The Financial Reporting Council (FRC) has published new guidance material, “What Makes a Good Annual Report and Accounts (ARAs)”. Jane Marshall takes a look at the implications of this for the charity sector.
Although this is aimed at the for-profit sector, there is a direction of travel that may impact the next charity SORP as the FRC explain that the publication can be applied to all companies, of any size, and any accounting framework. As well as complying with relevant accounting standards, laws and regulations, and codes, high quality ARAs are also responsive to the needs of stakeholders and more than just a compliance exercise. Every business is different and, as a result, what a good ARA looks like will vary between individual entities.
Set against a backdrop of materiality, the guidance sets out the FRC’s view of the attributes associated with a high quality ARAs. It identifies these attributes using a framework of the 4Cs of effective communication and the corporate reporting principles.
Effective communication principles
Company specific
High quality ARAs are specifically tailored to the company. Importantly they are not generic or boilerplate, but instead include insights into the board’s decision making and explain the company’s business model.
Clear, concise and understandable
Clear, concise, and understandable ARA’s communicate information efficiently using straightforward language and short sentences.
Clutter free and relevant
Only relevant information is included. Duplicate information is to be avoided, instead using cross references to relevant information contained elsewhere in the ARA.
Comparable
ARAs should be comparable to company information published in previous years.
Corporate reporting principles
The FRC report sets these out, following the mnemonic ACCOUNT:
- Accurate
- Connected and consistent
- Complete
- On-time
- Unbiased
- Navigable
Materiality
With regard to materiality, the FRC explains that: “Materiality is the bedrock of corporate reporting. It is a fundamental concept embedded in accounting frameworks and the primary tool that helps companies to focus on key matters for them and their stakeholders. Materiality informs the breadth and depth of what needs to be included in the full ARA.
Information is material if omitting it or misstating it could influence the decisions and assessments of ARA users.”
In addition, the report makes clear that information can be material, either on the basis of quantitative factors, qualitative factors, or both. Materiality should be determined in the context of each entity’s business. Whether a particular piece of information is material will vary between entities.
The concept of materiality is implicitly recognised in the strategic report requirements, which include filters such as ‘principal’ risks and uncertainties and ‘key’ performance indicators. The charity sector is already familiar with these.
It was announced on 24 May 2023 that the Department for Business and Trade (DBT), working with the FRC, is conducting a review of the non-financial reporting requirements UK companies need to comply with to produce their annual report and to meet broader requirements that sit outside of the Companies Act.
The review will also consider if current company size thresholds (micro, small, medium and large) that determine certain non-financial reporting requirements, and the preparation and filing of accounts with Companies House, remain fit for purpose.
The consultation will close for comments on 16 August 2023.
So, it looks like change is on its way in the for-profit sector which can only mean more onerous reporting in Annual Reports.
The charity sector is way ahead of the for-profit sector in terms of the preparation of high-quality annual reports. Most charities would be able to use the exceptions in FRS102A if they were for-profit entities. Instead, the Charities SORP already provides guidance for charities on how to apply FRS 102 to ‘true and fair’ charity accounts and includes charity-specific requirements that are additional to those of FRS 102, specifically, requirements relating to the trustees’ annual report, fund accounting, the format of the statement of financial activities and additional disclosures.
Many in the charity sector would argue that the reporting requirements for smaller charities are far too onerous. It should be remembered that over 99% of registered charities would be classed as ‘small’ in company law terms.
The joint SORP-making body reshaped the Charities SORP development process following its governance review in 2018-19 to focus on the needs of users of the SORP, to prepare high quality annual reports and accounts, and those who use that information for a variety of purposes.
Their work since then has been focused on the needs of those two groups with a particular focus on how smaller charities preparing accruals accounts can be provided with an accounting framework that is proportionate, appropriate and practical. This in turn would support the preparation of high quality qualitative and quantitative information that is relevant to those who want to receive it.
At present, the revised Charities SORP is not expected to be published until 2024, and therefore allows only a short period of time prior to the effective date of 1 January 2025 for charities to understand any changes that are relevant to them. Whether there will be any further consultation once the revised SORP is published is yet to be seen.
