The FRC believes that the annual report, in response to increasing demands from both traditional and newer users, has become a document confused about its intended audience and purpose. Common complaints such as annual reports being too long and inaccessible must be balanced against a growing desire for more transparency and accountability in reporting. Non-financial information is also becoming increasingly important, as public expectation grows for companies to show greater consideration about their impact on wider society and the environment.
The discussion paper represents the first look into the FRC’s vision of a potential new system of corporate reporting that addresses these concerns. It sets out an approach to establishing this system, intended to be more agile, understandable, and accessible for a range of different users.
What does the FRC recommend?
The ‘reporting network’
The most radical proposal is the replacement of the annual report with a new ‘reporting network’. The heart of the model would centre around three, separate but interconnected mandatory reports: a Business Report, the Financial Statements, and a Public Interest Report.
The Business Report would be similar to a concise Strategic Report, with financial and non-financial information that enables users to understand how the company creates long-term value in accordance with its stated purpose. The Financial Statements would be a standalone report with the full set of a company’s audited financial statements, intended to provide information about the company’s financial performance and position. The Public Interest Report would be focused on how the business interacts with the ecosystem in which it sits. This would likely involve presenting primarily non-financial information on the business’ relationship with its stakeholders, with explanation and metrics on how the company interacts with them. It may also include existing mandatory reports such as gender pay gap reporting and modern slavery, all in one place.
Preparers would also be able to add other voluntary reports and communications into their reporting network as appropriate, such as periodic reports (interim and half-year reports), investor presentations, and supporting information on the business’ divisional operations or policies.
In addition to the introduction of a ‘reporting network’, the proposals include:
Alongside the discussion paper, the FRC has published a literature review conducted by the University of Exeter and a summary of the findings of an online survey carried out as part of the project.
When does this come into force?
The discussion paper only intends to outline the FRC’s long-term vision and does not include a definitive timeframe. Given the volume of possible regulatory and legal changes required for such an overhaul, it will likely take over a decade for any new model to be fully realised.
However, steps are already being taken to enhance reporting in line with the FRC’s vision. The creation of global sustainability standards is gathering momentum, and the implementation of ESEF from 2022 represents a technological advancement in reporting. There may be more regulatory tweaks coming while the FRC undergoes its transformation into the Audit, Reporting and Governance Authority (ARGA). And of course, there may be elements that preparers can adopt and innovate in the meantime.
How do I get involved?
The proposals in the paper are designed to be tested with stakeholders and stimulate conversation, and the FRC welcomes comments on any part of the paper. Comments on the paper are invited by 5 February 2021.
Read the FRC press release.
Read the supporting literature review.
If you need support or guidance, please get in touch with firstname.lastname@example.org