Narrative reporting

It has long been estab­lished that a set of com­pa­ny accounts should be accom­pa­nied by a direc­tors’ report that pro­vides addi­tion­al infor­ma­tion about the com­pa­ny that may be of inter­est to its share­hold­ers.

In recent years there has been a series of devel­op­ments that have increased the amount of infor­ma­tion that com­pa­nies have had to include as part of their annu­al report. These nar­ra­tive report­ing oblig­a­tions pro­vide an oppor­tu­ni­ty for man­age­ment to aid users of the finan­cial state­ments in their under­stand­ing of the com­pa­ny, its activ­i­ties and per­for­mance.

This will not be achieved by includ­ing stan­dard or ‘boil­er­plate’ word­ing that sole­ly aims to ensure that the legal require­ments have been met. Rather direc­tors need to care­ful­ly con­sid­er what they dis­close to not just meet their reg­u­la­to­ry oblig­a­tions, but also to pro­vide nar­ra­tive that is use­ful and meets the needs of the users of the finan­cial state­ments, which increas­ing­ly can rep­re­sent a wide range of the com­pa­ny’s stake­hold­ers and not just its share­hold­ers.

This fact­sheet aims to pro­vide a clear expla­na­tion of the nar­ra­tive report­ing require­ments faced by pri­vate com­pa­nies.

Company size

The key to under­stand­ing your com­pa­ny’s require­ments is to first ascer­tain its size. The nar­ra­tive report­ing require­ments become more oner­ous as a com­pa­ny increas­es in size.

The size lim­its relat­ing to peri­ods com­menc­ing pri­or to 6 April 2025 were as fol­lows:

For peri­ods com­menc­ing on or after 6 April 2025, some of these lim­its increased, per the below:

A com­pa­ny needs to meet two out of three of the above cri­te­ria for two con­sec­u­tive years to qual­i­fy as a micro, small or medi­um-sized com­pa­ny, unless it is the first year of the com­pa­ny’s exis­tence, in which case only that year has to be con­sid­ered. The turnover lim­it is adjust­ed if the finan­cial year is longer or short­er than twelve months.

There are cer­tain exclu­sions from the above size lim­its which are set out in the Com­pa­nies Act 2006. In addi­tion spe­cial rules apply to par­ent under­tak­ings which need to be tak­en into account.

Micro-entities

Com­pa­nies that meet the micro-enti­ty size cri­te­ria, and have opt­ed to pre­pare their annu­al report in accor­dance with the micro-enti­ty pro­vi­sions, have no nar­ra­tive report­ing require­ments due to the sim­pli­fied arrange­ments that exist for such com­pa­nies.

In prac­tice many com­pa­nies, despite meet­ing the size cri­te­ria, find the report­ing require­ments for micro-enti­ties inap­pro­pri­ate for their needs, and vol­un­tar­i­ly choose to pre­pare their annu­al report using the small-enti­ty pro­vi­sions instead. In such cir­cum­stances they will be sub­ject to the nar­ra­tive report­ing require­ments applic­a­ble to small enti­ties.

Small entities

Com­pa­nies that are able to and choose to adopt the small-enti­ty report­ing pro­vi­sions are required to include a direc­tors’ report as part of their annu­al report that is dis­trib­uted to the com­pa­ny’s mem­bers. Note though that the direc­tors’ report does not need to be includ­ed as part of the annu­al report that is filed at Com­pa­nies House: it (and the prof­it and loss account) can cur­rent­ly be removed from the annu­al report in a process com­mon­ly known as fil­let­ing. 

The direc­tors’ report of a small com­pa­ny is required to include the fol­low­ing:

• The names of all the direc­tors who held office at any time dur­ing the finan­cial year. It is also com­mon prac­tice to include details of any changes to the board that have arisen since the year end.
• Whether any qual­i­fy­ing third par­ty indem­ni­ty pro­vi­sion is in force at the time of the approval of the report or dur­ing the peri­od, for the ben­e­fit of one or more direc­tors.
• Unless the com­pa­ny is a whol­ly-owned sub­sidiary under­tak­ing of a UK par­ent com­pa­ny, details of any polit­i­cal dona­tions made or sim­i­lar expen­di­ture where the total amount incurred exceeds £2,000. In addi­tion the total con­tri­bu­tions paid to non-UK polit­i­cal par­ties should be dis­closed.
• Where the aver­age num­ber of employ­ees exceeds 250, the com­pa­ny’s pol­i­cy for the employ­ment of dis­abled per­sons.

Although not required, many small com­pa­nies will also pro­vide a brief descrip­tion of the com­pa­ny’s trad­ing activ­i­ty.

A state­ment that advan­tage has been tak­en of the small com­pa­nies exemp­tions in prepar­ing the direc­tors’ report is also required, which is pre­sent­ed imme­di­ate­ly above the sig­na­ture of the direc­tor or sec­re­tary who is sign­ing the report on behalf of the board.

