Insights from December year-end annual reports
Mid-way through the December year-end annual reporting process, we identify the key focus areas and some important considerations for those about to begin their report.
As the finish line comes into sight for many of our December year-end reporters, we reflect on the main topics of discussion with clients and share some learnings in the hope of supporting those yet to start their next annual report.
For Main Market listings, this season is particularly noteworthy, as December year-end reporters are working on their last reports before the majority of the new rules come in to force. AIM companies are exempt from many of the new rules; however, AIM Rule 26 now requires much greater governance disclosure on the corporate website, which could impact on the annual report content.
So, what have companies been thinking about, how are they preparing for the future and what are the key focus areas of reporting this year?
The EU’s Directive on Non-Financial Reporting was already in place last year, but there was great confusion about how to best comply. A wide range of approaches were taken – including ignoring it completely, without even saying why. However, with the establishment of best practice last year and further FRC guidance, the much preferred route this year is to have a small section in the strategic report titled ‘Non-financial information statement’ containing cross references to where all the required information can be found elsewhere in the strategic report.
All clients are working hard behind the scenes to ensure they have a considered approach to reporting against the revised UK Corporate Governance Code and The Companies (Miscellaneous Reporting) Regulations when required to do so next year. Many leading companies are pushing hard to adopt as much as is feasible this year, but the vast majority are acknowledging the direction of travel without specifically adopting any of the new disclosures.
The stakeholder agenda
In essence, what this means is that there has been a broad acceptance that the importance of key stakeholders should be recognised in both the strategic report and governance sections of annual reports. In particular the concept of corporate purpose has gained traction and ‘people’ reporting has certainly come of age, with honest and meaningful disclosures becoming the norm, as opposed to the trite platitudes with which we became so familiar.
For some, the stakeholder agenda has been an opportunity to review how their corporate strategy and sustainability strategy interconnect. Regardless of the approach, it’s fair to say that integrated reporting is now the standard and pure sustainability communications have become much more focused on the corporate website.
Conciseness starting to have teeth
It was back in 2011 that the FRC first began its work around clear and concise reporting, with the publication of ‘Cutting clutter: Combating clutter in annual reports’. However, up until now, most companies have focused on not adding more than is necessary rather than actively reducing narrative that they have produced in the past. This year we have seen many clients be ruthless in their effort to create a more concise report, with some significantly reducing the number of internal content contributors, in an effort to remove many of the internal barriers to content reduction.
While the regulated disclosures for AIM companies remain lighter touch, we have seen most continue to push further in an effort to provide a clear corporate narrative in the annual report. Bizarre though it may seem, AIM companies are not technically required to include a business model or strategy in their annual report, but most now do.
Changes to AIM Rule 26 dictate that greater governance disclosure is made available on the website. As one might expect this is translating into an enlarged section in the annual report.
For those of you yet to produce your annual report, the direction taken by December year ends can offer some useful insight into the current trends in corporate reporting. Non-financial reporting, with the prominence of the stakeholder agenda, remains a key focus area – and will only increase in importance with the introduction of the revised UK Corporate Governance Code and The Companies (Miscellaneous Reporting) Regulations 2018 this year. Companies would be wise to start considering these new requirements now, even if full compliance is a way off, and start putting the wheels in motion to prepare for next year’s reporting cycle.
Meanwhile, cutting the clutter of annual reports can only be a good thing – for preparers and stakeholders of reports alike. However, it does take work to step back and take stock of the status of your annual report, identifying areas where improvement can be made, and finding alternative avenues for non-essential, but still useful, disclosure.