Strategic Report Guidance 2022 Financial Reporting Council

Summary

Cover.qxd 5/24/2022 7:09 AM Page 1
Guidance
Accounting and Reporting
Financial Reporting Council
June 2022
Guidance on the Strategic Report
Financial Reporting Council
8th Floor
125 London Wall
London
EC2Y 5AS
+44 (0)20 7492 2300
www.frc.org.uk
Cover.qxd 5/17/2022 9:31 AM Page 2
The FRC’s purpose is to serve the public interest by setting high
standards of corporate governance, reporting and audit and by holding
to account those responsible for delivering them. The FRC sets the
UK Corporate Governance and Stewardship Codes and UK standards
for accounting and actuarial work; monitors and takes action to promote
the quality of corporate reporting; and operates independent enforcement
arrangements for accountants and actuaries. As the Competent Authority
for audit in the UK the FRC sets auditing and ethical standards and
monitors and enforces audit quality

The FRC does not accept any liability to any party for any loss, damage or
costs howsoever arising, whether directly or indirectly, whether in contract,
tort or otherwise from any action or decision taken (or not taken) as a result
of any person relying on or otherwise using this document or arising from
any omission from it

© The Financial Reporting Council Limited 2022
The Financial Reporting Council Limited is a company limited by guarantee

Registered in England number 2486368. Registered Office:
8th Floor, 125 London Wall, London EC2Y 5AS
Financial Reporting Council
June 2022
Guidance on the Strategic Report
Contents
Page
Guidance on the Strategic Report
Summary 3
1 Objectives and how to use this Guidance 6
2 Scope 8
3 The annual report 11
4 The strategic report: purpose 17
5 The strategic report: materiality 19
6 The strategic report: communication principles 22
7 The strategic report: content elements 25
7A The strategic report: content elements for entities that are not PIEs or are 27
PIEs with 500 or fewer employees
7B The strategic report: content elements for entities that are PIEs with more 42
than 500 employees
7C The strategic report: climate-related financial disclosures 59
8 The strategic report: content elements for the section 172 reporting 61
9 The strategic report with supplementary material 67
Appendices
I Glossary 69
II The Companies Act 2006 strategic report disclosure requirements 73
III The Companies Act 2006 directors’ report disclosure requirements 88
IV(a) The Companies Act 2006 strategic report disclosure requirements as they
apply to LLPs 98
IV(b) The Companies Act 2006 energy and carbon report disclosure requirements 106
for large LLPs
Basis for Conclusions 109
Financial Reporting Council 1
2 Guidance on the Strategic Report (June 2022)
Summary
(i) The Financial Reporting Council’s (FRC’s) purpose is to serve the public interest by
setting high standards of corporate governance, reporting and audit and by holding to
account those responsible for delivering them. The FRC believes that encouraging
entities1 to prepare a high quality strategic report – which provides shareholders with a
holistic and meaningful picture of an entity’s business model, strategy, development,
performance, position and future prospects – is a key part of achieving this purpose

(ii) The FRC believes the strategic report should be clear and concise and result in fair,
balanced and understandable reporting. The Guidance on the Strategic Report (the
Guidance) is therefore intended to encourage preparers to consider how the strategic
report fits within the annual report as a whole with a view to improving the overall quality of
corporate reporting

(iii) This Guidance relates to the Companies Act 2006 requirement to prepare a strategic
report, which was brought in through the following regulations:
(a) The Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013
(SI 2013/1970);
(b) The Companies, Partnerships and Groups (Accounts and Non-Financial Reporting)
Regulations 2016 (SI 2016/1245);
(c) The Companies (Miscellaneous Reporting) Regulations 2018 (SI 2018/860);
(d) The Statutory Auditors Regulations 2017 (SI 2017/1164); and
(e) The Companies (Strategic Report) (Climate-related Financial Disclosure)
Regulations 2022 (SI 2022/31)

