Brexit, improving governance reporting standards, Covid-19 and sustainability. We take a look at what lies ahead for the financial reporting landscape in 2021.
While the UK Companies Act 2006 (CA 2006) and related secondary legislation is influenced by European legislation, there are no current plans for a review of the CA 2006, but we cannot rule out changes in the near future. However, we envisage many material risks across many businesses following the exit of the European Union, from opposite ends of the supply chain to the marketplace. The effect of Brexit will differ across companies, but depending on the severity of the challenges it will present will have a significant impact on financial reporting. This could present the need for a fair review of the company’s business upfront, followed by the viability and going concern statements. We could also see a heightened need for the strategy and KPIs to link to risks, as well as content detailing how Brexit has affected each principal risk to the business.
Improving governance reporting standards
A recent review from the Financial Reporting Council explains that the roll out of the latest Corporate Governance Code was disappointing, and that companies are viewing it as a tick-box exercise, rather than an opportunity. We think that the latest Corporate Governance Code is an opportunity, one to drive better financial reporting, creating a better connection between the different sections of the annual report. Instead, companies are producing unlinked, minor explanations to gain compliance against the new code. For example, something that is of increased importance this year following the Covid-19 pandemic is the Section 172 Statement. We see many companies showcase how they engage with their stakeholders and why, but do not disclose the outcome of the said engagement, or how stakeholders are represented on the board. A vast amount of companies in 2020 will have made hard, impactful decisions, but can we encourage more content around that, on how stakeholders’ interests were considered or aided or changed outcomes of particular decisions. Case studies are a great way to solve these challenges. Such content would then begin to better link the governance section of an annual report, to the strategic report, covering responses to the marketplace, business highlights and strategic priorities.
The FRC has listed a number of areas that they want to see improved in this year’s financial reporting season:
- Companies to have a well-defined purpose and to clearly show the progress towards achieving it.
- Discussion of the issues raised, topics considered, and feedback received during engagement with shareholders and employees.
- Clearly show the impact of engagement with stakeholders, including shareholders, on decision-making, strategy and long-term success.
- Increased focus on assessing and monitoring culture, including consideration of methods and metrics used.
- Increased attention and better reporting of succession planning, diversity and board evaluation.
- Clearly show the impact of engagement with shareholders on remuneration policy and outcomes.
- Clearly show the impact of the engagement within the workforce in relation to executive remuneration policy.
Click here to read more on the FRC’s review of corporate governance reporting.
The Covid-19 pandemic
The Covid-19 pandemic looks like it is here to stay in 2021, signalling another year of unprecedented challenges for companies throughout the country. We believe that investors and other key stakeholders can best understand the impact of Covid-19 by analysing the following three areas:
- Available cash and funding.
- The short and long-term effects on the strategy, business model and a company’s risks and the operational responses that follow those.
- A board’s assessment of going concern and viability.
The marketplace is another crucial segment, indicating how mega and macroeconomic trends are either for or against a company during this current climate. One of our favourite ways to report on how Covid-19 has affected a business over the past financial year is through the use of a timeline, mapping each significant phase of the pandemic against a business’ response, pulling in parts of the Section 172 Statement, showcasing how the board considered key stakeholders in those decisions.
Sustainability was a big talking point in 2020, and we expect that to continue throughout 2021, especially after the UK Government made it mandatory to report on the Task Force on Climate-related Financial Disclosures (TCFD) by 2025, with many requirements needing to be fulfilled by 2023. This means that many companies who have not yet developed their sustainability credentials will need to begin their journey alongside TCFD pretty swiftly to have a rigorous sustainability strategy in place by 2023. The main requirements focus around governance, strategy, risk management, and metrics and targets, including highlighting climate-related risks and opportunities and how to identify, assess and measure them. Information on how to report on those disclosures can be found in our upcoming reporting guide.
Please get in touch if you require additional information and guidance around reporting on some of these key trends that we expect to see unfold in 2021.