The UK’s Financial Reporting Council aims to develop a principles-based framework for corporate reporting.

By Paul A. Davies and Michael D. Green

The UK’s Financial Reporting Council (FRC) has published a discussion paper, “A Matter of Principles — The Future of Corporate Reporting,” that aims to “provide thought leadership for the future of corporate reporting and explore ideas for a new model, challenging the status quo”. The paper, published on 7 October 2020, builds on previous independent reviews and reform proposals by the FRC.

The Problem

The discussion paper was prompted by a number of concerns identified by the FRC relating to the practice of corporate reporting. One issue is that an increasing number of stakeholders have taken an interest in corporate reporting. Also, investors’ interests have broadened. As a result, the corporate reporting regime is expected to cater to multiple audiences and purposes. At the same time, the FRC considers that reporting should be more than a compliance exercise, as stakeholders’ expectations evolve.

Further, non-financial reporting has evolved alongside multiple frameworks, which have themselves developed in an effort to meet stakeholder demands. The proliferation of reporting regimes translates into companies offering fragmented content on non-financial information that makes drawing meaningful comparisons between peer companies difficult.

The FRC’s initiative comes in the context of a busy period for the harmonisation of environmental, social, and governance (ESG) reporting standards. Leading standard-setting agencies have pledged to collaborate on establishing a harmonised ESG framework. Moreover, the World Economic Forum’s International Business Council released a white paper on converging ESG reporting standards, while the IFRS Foundation similarly published a consultation paper to assess demand for global sustainability standards.

The Proposals

The new corporate reporting model proposed by the FRC centres around a network structure, governed by a set of principles designed to recognise the needs of different stakeholders. This network structure includes the following reports:

  • A mandatory business report, to enable users to understand how the company fosters the creation of long-term value. The report would, importantly, include some non-financial information.
  • Financial statements, to provide information about the financial position, financial performance, and cash flows of the company.
  • A dedicated public interest report, to disclose non-financial information.

The stand-alone public interest report would be the main report dealing with non-financial information. It would provide information that enables stakeholders to understand the company’s positioning in respect of public interests and also to measure the company’s performance against public interest obligations. In the FRC’s view, the information contained in this report should be given the same importance as financial information and should be balanced, consistent, and comparable across companies. The paper supports non-financial reporting being put “on a similar statutory basis as financial reporting” in order to achieve such objectives.

The public interest report should identify relevant stakeholders, including those who would either be an important part of the business operations or those who would be affected, or at risk of being affected, by the operations. In relation to each stakeholder, the report should include metrics relating to external outcomes, policies, risks posed by the company’s operations, and any mitigation steps adopted. The report would thus be expected to include information about the impact of the business on employees, suppliers, customers, and the community; it would deal with environmental, human rights, anti-corruption, and anti-bribery matters.

Industry Comments

The consultation paper has so far been well received by the industry. The Association of Chartered Certified Accountants (ACCA), a global organization, welcomed the development as timely and said that it is “positive to see that the FRC’s […] definition of corporate reporting recognises the importance to inform through corporate reporting the wider stakeholders in addition to shareholders and investors”. ACCA also noted the FRC’s emphasis on the importance of non-financial reporting, in line with other global initiatives by the European Commission, the World Economic Forum, and the IFRS Foundation. In the ACCA’s view, thinking about longer-term developments and not just responding to some of the more specific issues is crucial.

The consultation closes on 5 February 2021. Latham & Watkins will continue to monitor developments in this area.

This post was written with the assistance of Sabina Aionesei in the London office of Latham & Watkins.