04 April 2016

FRC: Non-binding guidelines for reporting non-financial information by companies

The FRC believes that non-mandatory guidance can be helpful to companies when implementing legal requirements. The FRC attaches great importance to Clear & Concise reporting and ensuring that the annual report includes information that is relevant to investors.

The FRC has some concerns about the direction of travel of the Commission’s proposals, in particular that some of the questions may be re-opening positions that were agreed at the time of negotiating the EU Directive on disclosure of non-financial and diversity information (the ‘non-financial reporting Directive’). The FRC´s comments are highlighted as:

(a) Audience of the non-financial statement (Q2) – the FRC believes that asking the question about the audience of the non-financial statement in the context of guidelines that support the non-financial reporting Directive is inappropriate. The EU legal framework sets out that the primary audience for information contained in an annual report is the company’s shareholders and materiality is determined in that context.

The FRC acknowledges that other stakeholders will have an interest in a company’s activities and reporting can improve transparency. However, where information is of interest to a broader group of stakeholders, the FRC encourages the disclosure of information outside the annual report. In FRC´s view, considering the placement of information depending on the audience will result in more relevant information for all users.

(b) Principles-based guidelines (Q4) – the FRC commends the Commission for developing a Directive that is proportionate, principles-based and takes into account materiality. In developing the guidelines, the FRC believes that the Commission should ensure that it does not go beyond the principles in the Directive and inadvertently introduce new disclosures.

In FRC´s view, any guidelines should be concise, principles-based and allow companies flexibility to tell their story. The FRC does not support prescriptive guidelines as these can lead to boiler plate reporting as well as resulting in excessive detail that can obscure relevant information.

(c) Key performance indicators (KPIs) (Q6) – when reporting KPIs, the FRC believes that it is critical that companies report KPIs that are material to their business rather than including a long list of indicators. It is for the directors’ to apply judgement in determining which indicators are key to their business. The FRC is concerned that including a comprehensive list of KPIs in the guidelines will result in companies including immaterial KPIs in their annual report.

In addition, the FRC considers that it is important that, where relevant, KPIs are linked to the business model and strategy.

(d) National frameworks (Q8) – the FRC believes that any EC guidelines should complement national frameworks and be flexible to enable member states to use national guidance where it exists. The UK legislation for narrative reporting is broader than nonfinancial reporting and it is vital that UK companies are not precluded from using local guidance as a result of the European guidelines.

(e) Reference to other frameworks (Q8) – the FRC does not support the guidelines containing an exhaustive list of all frameworks for non-financial reporting. The FRC believes that this would be confusing for companies given that there are a number of frameworks in existence that address similar issues, many of which do not have authoritative status. The Directive deliberately contains a broad principle that companies may rely on “national, Union-based or international frameworks”. The FRC believes that the guidelines should not include a greater degree of prescription of the framework than is set out in the Directive.

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