The FRC released best practice guidance on the preparation of the strategic report in July 2018 which is aimed at all entities that prepare strategic reports.
The purpose of the strategic report is to inform members of the company and help them assess how the directors have performed their duties in promoting the success of the company. The information should not be boiler plate and should add value to the users of the financial statements.
The main components of the strategic report are as follows:
The strategic management element and employee and environmental requirements are only mandatory for quoted entities and not considered further in this guidance.
For accounting periods starting on or after 1 January 2019, there is a requirement for large businesses (those that breach 2/3 of the following limits: Turnover £36million, Balance Sheet £18million, 250 employees) to ensure that shareholders are provided with information to help them assess how the directors have performed their duty under section 172 to promote the success of the company. This covers:
- the consequences of long term decision making,
- the needs of employees,
- fostering of business relationships,
- environmental considerations,
- maintaining the business reputation; and
- acting fairly towards the members.
As far as is possible, this should be made evident from reading the strategic report.
We recommend the following format for the strategic report:
Fair Review of the Business
This section of the strategic report should incorporate the Business Performance and Position section above as well as details of trends. The information disclosed should give a true and fair review of the business.
It is useful to include an overview commentary of the overall business purpose. This should include an explanation of why the business exists. It would then be best practice to develop this to include elements of the strategy for achieving the overall business purpose in order to give insight in to the development, performance, position and achievements of the business throughout the year. A link can then be established between this and the relevant Key Performance Indicators (KPI’s) of the business.
The KPI’s should be explained in detail and comparatives provided along with comments as to how the information compares to budget or management’s expectations. The commentary may also incorporate elements of the business environment such as trends in the external regulatory, macro-economic and social environment and internal trends in products, services and investment. If relevant to the entity non-financial performance measures should also be provided such as those relating to environmental, social or employee matters although this is not mandatory for a medium sized entity.
Principal risks and uncertainties
This section of the report should include the information in the Business Environment section above, which has not been included elsewhere within the strategic report.
The principal risks and uncertainties to be described are those which are regularly considered by the management of the business. The wording should explain the actual risk or uncertainty facing the entity, what the potential impact is and what management are doing in order to mitigate the risk.
The strategic report may also contain matters which are strictly requirements of the directors’ report but the directors consider that those matters are instead of strategic importance. For example the future developments of the business may be well placed within the strategic report.
Furthermore, where appropriate, references should be included to or additional explanations provided of, amounts included in the company’s annual accounts which the directors feel are of material importance to the users of the financial statements. This may be an acquisition that took place during the year or a certain post balance sheet event. This can also extend to environmental, employee and social aspects given the current rising levels of interest in these areas.
If you require any further assistance or would like more information then please get in touch with your usual contact or Sophie Parkhouse, Technical and Training Director on Tel: 01823 286096 or E: email@example.com