Medium and large size entities

Both medi­um and large size enti­ties have con­sid­er­ably more oner­ous nar­ra­tive report­ing require­ments when com­pared to small enti­ties, and there is no exemp­tion avail­able to them when fil­ing their annu­al report with Com­pa­nies House.

The most sig­nif­i­cant dif­fer­ence is the need to incor­po­rate a strate­gic report as part of the annu­al report. There are also addi­tion­al require­ments for the direc­tors’ report that will need to be addressed.

Strategic report

For a pri­vate lim­it­ed com­pa­ny the strate­gic report should con­tain the fol­low­ing:

• A fair review of the com­pa­ny’s busi­ness. This should include a bal­anced and com­pre­hen­sive analy­sis of the com­pa­ny’s devel­op­ment and per­for­mance dur­ing the year and its finan­cial posi­tion at the end of it. It may be nec­es­sary for the review of the busi­ness to include ref­er­ences to or pro­vide addi­tion­al expla­na­tion to amounts includ­ed in the accounts them­selves.
• A descrip­tion of the prin­ci­pal risks and uncer­tain­ties faced by the com­pa­ny.
• An analy­sis of the key per­for­mance indi­ca­tors (KPIs) used by man­age­ment to assess the com­pa­ny’s per­for­mance. For medi­um-sized com­pa­nies this is restrict­ed to finan­cial KPIs, but large com­pa­nies are required to include non-finan­cial KPIs such as those relat­ed to employ­ee or envi­ron­men­tal mat­ters.

For par­ent com­pa­nies prepar­ing con­sol­i­dat­ed accounts the strate­gic report is required to con­sid­er the group’s per­for­mance and not just that of the com­pa­ny itself.

Directors’ report

A medi­um or large com­pa­ny is required to include in its direc­tors’ report all of the mat­ters that a small com­pa­ny has to include, but also has the fol­low­ing addi­tion­al require­ments:

• The div­i­dend rec­om­mend­ed by the direc­tors.
• Infor­ma­tion on the acqui­si­tion of own shares (not required for medi­um-sized pri­vate com­pa­nies).
• Stream­lined ener­gy and car­bon report­ing (cov­ered below).

And the fol­low­ing for finan­cial peri­ods com­menc­ing before 6 April 2025 only:

• An indi­ca­tion of the com­pa­ny’s finan­cial risk man­age­ment objec­tives and poli­cies and the expo­sure to price, cred­it, liq­uid­i­ty and cash flow risk when con­sid­ered mate­r­i­al to the assess­ment of the com­pa­ny’s assets, lia­bil­i­ties, finan­cial posi­tion and prof­it or loss.
• Impor­tant events that have occurred since the year end.
• Like­ly future devel­op­ments in the com­pa­ny’s busi­ness.
• Research and devel­op­ment activ­i­ties.
• An indi­ca­tion of the exis­tence of any branch­es of the com­pa­ny out­side the UK.
• Where the aver­age num­ber of employ­ees exceeds 250, a state­ment on employ­ee engage­ment and a state­ment describ­ing the com­pa­ny’s pol­i­cy regard­ing the hir­ing, con­tin­u­ing employ­ment and train­ing, career devel­op­ment and pro­mo­tion of dis­abled per­sons.
• For large com­pa­nies only, a state­ment sum­maris­ing how the direc­tors have had regard to the need to fos­ter the com­pa­ny’s busi­ness rela­tion­ships with sup­pli­ers, cus­tomers and oth­ers, and the effect of that regard, includ­ing on the prin­ci­pal deci­sions tak­en by the com­pa­ny dur­ing the finan­cial year.

Often it will make sense for the com­pa­ny to present infor­ma­tion required to be includ­ed with­in the direc­tors’ report as part of the strate­gic report. This is per­mit­ted, pro­vid­ed that there is a clear cross ref­er­ence to the dis­clo­sures that have been includ­ed as part of the strate­gic report with­in the direc­tors’ report.

Also required for large com­pa­nies is a state­ment of how the direc­tors have com­plied with their duty to have regard to the mat­ters set out in sec­tion 172 (1)(a)-(f) of the Com­pa­nies Act 2006. This refers to the require­ment that a direc­tor of a com­pa­ny must act in the way he or she con­sid­ers, in good faith, would be most like­ly to pro­mote the suc­cess of the com­pa­ny for the ben­e­fit of its mem­bers as a whole, and in doing so have regard (amongst oth­er mat­ters) to:

• The like­ly con­se­quences of any deci­sion in the long term
• The inter­ests of the com­pa­ny’s employ­ees.
• The need to fos­ter the com­pa­ny’s busi­ness rela­tion­ships with sup­pli­ers, cus­tomers and oth­ers.
• The impact of the com­pa­ny’s oper­a­tions on the com­mu­ni­ty and the envi­ron­ment.
• The desir­abil­i­ty of the com­pa­ny main­tain­ing a rep­u­ta­tion for high stan­dards of busi­ness con­duct.
• The need to act fair­ly as between mem­bers of the com­pa­ny.

