group report on disclosure of climate-related information

IPSASB issues amendments to keep IPSASs in line with IFRSs

Legal and Regulatory Developments

EC consults on updating the non-binding guidelines on non-financial reporting

European Single Electronic Format (ESEF) factsheet

Business Model Strategy : Guidance for Credit Unions

ESMA Q&As clarify prospectus and transparency rules in case of no-deal Brexit


IFRS in your pocket 2019

IFRS model financial statements 2018 — Appendix 2: Early adoption of IFRS 16 'Leases'

International GAAP Bank — Illustrative disclosures under IFRS 7 as amended by IFRS 9

IFRS on Point

Need to know — FRC proposes amendments to FRS 101 and FRS 102

Cost is king : Deloitte CFO Survey - 2018 Q4

The capitalisation debate: R&D expenditure, disclosure content and quantity, and stakeholder views

Governance in brief — Brexit and viability disclosures - a timely reminder

Newsflash: Independent review into the quality and effectiveness of audit in UK

Newsflash: Achieving effective stewardship in the UK

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