(iv) It is also relevant to limited liability partnerships (LLPs) that are required to prepare a
strategic report in accordance with the Limited Liability Partnerships (Accounts and Audit)
(Application of Companies Act 2006) Regulations 2008 (SI 2008/1911), which were
amended by The Limited Liability Partnerships (Climate-related Financial Disclosure)
Regulations 2022 (SI 2022/46)

Aims of the Guidance
(v) The FRC has developed guidance that aims to be:
(a) principles-based;
(b) mindful of recent developments in narrative reporting best practice; and
(c) aligned with the requirements in the UK Corporate Governance Code

Overview
(vi) The Guidance serves as a best practice statement and, as such, has persuasive rather
than mandatory force. One of its objectives is to set out high-level principles that enable
entities to ‘tell their story’

(vii) The Guidance is for directors (or members in the case of an LLP) and is intended to serve
as best practice for all entities preparing strategic reports

1
This Guidance uses the broader term ‘entity’ unless the term ‘company’ is more appropriate in a specific context

Financial Reporting Council 3
The annual report
(viii) The Guidance encourages entities to provide information in annual reports that is relevant
to shareholders. With that in mind, the Guidance is framed in the context of the annual
report as a whole. In practice, an annual report comprises a number of components. The
information contained in each of these components has different objectives that should
guide preparers to where disclosures could be located. The aim is to promote
cohesiveness and enable related information to be linked together

(ix) In meeting the needs of shareholders, the information in the annual report may also be of
interest to other stakeholders. The annual report should not, however, be seen as a
replacement for other forms of reporting addressed to other stakeholders

(x) Placement is a key theme in the Guidance with a view to providing entities with the
building blocks to be innovative in the location of information whilst working within the
regulatory framework. The aims are to ensure that important information is prominent and
improve the accessibility of information. The Guidance recommends that information that
is not relevant for shareholders should be provided outside the annual report where this is
permitted by law or regulation

The strategic report
(xi) 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, to promote
the success of the company2 and, in doing so, had regard to the matters set out in that
section. This includes considering the interests of other stakeholders which will have an
impact on the long-term success of the entity

(xii) The strategic report should reflect the board’s view of the company and provide context for
the related financial statements

(xiii) The Guidance recommends that information that is material to shareholders should be
included in the strategic report. Immaterial information should be excluded as it can
obscure the key messages and impair understandability

(xiv) The communication principles suggest that strategic reports should have the following
characteristics – be fair, balanced and understandable; be concise; have forward-looking
orientation; include entity specific information; and link related information in different parts
of the annual report. There are also principles which recommend that the structure,
presentation and content of the strategic report be reviewed to ensure that information
remains relevant to the current period. The communication principles are intended to
emphasise that the strategic report is a medium of communication between a company’s
board and its shareholders

(xv) The content elements for the strategic report set out in the Guidance are derived from the
Companies Act 2006, and include a description of the entity’s strategy, objectives and
business model. In addition, the strategic report must include an explanation of the main
trends and factors affecting the entity; a description of its principal risks and uncertainties;
and an analysis of the development and performance of the business; including key
performance indicators. Entities must disclose information about the environment,
employees, social, community, human rights, and anti-corruption and anti-bribery
matters when material. There is also a requirement for certain entities to include
climate-related financial disclosures and disclosures on gender diversity

