New narrative reporting in accounts for companies

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New narrative reporting requirements which come into force today as part of a drive to improve the information available in annual reports could mean future assurance opinions are extended to cover much more than just the financial statements, according to ICAEW say Harris & Co chartered accountants Northampton who specialise in accountancy services for small and medium sized businesses.

From 1 October, companies have to provide a ‘strategic report’ covering their business model, the principle risks and challenges they have faced and opportunities in the coming year. Quoted companies are also required to provide additional information on human rights, diversity and greenhouse gas emissions.

The government has said that the aim of the reforms is to provide greater clarity and equip investors and other stakeholders with information on which to base decisions.

Robert Hodgkinson, ICAEW executive director, said:

‘But the big question is whether this information is trustworthy. There is a trend towards companies requesting assurance on other elements of the annual report – beyond the traditional auditor report on the financial statements – to help add credibility to information that matters to markets.’

ICAEW’s narrative assurance working party, which includes representatives from company boards and the investment community, as well as audit firms, has developed a paper, The Journey: Assuring All of the Annual Report? looking at how this could work.

The paper identifies a range of challenges to be tackled if such an ‘omni-assurance’ approach is to be adopted. These include reaching agreement on what the UK’s new ‘fair, balanced and understandable’ reporting requirement means in practice; determining what is material and should be included in the annual report; and clarifying how to support forward-looking information with evidence.

Hodgkinson said:

‘As the scope of assurance grows, the challenges of moving to assurance on the full report shrink. Some elements will undoubtedly prove harder to assure but, over time, it should be possible to overcome the challenges.’

Business Secretary Vince Cable has welcomed changes in executive pay reporting regulations which also come into force today and will see company pay policies subject to a new legally binding vote. Companies are required to provide details of the links between pay and performance, while directors’ pay must be reported in a single, cumulative figure using a standard approach.

Cable said:

‘Over the last decade the pay of our top executives has quadrupled but it has not always been an indication of how well a particular company has performed. Our reforms mean shareholders will now no longer be kept in the dark. They now have powerful tools for every shareholder - big or small- to speak up and challenge companies over excessive pay and prevent big bosses being rewarded for failure.’

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