FRC welcomes non-financial reporting review

Published: 22 March 2024

6 minute read

The government has committed to bringing forward legislation following its review of non-financial reporting requirements for UK companies, which aims to simplify the reporting framework as part of its Smarter Regulation agenda. The FRC has been closely involved in this review and in this In-conversation, Kate O'Neill sits down with our Director of Accounting and Reporting Policy, Jenny Carter and Elisa Noble, a Senior Project Director in the Accounting and Reporting Policy team to discuss the announcement and what it means for companies' reporting.

You can also listen on Apple Podcasts and Spotify.

Transcript

0:07

Hello there and welcome to another FRC in conversation. My name is Kate O'Neill. I'm the Director of Stakeholder Engagement and Corporate Affairs here at the FRC. And today I'm joined by Jenny Carter, the Director of Accounting and Reporting Policy, and Elisa Noble, the Senior Project Director in the Accounting and reporting team. Lisa and Jenny, this week there's been two key statements by the government, one by the Prime Minister and the other by Minister Hollinrake of the Department of Business and Trade.

0:37
And summarising wildly it relates to non-financial reporting for companies. Jenny, starting with you, what's the purpose of this week's announcements and why is non-financial reporting such a big issue in UK corporate life? Thanks Kate. So non-financial reporting provides additional information to users of financial statements about the company. And over the last few years, we've seen quite a lot of growth in non-financial reporting and it provides useful information. But that growth in requirements has made it a lot more complicated a landscape. And so there's been lots of calls to streamline

1:15
some of that and to better take account of the relevant sizes of different companies and to have a clearer framework. So that's what the government's trying to do to streamline that framework and also thinking about entity sizes and what works best for which entity, right. And we'll come back to that in a minute. Jenny, Elisa, what's been the FRC's role in this? Because it's announced by the government, but the FRC has been closely working with the department on this topic for some time. Yes, that's right, Kate. We have been supporting the department with the review with an interest in promoting high quality reporting across the annual report.

1:53
And because we set guidance on some of these areas, we've been able to help the department in reviewing the existing framework, look at any opportunities for simplification

2:04
and and improvements. We've also been involved in the outreach and stakeholder engagement where we've been able to help bring a wide range of views for the government to consider. Jenny and Elisa, we hear a lot on a lot of platforms that the annual report and accounts have become too long. What purpose are they serving? I mean they're, Lisa brought up, you know, high quality reporting. It can't just be about financial reporting, can it, Jenny, I mean there's too many other aspects of company life that stakeholders are interested in. Yes, absolutely. And that, of course, is what has driven the growth in requirements in recent years.

2:42
But I think what the idea is to make sure that's focused and the right information is being provided by the right companies and considering different thresholds at which different reporting comes into play. And do you mean by that, if you're a small company with, I don't know, 100 employees, you shouldn't have to report at the same level as a company, for example, that employs thousands of employees or is in a different sector? Yes, absolutely. We think there should be a number of clear thresholds and this is what the government's been changing some of these thresholds and increasing them to reflect inflation and also a rebasing a little bit

3:20
around where they think those thresholds should be. You know businesses grow, you've got micro entities, small companies, medium sized, large and then there are some requirements that apply to larger companies still and having those clear categories and then tailoring the requirements to fit and that includes both the financial requirements and also the non-financial requirements. But Lisa, with the non-financial requirements, does this mean that companies now on this week's announcements can pick and choose what they're going to report on or is it really just driven by size and thresholds? As Jennies reference just now,

3:57
the announcements this week focused on removing certain specific disclosure requirements, mainly in the directors report and the directors remuneration report. These were items that were considered to be perhaps duplicative or slightly out of date or less useful for which there was clear consensus from stakeholders that these are no longer needed. So those will be helpful things to remove from the reporting framework, helping people to concentrate on more relevant items.

