Regulations laid to introduce significant new annual reporting requirements

*These Regulations were withdrawn by the Department of Business and Trade in October 2023 – see here for more details*

The Department of Business and Trade has laid The Companies (Strategic Report and Directors’ Report) (Amendment) Regulations 2023 (the Regulations) in draft for approval by Parliament.

The Regulations are part of a package of measures that see the Government and Financial Reporting Council (FRC) implementing the proposals from the Government’s March 2021 white paper on audit and corporate governance reform, Restoring trust in audit and corporate governance (for further details, see our blog on the Government’s response to the feedback received on the white paper, issued in June 2022, here). The FRC is separately consulting on changes to the UK Corporate Governance Code to implement the recommended reforms (see our briefing here for further details).

The legislative changes will impact all UK-incorporated companies (and groups), listed, public and private, if they are companies (or groups) with a "high level of employees and turnover"; that is with both 750 or more employees and an annual turnover of £750 million or more (the 750:750 threshold).

The Regulations will impact companies with shares listed on a regulated market first (so including the main market of the London Stock Exchange) – for financial years starting on or after 1 January 2025 – and other companies that meet the new 750:750 threshold for financial years starting on or after 1 January 2026.

They introduce a number of new reporting requirements, including:

• Distributable profits – companies will be required to disclose, as at the beginning and the end of the relevant financial year, their distributable profits (or a minimum figure). The inclusion of the distributable profits figures as a note to the accounts means that they will be subject to statutory audit.
• Distribution policy – in their directors’ reports, directors will be required to set out their policy towards the amount and timing of returns of value to shareholders over the short and medium-term (as defined in the resilience statement – see further below) and how that policy has been applied during the financial year. The policy statement should also describe the key risks and constraints relevant to implementing and sustaining the policy.
• Resilience statement – directors will be required to make a new statutory resilience statement, which will form part of the strategic report, that summarises the company’s strategic approach to managing risk and building or maintaining resilience over the short, medium and long-term. For these purposes, short-term must equal the period covered in a company’s going concern statement (a minimum of 12 months) and medium-term means a period chosen by the company and explained by reference to the company’s strategic, business planning and investment cycle. As part of making the resilience statement, companies will need to give an explanation of the company’s risk management governance and carry out an annual ‘reverse stress test’, in which the company tests a scenario in which the business could become unviable and seeks to learn lessons from that.
• Audit and Assurance policy – companies will have to publish an Audit and Assurance Policy (AAP) every three years as part of their directors’ report setting out whether and how a company is planning to obtain assurance on: its company reporting, beyond its statutory audit; and the effectiveness of its internal financial controls. Each year companies must report how they have implemented their AAPs.
• Material fraud statement – the directors' report will need to contain a material fraud statement which contains a summary of the directors’ assessment of the risk of material fraud and a description of the main measures in place, or proposed, to prevent and detect the occurrence of material fraud. Fraud is material for these purposes if it would influence the decisions a reasonable shareholder would take in connection with their shareholding in the company.

As part of the separate Governance Code consultation mentioned above, the FRC suggests that all companies that report against the Governance Code (so including those main market listed companies that do not meet the new 750:750 threshold) consider, on a comply or explain basis: reporting in a similar way to the new resilience statement; and preparing an AAP.

The Regulations are subject to the affirmative resolution procedure so need approval of both Houses of Parliament. They are expected to become law later this year.