narrative reporting (part 3) s172 and beyond
TRANSCRIPT
© ICAEW 2020
ICAEW KNOW-HOW
FINANCIAL REPORTING FACULTY
Narrative reporting (part 3) – s172 and beyond
This webinar will commence shortly ……
22 OCTOBER 2020
Introduction
Olivia Cox
Technical Strategy Department
ICAEW
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Today’s presenters
Vicki Tibbitts
Senior Manager
Deloitte
Elaine Forrest
Senior Manager
PwC
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Contents
Reminder of the requirements
Year 1 reflections
Private companies and subsidiaries
Tips for year 2
Other narrative reporting developments
Resources
Questions
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VAT Changes in 2015
A reminder of the requirements
“Large’” follows the Companies Act,
capturing those who meet two out of
the following three criteria:
-Turnover of more than £36m
-Balance sheet total of more than
£18m
-More than 250 employees
A company may also be treated as
large if it is ‘ineligible’ e.g. a PLC
whether listed or not or those
performing certain financial services
Companies need to report on how the directors have carried out their s172 duty
under both the Companies Act and the UK Corporate Governance Code:
Section 172 (1) statement
A statement in the strategic report
which describes how the directors
have had regard to the matters set
out in section 172 (1) (a) to (f) when
performing their duty under section
172.
Applicable to a company that is “large”
under the Companies Act 2006
Stakeholder engagement
Directors’ report requirements to
disclose on these matters but you
can cross refer.
Subsidiaries
Remember – There is no s172
exemption © ICAEW 2020
Responsible business
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Impact
Directors’ decisions Stakeholders
Needs
U.S. Business Roundtable statement on the Purpose of the Corporation August 2019
‘Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities and our country.‘
“A company cannot achieve long term profits without embracing company purpose and
considering the needs of a broad range of stakeholders”
Larry Fink, CEO Blackrock, Annual letter to CEOs 2020
Resources to help
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What have we seen from year 1?
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Stakeholders
• Who are the key ones?
• How does the company engage with
their stakeholders?
• Who is engaging with stakeholders?
• What issues do stakeholders care
about?
• What impact has this engagement
had on principal decision making?
Example of stakeholder engagement
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Serco
Annual Report &
Accounts 2019
What have we seen from year 1?
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90% provided a clearly identifiable s172(1) statement…
…with 84% drawing out examples of decision making within their s172(1) statement
36%
70%
70%
84%
100%
100%
66%
0% 20% 40% 60% 80% 100%
(f) the need to act fairly as between members of the company
(e) the desirability of the company maintaining a reputation forhigh standards of business conduct
(d) the impact of the company's operations on the environment
(d) the impact of the company's operations on the community
(c) the need to foster the company's business relationships withsuppliers, customers and others
(b) the interests of the company's employees
(a) the likely consequences of any decision in the long term,
How many companies clearly discussed each of the s172 matters as part of their s172(1) statement?
www.deloitte.co.uk/annualreportinsights
Section 172 statements – examples of decision-making
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Lloyds Banking Group
2019 Annual Report
Example of considering consequences in the long term
SEGRO
Annual Report & Accounts 2019
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Structure and placement
Different approaches to structure are
possible BUT all required statements
must be present in the right reports
The statement should provide a
coherent message by itself and
sufficiently specific cross references
should provide further context
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Role of the Board
Show the value the board added - Plan
carefully to make sure that the role of
the board can be reflected in the annual
report.
'How' the directors have had regard to
s172 includes both an element of
process and an element of application
to business issues
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Example of the Board’s role
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Royal Mail Group
Annual Report and Financial
Statements 2019-2020
Private companies and subsidiaries
VAT Changes in 2015
• These requirements apply to a large population of private companies
(including family businesses, subsidiaries of multinational groups and private
equity portfolio companies)
• There’s no exemption for subsidiaries included in the group annual report of a
parent company, unless small and do not prepare a strategic report
• Remember there is a requirement to publish this on the website
Is it appropriate to
cross refer to a group
s172 statement?
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Parent companies and subsidiaries – factors to consider
• Is it clear that the directors are considering their duties in respect of the subsidiary
(and not of the parent, even if there is some overlap)?
• Assess the subsidiary’s statement carefully to ensure that it is tailored to the
subsidiary’s activities and covers all the legal requirements within the subsidiary’s
own strategic report.
• A subsidiary s172(1) statement can cross-refer to a group statement for more
detail, but it must contain enough information to meet the requirements itself – a
simple cross-reference to the group annual report is not enough.
• What is the relationship between the subsidiary and the group? e.g. autonomy vs
reliance on group decisions.
• Who are the stakeholders, what are they interested in and how has this affected
decisions and strategies in the subsidiary?
