The portfolio companies reviewed in the latest round have been subject to several changes, both from a regulatory reporting standpoint and a seismic shift in the world around us from the impact of the Covid-19 pandemic. Although some businesses have been able to continue to operate with minimal disruption, depending on their industry and geographic reach, there has certainly been an expectation change in the transparency of discussions regarding business performance, impact on liquidity, financial risk and outlook. The FRC (“Financial Reporting Council”) has continued to provide guidance to companies and auditors around disclosing the impact of the pandemic in the Annual Report.

We have outlined here some key themes and recommendations that will assist those responsible for drafting the annual report.

• Quantification assists transparency - throughout the Guideline requirements, good practice can be assisted by providing quantification in the analysis. This will assist those drafting the annual report to impart the useful information they hold clearly and the stakeholders to fully understand the context of what is being said. Examples of areas that would benefit are:
  • Sensitivities in financial risks and covenant compliance thresholds;
  • Market trends and future performance expectations; and
  • Targets not just measures for areas of importance to the values of the group, such as environmental goals, diversity aims and social contribution plans.

• Clarity and simplicity should be the key aims in drafting an annual report narrative. This can be assisted by pulling out the key points in an ‘At a glance’ section and ensuring it addresses both financial and non-financial measures of performance that are strategically focused. It is important to challenge whether these measures address all areas of strategic priority, and whether any others should be disclosed and discussed to ensure this is addressed.
• The changing dynamics of the business and the risks it faces may never have been more tested. It is important to reflect this narrative in the annual report, particularly focusing on the mitigations in place. It is likely that the resilience of the business model has also been tested, and it is even more essential to really address the key inputs that have continued to create value for the stakeholders.

Each year a sample of portfolio companies are reviewed for compliance with the Guidelines, and over the last thirteen years there has been a sizable shift in the underlying quality and transparency of reporting. All the Guideline areas require careful consideration to ensure good practice can be achieved and this guide provides both an understanding of what good practice looks like and some actual examples from the most recent review. The examples set out elements of good practice for the specific criteria disclosed. The Group will review the disclosures in the annual report when reviewing compliance.