When is a strategic report required?
Every company must prepare a strategic report as part of its financial statements if it is a medium or a large company.
What should a strategic report contain?
The contents of the strategic report are laid out in the Companies Act 2006 section 414C. The purpose of the report is to present the company’s performance in the reporting period and note any future considerations that users of the financial statements should be aware of. The strategic report should be a fair and balanced review and should aid understanding of how senior management have performed in their duties. There are prescribed sections which must be included in the report as follows:
a) Fair review of the business activities of the company
The directors should describe the development of the business and its performance during the reporting period and state the company position at the end of the reporting period. The commentary on performance should be linked to key performance indicators, financial and non-financial, depending on the nature of the business*. References could be made to environmental indicators and employee matters, and therefore this review is not solely about financial performance. The report should refer to the results reported in the financial statements and provide further explanation regarding the reported results, regardless of whether this is positive or negative.
b) Description of the principal risks and uncertainties facing the company**
This will be different for every company and there is no prescribed format for directors to follow. Common headings seen in a strategic report are:
- Background to the business
- Business Overview
- Future Developments
- A heading relating to each significant risk and/or uncertainty. Examples of risks include:
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- Interest rates;
- Impact of inflation;
- Supply chain issues;
- Employee recruitment and retention.
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How does the strategic report impact an audit?
Auditors review ‘Other Information’ as part of their audit work and this will encompass the Strategic Report and the Report of the Directors. The review undertaken is limited to determining if the information is consistent with the financial statements and audit findings. Auditors do not provide an opinion on the ‘Other information’ but are required to report inconsistencies. As part of the audit process the auditors could revisit prior year forecasts, refer to discussions with management prior and during the audit, to see if this agrees with the narrative given in the Strategic Report.
It is important that auditors review all available information to obtain “sufficient appropriate audit evidence that the financial statements show a true and fair view” and therefore the information provided by directors in the Strategic Report could have a significant impact on this assessment, especially when inconsistencies are found.
Where can I get help?
There is a lot of information online but speaking to your accountant is a good place to start. Remember, it is the Directors responsibility to write the report and they are best placed to explain what has happened in the business. Your accountant will be able to read the report from an objective position and offer feedback as necessary.
Useful links
Below are some useful links for further information:
- Companies Act 2006 s 414A “Duty to prepare a strategic report”
- The new strategic report | ACCA Global
- 01 Guidance 1..98 (frc.org.uk)
- A practical guide to the strategic report (kpmg.com)
* Medium sized companies do not have to report non-financial key performance indicators.
** Where reporting on developments or other matters are considered prejudicial to the company by the directors, these do not have to be reported (CA2006 S414C(14), but directors should document why they consider this exemption is met.
Author: Helen Griffiths, Accounts and Audit Manager, Plus Accounting
Any views or opinions represented in this blog are personal, belong solely to the blog owner and do not represent those of Plus Accounting. All content provided on this blog is for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site.
Date published: 29 April 2024