What parts of the annual report will be affected?
Changes are wide-ranging and will affect financial, non-financial, corporate governance and remuneration reporting. Planned reforms will also support greater use of digital reporting formats.
What is the single biggest change?
At this stage, it appears to us that the biggest shift is a proposed move towards a principles-based list of ‘baseline requirements’ for the content of the Strategic Report, a contrast to the prescriptive (but brief) language in the Companies Act.
The proposed baseline requirements (remember these are not set in stone – the consultation is open to gather opinions as to whether this list, and indeed the overall concept, is right) are:
- Business model
- Performance review
- Resources and relationships
- Company strategy
- Risks
More detail is given in the consultation document (page 37) as to what each of these entails, but the descriptions of each do not constitute radical departures from common practice. It is notable, though, that the current proposals would see market context disclosure (‘main trends and factors’) relegated to an optional extra.
What disclosures are marked for removal?
The Section 172(1) statement is likely to soon be a thing of the past, replaced in part by the ‘resources and relationships’ baseline requirement. The Non-Financial and Sustainability Information Statement (NFSIS) will also be removed, on the basis that it forces reporters to cover immaterial topics by default.
Further disclosures marked for removal include financial KPIs, gender breakdowns of employees, management and Directors, and a whole swath of remuneration requirements – including disclosure of the CEO to employee pay ratio, relative importance of spend on pay, alignment with wider employee pay policies and malus and clawback policies, among others.
Are the big issues currently facing businesses discussed?
The document discusses the rise of AI in terms of something used to both consume reports and, in some cases, to produce them. Reference is made to the fast-changing nature of this technology, and the overall approach seems to remain ‘wait and see’.
The only notable proposal to add, rather than remove, disclosure, is in the area of cyber security risk and resilience. The document notes that 85% of UK-listed companies report on cyber risk, but that the quality varies. We would support the concept of making this disclosure mandatory for all, given the outsize importance of this issue to businesses.
Suggested requirements include information on a company’s cyber security governance arrangements, the extent to which a company makes use of cyber security support and guidance offered by the government and regulators, and whether a company has an incident response plan in place.
How do these changes interact with the introduction of UK SRS?
The UK SRS are still planned to be implemented in short order, with final listing rules expected to be published in Autumn 2026. The government plans to consider further how UK SRS should be written into the Companies Act, taking into consideration feedback to this consultation and the Post-Implementation Review of the existing climate-related financial disclosures (i.e. those commonly referred to as the TCFD).
Interestingly, the document contains a proposal that companies should have the flexibility to report climate and sustainability information anywhere in the Strategic Report, while leaving the door open for some disclosures to be placed outside it, likely a corporate website (e.g. for details on policies and processes) or a central online portal (e.g. granular emissions data). These plans seem to be at a fairly early stage, however.
What happens next?
You can read and respond to the full consultation document, which also covers changes to qualifying company size thresholds, reporting exemptions and acceptable accounting standards (among other things), here.
The consultation is open until November 30th.
