The strategic report is a Companies Act requirement that can feel like an unnecessary and intrusive burden. Whilst the report is at heart a statutory obligation, it also provides an opportunity to highlight the year’s good news and set the right tone for the remainder of the financial statements.
Background
The purpose of the strategic report is to provide relevant information to shareholders to help them assess how the business, and the directors, have performed in the year.
The report should reflect the directors’ view of the company and it should also provide context for the financial statements that follow.
What are the minimum requirements?
There are five core areas that must be covered in the report:
- Provide an insight into the business model and main strategy and objectives;
- Describe the principal risks and uncertainties that the business faces;
- Provide relevant non-financial information;
- Provide a comprehensive analysis of the performance in the year, including via the use of KPIs; and
- Provide information to enable shareholders to assess how the business, and the directors, have performed.
These areas must all be covered in a fair, balanced and understandable way, and the report as a whole must be consistent with the financial statements overall.
The FRC have also published a useful guide – Guidance on the Strategic Report – that outlines the specific statutory reporting requirements of all companies, and this is available on the FRC website.
Why is it important?
Aside from being a statutory obligation, businesses of geographical or industrial significance usually find that their financial statements are scrutinised by more than just the shareholders.
Competitors and local press outlets are often keen to review financial information that becomes publicly available at Companies House, and the current climate means that sending the right message about your business, via the strategic report, is more important than ever.
Making the most of your strategic report
There are several areas of opportunity within the report.
- Including the right amount of detail – many businesses opt to disclose the bare minimum required to meet their statutory obligations. However, the FRC actively encourages entities to ‘tell their story’, and including additional information in the right areas, such as the description of future strategy, can get the right message across to shareholders and third parties. This can be vital in uncertain economic times.
- KPIs – the correct use of financial and non-financial KPIs can demonstrate how the business has performed, and a supporting commentary can help third parties, such as the local press, to interpret the accounts correctly, reducing the risk of the reader making their own assumptions.
- Confidentiality – whilst being open and positive about the business is to be encouraged, the board must be sure not to disclose commercially sensitive information, such as by naming clients or sensitive KPIs, or any information that would be prejudicial to the interests of the company.
If you have any questions about writing your Strategic Report, or if you’re interested in learning more, then please contact Grahame Maughan or one of his colleagues in our Audit & Assurance team.