CDSB supports the FRC’s proposals, stressing several points that are essential to achieving a practical framework for corporate reporting in the UK.
Last week the CDSB submitted its response to the Financial Reporting Council’s (FRC) discussion paper on the Future of Corporate Reporting in the UK. In its report, the FRC explores several ideas for changes to the corporate reporting process, seeking to make it more useful for all stakeholders examining a company. The FRC proposes a network of separate but interconnected reports to unbundle the existing Annual Report – at the centre a Business Report, similar to the current Strategic Report, alongside the Financial Statements and a Public Interest Report.
The focus of CDSB as an organisation is to advance the integration of environmental and natural capital information within the annual report for the benefit of primary users, predominantly investors. Nonetheless, we recognise that corporate reporting is evolving and no longer solely provides financial information to those considered primary users, but benefits a range of stakeholders. However, in serving several purposes and users, we agree that annual reports have generally become unwieldy, are not user-friendly for any of the stakeholders interested in their content, and do not necessarily achieve all that they are intended to.
Therefore, CDSB is broadly supportive of the FRC’s proposals. However, in our response, we stress several points that we consider essential, to achieve a practical framework for corporate reporting in the UK.
Objective-driven
CDSB supports taking an objective-driven approach to the three core reports, recognising that user-focussed reports may not be optimal as multiple stakeholders often have the same reporting needs. For example, investors are no longer just interested in corporate reporting for financial purposes; their interests on environmental or social matters may also align with other users. However, in taking such an approach CDSB reiterates that the specific needs of different user groups should not be missed, and the needs and expectations of key stakeholders, such as investors should be considered as they evolve over time.
Reporting principles
The establishment of a common set of principles to underline the corporate reporting model proposed to support effective communication by companies largely matches up with the guiding principles of the CDSB Framework, which are based on the principles found in the IFRS Conceptual Framework. However, in our opinion, we believe the principles and attributes currently proposed are duplicative and can be streamlined to be more user-friendly.
Materiality
CDSB agrees with the FRC’s proposal to move away from a single test of materiality to a model with multiple definitions depending on the reporting objective. This is aligned with the approach proposed by the five leading sustainability organisations as part of their Statement of Intent to Work Together Towards Comprehensive reporting.
Non-financial information
We welcome the focus on non-financial reporting within the FRC’s proposals. The need for a single set of global standards is aligned with CDSB. It reflects our work with the other leading sustainability reporting organisations to move towards a comprehensive system with the IFRS Foundation potentially playing a critical role in achieving this. However, in our response, we flag that further thought is required on the terminology proposed in relation to impact and outcomes, which we believe is overly complicated. Appropriate guidance will need to be provided to preparers in understanding the difference between the impact of a company’s activities on people and the planet, and environmental and societal impacts on a company’s enterprise value.
Technology
The discussion paper also notes the future role of technology in improving information accessibility for users and a focus on electronic communication. We highlight that inline XBRL (iXBRL), which is already in use for other reporting in the UK and elsewhere globally, can form an excellent solution to allow human and machine readability and ensure linkage between reports.
Michael Zimonyi, CDSB Policy & External Affairs Director and Member of the FRC’s Stakeholder Advisory Council, commented:
“It is encouraging to see that the FRC has outlined an approach which is compatible with other approaches globally, such as the double materiality principle of the EU Non-Financial Reporting Directive (NFRD), which has been transposed into the Companies Act, but also the dynamic materiality approach that we have proposed together with the four other main sustainability reporting standard setters.
This maintains the possibility of consistency and comparability between UK, EU and global company reporting, which is essential if we are to achieve a global set of internationally recognised material non-financial reporting standards.”
The summary is written by Sundip Jadeja, CDSB's Technical Manager.