2
Section 172 of the Companies Act 2006

4 Guidance on the Strategic Report (June 2022)
This edition of the Guidance
(xvi) This edition of the Guidance issued in June 2022 updates the edition of the Guidance
issued in June 2018 for the following:
(a) the changes introduced by The Companies (Strategic Report) (Climate-related
Financial Disclosure) Regulations 2022 (SI 2022/31) and The Limited Liability
Partnerships (Climate-related Financial Disclosure) Regulations 2022 (SI 2022/46)
which require certain entities to make climate-related financial disclosures;
(b) amendments to The Limited Liability Partnerships (Accounts and Audit) (Application
of Companies Act 2006) Regulations 2008 (SI 2008/1911) introduced by The
Statutory Auditors Regulations 2017 (SI 2017/1164), which requires a traded LLP or
banking LLP to prepare a strategic report;
(c) amendments to The Large and Medium-Sized Companies and Groups (Accounts
and Reports) Regulations 2008 (SI 2008/410) and The Limited Liability Partnerships
(Accounts and Audit) (Application of Companies Act 2006) Regulations 2008
(SI 2008/1911), which implement the government’s policy on Streamlined Energy
and Carbon Reporting (SECR). The SECR amendments were made to the
appendices that relate to the directors’ report disclosure requirements;
(d) amendments to the definition of a public interest entity (PIE) to align it with the
existing legislation; and
(e) some minor typographical or presentational corrections

(xvii)The effective date of the requirements that this Guidance relates to vary. The Guidance is
intended to serve as best practice when entities are applying the relevant legal
requirements

Financial Reporting Council 5
Section 1
Objectives and how to use this Guidance
1.1 The objectives of the Guidance on the Strategic Report (the Guidance) are to:
(a) ensure that relevant information that meets the needs of shareholders is presented
in the strategic report;
(b) encourage entities to experiment and be innovative in the drafting of their annual
reports, presenting narrative information in a way that enables them to best ‘tell
their story’ while remaining within the regulatory framework; and
(c) promote greater cohesiveness in the annual report through improved linkage
between information within the strategic report and in the rest of the annual report

1.2 This Guidance is structured as follows:
Boxed text in bold type describes the main principles or, in Sections 7, 7A, 7B, 7C
and 8, content elements that form the basis of this Guidance. References to
legislative or other regulatory requirements are given in the footnotes to this
Guidance

1.3 The bold text is followed by further supporting guidance explaining how the main
principles and content elements might be applied. The supporting guidance is then
supplemented by highlighted text as follows:
Summary of legal requirements
Where the law or regulation underpinning the Guidance requires explanation or
highlighting, this information is included in a ‘summary of legal requirements’. This
information is intended to summarise important aspects of the legal requirements; it is
not intended to be a comprehensive analysis of the law

Example
Where a specific paragraph warrants further application guidance, practical examples
are included. These examples are intended to be illustrative only and may not be
appropriate for all entities

Linkage example
One of the main objectives of this Guidance is to encourage the preparation of more
cohesive annual reports. The ‘linkage examples’ illustrate ways in which
interdependencies or relationships between strategic report content elements and
disclosures placed elsewhere in the annual report might be highlighted or presented

The linkage examples are not intended to be a comprehensive list of all possible
linkages in the strategic report, nor are they intended to be a template for the
presentation of information

6 Guidance on the Strategic Report (June 2022)
1.4 This Guidance uses the following terms to distinguish between mandatory disclosure
requirements and best practice guidance:
(a) ‘Must’ is used to refer to mandatory legislative or other regulatory requirements for
entities within their scope. Such requirements might be mandatory only when
resulting disclosures would be material;
(b) ‘Should’ is used throughout this document to refer to guidance and recommended
ways of achieving the requirements in legislation; and
(c) ‘Could’ is generally used when preparers may wish to consider alternative forms of
presentation of information, or when providing examples of disclosures which may
be applicable

1.5 Terms defined in the Glossary (Appendix I) are in bold type the first time they appear in
each section

1.6 Clarifications of the Act’s requirements in respect of the strategic report are provided in
a letter from the Department for Business, Innovation and Skills (BIS) (now the
Department for Business, Energy & Industrial Strategy (BEIS)) that can be found on the
FRC’s website at https://www.frc.org.uk/guidance-on-the-strategic-report

Financial Reporting Council 7
Section 2
Scope
2.1 This Guidance is non-mandatory and encourages best practice for all entities3 preparing
a strategic report

2.2 The Act sets out different levels of reporting depending on the type of entity

Summary of legal requirements
Section 414A of the Act requires all companies that are not small4 or micro-entities5 to
prepare a strategic report

