The Association of Chartered Certified Accountants (ACCA) has welcomed the government’s draft regulation on narrative reporting but warned the proposals should ensure a coherent framework for financial reporting.
The draft regulation issued by the Department for Business, Innovation and Skills (BIS) is aimed at increasing transparency by making it easier for shareholders to understand relevant information about companies’ strategy and the risks they face.
The main aim of the regulation is to cut the clutter from reports and remove unnecessary reporting obligations but with companies being expected to report on their strategy, business model and human rights.
Under the proposed regulation companies will be required to produce a more succinct strategic report to replace the current business review.
In a report, A new structure for narrative reporting in the UK, BIS explained the new section 414A of the Companies Act 2006 will introduce the requirements to prepare this strategic report "replacing the business review and putting the strategic information at the front, separated from the director’s report".
Section 414C specifies the additional requirements to report on the company’s performance on environmental, social and community issues. In addition, the strategic report should also disclose the number of women on the board, in senior positions and within the organisation as a whole.
"The [BIS’s] proposals are a step in the right direction but if the report is genuinely strategic orientated there should be no requirements to disclose ad hoc matters which may not be material to an explanation of an individual company’s strategy and performance," ACCA head of technical John Davies told The Accountant.
Davies also said the work undertaken on the subject by bodies such as the UK Financial Reporting Council (FRC) or the International Integrated Reporting Council (IIRC) should be taken into account.
"The FRC has done work to review how the various constituent elements of the annual report can be brought together so as to make it more focused and credible, and the IIRC is developing a joined up approach to reporting which links strategy to other material factors relevant to an understanding of where a company is going."
"We agree with ACCA about the importance of strategic reporting but while we think it is right to specify in law what the report should focus on strategy, introducing legislation to cover how this should be done would be the wrong approach," a BIS spokesperson said.
"We are working closely with the FRC to produce high quality guidance that we hope will aid companies as they have together the strands of their report," the BIS spokesperson added.
The regulations will come into effect in October 2013 and companies whose fiscal year ends after this date will be expected to comply with the new regulations.
Association of Chartered Certified Accountants
Department for Business, Innovation and Skills