ICAEW urges FRC to step back from its proposals to update its Strategic Report Guidance

Last month, ICAEW urged the Financial Reporting Council (FRC) to reconsider its approach to amending its Guidance on the Strategic Report. 

The proposed amendments, issued by the FRC in August, aimed in particular to reflect the requirements introduced by the new EU non-financial reporting directive and to address calls for greater focus to be placed on the directors’ duty under Section 172 of the Companies Act ‘to promote the success of the company. 

ICAEW warned in its response to the FRC that the proposed changes could, if unchanged, result in confusion and even deter some companies, especially at the smaller end, from continuing to make use of the well-regarded voluntary guidance.   

Summary of ICAEW views

Some change to the FRC’s guidance is necessary to accommodate the requirements of the non-financial reporting directive. This is no easy task given the unsatisfactory way in which the regulations themselves have been incorporated into UK company law. However, in our view, the FRC does not appear to have achieved a seamless integration. Given the complexity of the underlying regulations we believe it is even more important for the FRC’s guidance to provide clarity in this area.

Changes have also been proposed in anticipation of the final outcome of the Government’s response to the Green Paper on corporate governance reform, which includes proposals in relation to Section 172. We caution against this approach and suggest that the FRC awaits the final outcome of the legislative process before finalising related or consequential changes to the guidance.

In addition, ICAEW noted that the FRC has taken the opportunity to carry out a far more extensive review of the guidance, amending the order and drafting in places but also reflecting a wider range of developments, including the emphasis in the International Integrated Reporting Council’s <IR> Framework and elsewhere on long-term value creation.

We understand the wish of the FRC to keep its guidance relevant and up to date, and support the FRC’s aim of encouraging entities to consider and provide more relevant information on how value is generated, but overall we are concerned that the scope and scale of the proposed changes run the risk of reducing the overall effectiveness of the guidance.

An alternative approach

We suggest that a better approach might be for the FRC to focus first on the impact of the non-financial reporting directive, perhaps updating, extending and re-issuing its July 2017 factsheet to meet the urgent need for more clarity for companies in this area.

The FRC could then take the time necessary to consider different views on more extensive changes to the guidance to meet other objectives and ensure that its current usefulness and relevance to companies is preserved.

If you have any thoughts on the FRC’s proposed amendments to the Strategic Report Guidance or on ICAEW’s response, please get in contact at frfac@icaew.com

Dr Nigel Sleigh-Johnson
Head of Financial Reporting Faculty