For a financial year in which the company is a parent company, and the directors of the
company prepare group accounts, the strategic report must be a group strategic report
relating to the entities included in the consolidation.6
A detailed analysis of the legal requirements in respect of the strategic report, including
information on the application of the statutory requirements to different types of entity, is
set out in Appendix II and Appendix IV(a)

Additionally, section 415 of the Act requires all companies that are not micro-entities7 to
prepare a directors’ report which contains other information specified by the Act and
its associated regulations.8 The extent of disclosure in a directors’ report also varies
depending on the type of company. An analysis of the legal requirements in respect of
the directors’ report is set out in Appendix III and Appendix IV(b) (energy and carbon
report requirements for LLPs)

Both the strategic report and the directors’ report are integral parts of the annual report

Section 4(1)(a) of The Partnerships (Accounts) Regulations 2008 (SI 2008/569)
requires qualifying partnerships to prepare a strategic report. The Limited Liability
Partnerships (Accounts and Audit) (Application of Companies Act 2006) Regulations
2008 (SI 2008/1911) also require a traded limited liability partnership (LLP) or banking
LLP to prepare a strategic report

2.3 As noted above, the extent of disclosure that is required for an entity will vary according
to the type of entity. As a general principle, this Guidance encourages disclosure of
material financial and non-financial information that is necessary for an
understanding of the development, performance, position or future prospects of the
3
This Guidance uses the broader term ‘entity’ unless the term ‘company’ is more appropriate in a specific context

4
Section 414B of the Act. A company or qualifying partnership is entitled to the small companies’ exemption in relation to the
strategic report for the financial year if – (a) it is entitled to prepare accounts for the year in accordance with the small companies’
regime (section 381), or (b) it would be so entitled but for being or having been a member of an ineligible group. The small
companies regime does not apply to any company that is, or was at any time within the financial year to which the accounts
related – a public company, a company that is an authorised insurance company, a banking company, an e-money issuer, a
MiFID investment firm or a UCITS management company, carries on insurance market activity (section 384(1)) or is a scheme
funder of a Master Trust scheme

5
Section 384A of the Act

6
Section 414A(3) of the Act

7
Section 415(1A) of the Act

8
In the case of a medium-sized or large company, The Large and Medium-sized Companies and Groups (Accounts and Reports)
Regulations 2008 (SI 2008/410). In the case of small companies, The Small Companies and Groups (Accounts and Directors’
Reports) Regulations 2008 (SI 2008/409)

8 Guidance on the Strategic Report (June 2022)

Business model. In addition, the strategic report must include an explanation of the main trends and factors affecting the entity; a description of its principal risks and uncertainties; and an analysis of the development and performance of the business; including key performance indicators. Entities must disclose information about the environment,

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Frequently Asked Questions

What is the guidance on the strategic report?

The Guidance on the Strategic Report is set in the context of the annual report as a whole to recognise that the strategic report does not exist in isolation from other aspects of corporate reporting. The Guidance includes communication principles that emphasise the qualities of good corporate reporting.

What does the frcs updated guidance on strategic reporting mean for preparers?

The FRC’s updated guidance is intended to encourage preparers to consider how the strategic report fits within the annual report and to improve the overall quality of corporate reporting, as pressure ramps up on certain companies to disclose more in this area.

How can preparers incorporate new climate related financial disclosures into strategic reports?

New guidance from the FRC helps preparers incorporate new climate-related financial disclosures into their strategic report. The Financial Reporting Council has produced up-to-date guidance on putting together a strategic report that incorporates the requirement to include new climate-related financial disclosures.

What is the revised guidance on non financial reporting?

The revised Guidance incorporates the non-financial reporting Regulations which were effective for financial years beginning on or after 1 January 2017 and the legislative requirements relating to the director’s section 172 duty to promote the success of the company, which are effective for financial years beginning on or after 1 January 2019.