4:28
And what do you think about the whole idea of using information better, Cross referencing? Using it in a multiple way rather than repetitive or just regurgitating the same information over and over? Jenny

4:43
Yes, I suppose it's better if there's just one clear location for a piece of information. But otherwise, companies should think carefully about how they're presenting information so it's clear and it isn't repetitive. And it's easier for users of that information to find the bits they need and to focus on the bits that matter to them. Now, the government said today, this is the way that they're going to look at the thresholds. They did mention they're going to lay secondary legislation over the summer. What's next for companies? I mean, do they have to start reporting depending on their thresholds and size, differently immediately or is there some date in mind that this will apply?

5:20
So the legislation needs to be finalised. The statement suggested that secondary legislation might be laid this summer. It will then be effective, we understand potentially from the next commencement date, which would be 1st of October later this year. Companies will need to look at any specific transitional provisions that are included in the regulations to work out whether and when they would perhaps fall into a different size category to qualify for any simplifications in reporting. For items that are removing disclosure requirements from say the directors report, those would apply

5:58
to financial years beginning on or after the effective date that is included in those regulations. So really people have time, Jenny, to prepare for this change. What they do, remove certain information that they've been reporting on and streamline it, but they've got a period of time to do this in.

6:15
Yes, absolutely. So if you're in the middle of preparing accounts and annual reports, there's no change until the legislation has been made. But people, particularly those that are moving between thresholds, could start to familiarise with the requirements of a different threshold.

6:32
So what's next for the FRC and all of this? I mean, are we going to continue to work with the Department for Business and Trade on the next stage of the legislation? Are we going to continue with some consultations or stakeholder engagement? Yes, we'll continue to work with the Department for Business and Trade. I think this announces the first initial phase of this work and we will continue to work with them as they progress with this project.

6:56
Elisa, what would you think the reaction of most smaller companies in the UK on receiving this news? Do you think it will be universally applauded and welcomed?

7:07
I think it will be welcomed by many companies. But of course, companies will have to think of their own circumstances in deciding whether or not they may want to take up all of the available options that they may newly qualify for, right. So in a way, you're both telling me great kickoff point this week, more legislation to await and I guess we'll be taking an interest in what it actually says. And also, I guess there will be people in the stakeholder university of the FRC who will want some idea from us on either guidance or direction on how to approach this new reporting threshold. I mean, will we be issuing

7:44
guidance, Jenny, We will be updating some of our materials to reflect the new requirements. So yes, that will be coming out and we'll bear in mind where we could provide additional guidance to companies. But I guess we're very conscious of people treating guidance as the title requires, the least of which is guidance, not more rules, not a regulation, but something that we hope gives people a toolkit to plan their reporting around.

8:09
Yes, that's right. And by removing some of the more prescriptive older requirements from the Companies Act, that should hopefully leave more room for companies to focus on applying materiality concepts to other aspects of reporting such as strategic reports. And I think that's a really important thing to take away from this podcast, is reporting should be about materiality and it should be about material, both risks and opportunities. I mean, would you both agree with that? Yes, definitely. And as we've said, removing some of these requirements that are a bit outdated or duplicative does mean more focus can be put on the reporting

8:48
that's providing some of the key messages. And so and Lisa, in this week's announcement, I guess an area that people may be particularly focused on is the fact under these new thresholds, there are some companies whose requirement for an auditor will be changed. Yes, that's right, Kate. The rules for the availability of the audit exemption for companies is linked to the small companies size threshold in the Companies Act. So companies that qualify to be small under the new thresholds may want to give some thought to whether or not they would like to take advantage of that option or whether they would like to continue to have an audit.

9:26
And I guess that will be an area for companies that are perhaps less complex, are in markets that are less complicated. But it will be for the companies to make their own decision on that. Is that correct, Jenny? Yes, absolutely. The exemption will be available for those that meet the criteria. But companies will need to decide for themselves whether to take advantage of it. There may be various factors that they take into account. Well, it sounds like a lot of interesting news for smaller companies to consider as they prepare for future reporting and in some cases, a different approach to auditing. But Elisa and Jenny, thank you for

10:03
really bring to life not just what's been announced this week, but what has been the FRC's role to date and what we'll be continuing to work with the government on as it approaches laying the secondary legislation. And in turn will look to what guidance and examples we will be expecting as companies adapt to this. So we'll definitely have you back as we progress towards the secondary legislation. Thank you for your time today. Thank you. Thank you.