This dis­clo­sure will need to reflect the issues, fac­tors and stake­hold­ers the direc­tors con­sid­er rel­e­vant to their deci­sion mak­ing, the main meth­ods used to engage with stake­hold­ers and under­stand the issues to which they must have regard, and infor­ma­tion on the effect of that regard on the com­pa­ny’s deci­sions and strate­gies dur­ing the finan­cial year.

Note that this state­ment will also need to be pub­lished on the com­pa­ny’s web­site.

Companies subject to audit

Most small com­pa­nies will be able to take advan­tage of audit exemp­tion, but medi­um and large com­pa­nies will be sub­ject to the require­ment to have their accounts audit­ed. For those com­pa­nies that are required to have their accounts audit­ed, or choose to do so vol­un­tar­i­ly, there are two addi­tion­al require­ments:

• A state­ment con­cern­ing the direc­tors’ respon­si­bil­i­ty for the prepa­ra­tion for the finan­cial state­ments.
• A state­ment that all direc­tors at the time of the approval of the report are not aware of any rel­e­vant audit infor­ma­tion that the com­pa­ny’s audi­tor is unaware of, and that appro­pri­ate steps have been tak­en to estab­lish this.

These state­ments are often includ­ed as part of the direc­tors’ report. The state­ment of the direc­tors’ respon­si­bil­i­ty for the prepa­ra­tion of the finan­cial state­ments can be pre­sent­ed sep­a­rate­ly if desired.

Environmental reporting requirements

As part of the need to address cli­mate change and encour­age com­pa­nies to con­sid­er their respon­si­bil­i­ties towards the envi­ron­ment, com­pa­nies are required to include dis­clo­sures in their direc­tors’ report on envi­ron­men­tal mat­ters, known as stream­lined ener­gy and car­bon report­ing (SECR).

For low ener­gy users, that is a large com­pa­ny under the thresh­olds that were in force pri­or to 6 April 2025, which has con­sumed 40MWh or less of ener­gy in the UK (includ­ing off­shore areas), the direc­tors’ report mere­ly needs to state that ener­gy and car­bon infor­ma­tion is not being dis­closed as it is a low ener­gy user. In assess­ing whether the 40MWh thresh­old is met large com­pa­nies must con­sid­er all the ener­gy from gas, elec­tric­i­ty and trans­port fuel usage. For par­ent com­pa­nies the ener­gy con­sump­tion of the par­ent and its sub­sidiaries must not exceed 40MWh if it is to qual­i­fy as a low ener­gy user.

Large com­pa­nies under the thresh­olds that were in force pri­or to 6 April 2025 that do not qual­i­fy as low ener­gy users will need to dis­close the fol­low­ing:

• The UK annu­al quan­ti­ty of emis­sions in tonnes of car­bon diox­ide equiv­a­lent from activ­i­ties for which the com­pa­ny is respon­si­ble involv­ing com­bus­tion of gas or con­sump­tion of fuel for the pur­pos­es of trans­port.
• The UK annu­al quan­ti­ty of emis­sions in tonnes of car­bon diox­ide equiv­a­lent result­ing from the pur­chase of elec­tric­i­ty for its own use, includ­ing for the pur­pos­es of trans­port.
• The aggre­gat­ed fig­ure in kWh of the UK annu­al quan­ti­ty of ener­gy con­sumed from activ­i­ties for which it is respon­si­ble involv­ing com­bus­tion of gas or fuel for the pur­pos­es of trans­port, and the pur­chase of elec­tric­i­ty for its own use, includ­ing for the pur­pos­es of trans­port.
• The method­ol­o­gy used to cal­cu­late its ener­gy con­sump­tion and emis­sion lev­els.
• At least one ratio that express­es the com­pa­ny’s annu­al emis­sions in rela­tion to a quan­tifi­able fac­tor asso­ci­at­ed with the com­pa­ny’s activ­i­ties.
• If the com­pa­ny has tak­en any mea­sures for the pur­pose of increas­ing the com­pa­ny’s ener­gy effi­cien­cy, a descrip­tion of the prin­ci­pal mea­sures tak­en.
• Where it is imprac­ti­cal to obtain all or some of the emis­sions or ener­gy con­sump­tion data requir­ing dis­clo­sure, what infor­ma­tion is not includ­ed and why.

Although this require­ment only applies to large com­pa­nies under the thresh­olds that were in force pri­or to 6 April 2025 (and lim­it­ed lia­bil­i­ty part­ner­ships (LLPs)), oth­er enti­ties are encour­aged to con­sid­er whether it would be help­ful to the users of their finan­cial state­ments to also make these dis­clo­sures. For LLPs, the dis­clo­sures are pre­sent­ed in an ‘Ener­gy and Car­bon Report’. 

These dis­clo­sure require­ments may prove chal­leng­ing to many com­pa­nies and the Gov­ern­ment had pro­duced detailed guid­ance to assist com­pa­nies meet their oblig­a­tions which is avail­able online using the fol­low­ing link:

https://www.gov.uk/government/publications/environmental-reporting-guidelines-including-mandatory-greenhouse-gas-emissions-reporting-guidance