• Have the new directors’ report requirements regarding employee engagement
and relationships with other stakeholders been included and cross referred to
where appropriate?
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Tips for year 2
• Remember to make the statement strategically relevant
• Use case studies to bring the disclosure to life but don’t just use COVID-19!
• Focus on the elements relevant to your company this year
• Ensure alignment with the stakeholders referenced in the business model and
company purpose. Don’t be restricted by the list in s172.
• Explain how engagement with stakeholders has affected decision making
• Don’t just look at stakeholder aspects
• Remember the role of the board
- Be clear on where the engagement happened and if not directly by the board, how did the
outcome get to be considered in the boardroom?
- Describe the board’s understanding of stakeholder concerns identified through engagement
activities
• Don’t forget the associated directors’ report requirements
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Section 172 statements – explaining the response to COVID-19
Duty to promote the success of
the company for the benefit of its members as a whole, having regard to…
The likely consequences
of any decision in the
long term
The interests of the
company’s employees
The need to foster the
company’s relationships
with suppliers, customers and
othersThe impact of the company’s operations on the community
and the environment
The desirability of the company maintaining a reputation for
high standards of business
conduct
The need to act fairly as
between members of the company
There should be plenty to discuss in this year’s
statement:
• Engagement with employees around new
working arrangements, health and well-being
• Adapting routes to market to meet new
patterns of demand from customers
• Working with the supply chain
• Keeping all investors informed
• Community outreach
• Building back greener
• Maintaining controls around high standards of
business conduct during very challenging times
Consider an introduction to the statement which
explains how the company has sought to act in the
wider public interest
Of 20 March year ends surveyed, 90% made reference to COVID-19 in their s172(1)
statement
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Just published – tips from the FRC Lab for year 2
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Content
• Be specific and genuine,
avoiding box-ticking
• Explain the why
• Link to strategy
• Include difficulties not just
positives
• Reflect the board’s oversight
• Include material KPIs on key
stakeholders
• Address future consequences
and planned actions
• Be consistent
Presentation
• Think of the flow and context
• Make it visible
• Use cross-referencing to
enhance understanding
• Include case-studies
Process
• Start early
• Include prompts on
stakeholders and Section 172
responsibilities
Remember:
• It is not about stating
compliance with the Section
172 requirements
• It is not just about stakeholder
engagement
• It needs to reflect what is
relevant to the company
• Section 172 should be
embedded in the directors’
strategic decision-making and
supported by the company’s
culture
Other narrative reporting developments
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Energy and carbon regulations
- now effective
EC consultation on changes to non-financial
reporting Directive
TCFD
FCA consulting on climate-related disclosure
rule for commercial premium listed
companies
Further steps towards a global set of ESG
standards
ESEF – Proposal was to delay the requirement to comply with this due to
COVID-19 but still awaiting the outcome of the FCA consultation on this
FRC Lab reports:
s172 tips
COVID-19 and reporting in times of uncertainty
FRC’s Annual Review of Corporate Reporting
2019/20
FRC thematic review on company and auditor responses to climate
change
(coming soon)
FRC’s year end letter to Finance directors and Audit committee chairs
(coming soon)
FRC Discussion paper: the Future of Corporate
Reporting
Deloitte annual report insights 2020
www.deloitte.co.uk/annualreportinsights
Covering new reporting areas including s172(1)
statement and the 2018 Code, it is focused on hot
topics that companies themselves are focusing their
attention on:
Includes examples of good practice disclosure and
“what to watch out for” tips
Resources
www.ukaccountingplus.co.uk
Includes Deloitte newsletters/publications
Board briefing on s172(1)
Statement
The new section 172(1)
statement – observations from
first reporters
Purpose People Planet Profit Pandemic
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Resources
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Ask a question
VAT Changes in 2015
Ask a question
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then click submit.
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Faculty resources
icaew.com/ukregulation
• Factsheet
- UK Regulation for Company Accounts
• Webinars icaew.com/frfwebinars
- Narrative reporting (part 1) (January 2019)
- Narrative reporting (part 2) (October 2019)
• By All Accounts icaew.com/byallaccounts
- Energy and carbon reporting (July 2020)
- S172(1) reporting: a co-ordinated effort (July
2020)
- Engaging stakeholders (January 2020)
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Future events
For details, please visit icaew.com/frfevents
Bitesize Briefings
COVID-19 series
Webinars
17 November: IFRS 17 Insurance Contracts for non-insurers
2020 Members’ event – recordings available
Going concern and resilience: lessons learned from COVID-19
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Questions
Vicki Tibbitts
Senior Manager
Deloitte
Elaine Forrest
Senior Manager
PwC
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Thank you for attending
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