Modernising Corporate Reporting - bold reforms

The stated aim of the consultation is to reduce the regulatory burden on companies using the principle that “reporting requirements should be commensurate with the size, complexity and economic impact of the reporting entity".

Thresholds

The Government is considering changes to reporting thresholds (and exemptions to these) and requirements as follows:

• Having already committed to removing medium sized companies from the requirement to prepare a strategic report, the Government is now considering whether some or all of the exemptions within the small companies reporting regime should be available to medium-sized companies.
• The Government is also asking for views on the trade-off of removing the audit requirement for medium-sized company accounts. The consultation acknowledges that audited accounts can be very valuable, giving companies, their investors and creditors, greater confidence in their accounts and as a result improving access to financing.
• The company size thresholds include one test of the number of employees a company employs, and this is calculated based on the company’s headcount. Recognising the change in working patterns and workforce models in the UK, the consultation seeks views on whether to allow companies to use the average number of employees or average number of full time equivalent employees to assess their size.
• Some non-financial reporting requirements apply only to the largest companies, but these requirements are applied using a variety of different thresholds. The Government is seeking views on unifying these requirements under a “very large” company threshold. At this stage no thresholds for this category have been proposed and this threshold would not be for financial reporting purposes.

Exemptions

• Small companies and micro entities which are part of ineligible groups are excluded from access to certain reporting exemptions. The Government is considering allowing more subsidiaries to use reporting exemptions, but is also conscious of the effect this might have on the regulator’s ability to scrutinise a group (and the importance of subsidiary affairs in a regulated group).
• While wholly-owned subsidiaries can benefit from some reliefs in financial reporting, the Government is considering what further disclosure exemptions could be provided. One particular example is the exemption that exempts a group company from being required to have its accounts audited, provided the parent company provides a parent company guarantee. The Government is considering removing the requirement for a parent company guarantee, and subsidiaries using this exemption would be audited to meet the group audit requirements only (its published accounts would not be audited, but the group’s accounts would be audited).

Accounting standards

The Government is proposing that all detailed financial reporting requirements are removed from the Companies Act 2006 (2006 Act) and its supporting regulations and that where necessary any requirements are transferred to financial reporting standards (or deleted). The 2006 Act would become the framework which supports the accounting standards. The Government is seeking feedback on which disclosure obligations should be retained in legislation and which requirements should be moved into accounting standards. The Financial Reporting Council will be consulting on possible changes to accounting standards in due course.

Replacing the distributable reserves test with solvency statements

Under the current 2006 Act requirements, companies returning profits to shareholders can only do so out of profits available for distribution, and there has been criticism that calculating profits available for distribution requires extensive and complex calculations, and can be subject to financial engineering to inflate distributable reserves.

The consultation proposes that companies move from the profits available for distribution approach to a requirement for the company’s directors to give a solvency statement to the effect that the payment of the dividend will not affect the company’s ability to continue as a going concern.

This change has been discussed by academics and practitioners for some time, and an iteration of the solvency statement requirement had been suggested as part of the previous Government’s Restoring trust in audit and corporate governance consultation (as an addition to the profits available for distribution test), but this received mixed views in consultation and was ultimately not taken forward.

At this stage, there is little in the way of detail on these latest proposals, but we expect the solvency statement requirements for dividends to be similar to those for the same statement for a reduction in capital. If this is the case, then the directors making the statement would need to assess the company’s balance sheet (the relative position of the company’s assets and liabilities) and cash flow (the company’s ability to pay its debts as they fall due) in the year immediately following the date of the statement. This means directors will have to look ahead and events like the possibility of a future winding up or disposal of the company would have to be factored in by the directors making the assessment.

We note that other jurisdictions (e.g. Jersey and Australia) use the solvency statement approach in this context, and have done for some time.

Introducing a slimmer baseline model for strategic reports

The Government is proposing a new, more streamlined set of baseline non-financial reporting (NFR) requirements to be included in companies’ strategic reports. This means removing most existing strategic reporting requirements and replacing them with a core set of baseline narrative disclosures, and the detail of this reporting would be tailored to be consistent with the size and complexity of the business in question. There is an open question (which the consultation seeks views on) as to whether the removal of the existing reporting requirements would mean companies would stop reporting on these issues, or do so in less detail. The October 2025 written statement committed to exempting UK subsidiaries with a UK parent from the requirement to produce a strategic report. The consultation clarifies that the Government’s intention is that the exemption will be limited to certain wholly-owned subsidiaries that are included within the group strategic report of a UK parent and will not be available to certain public interest companies such as traded companies and AIM companies, but seeks views on whether the exemption should be extended to all wholly-owned subsidiaries in future.

Removing statutory NFR reporting obligations

The Government is also proposing to remove explicit statutory disclosure requirements on environmental matters, employees, social/community matters, human rights and anti-corruption/anti-bribery (sections 414C(7)(b) and 414CB, and the section 172(1) statement). The argument is that companies should not stop reporting on these in their strategic report if they are financially material to the company (or to investors / creditors).

The consultation also seeks views on the proposal to remove the sex breakdown of senior personnel disclosure (section 414C(8)(c)) and whether the information in its current format has wider value.

It is worth noting that climate-related financial disclosures are excluded from this consultation pending a post-implementation review "due to be completed by spring 2027".

Which companies should produce non-financial reporting?

There are currently a number of different thresholds which determine the non-financial reporting content to be included in a company’s strategic report. The Government is proposing a single threshold for reporting baseline strategic information and wants to target this single threshold on companies whose investors and creditors most need the information that is produced. The exact threshold will depend on consultation feedback (on this point and the corporate reporting thresholds more generally).

Corporate Governance

The consultation also seeks views on changes to corporate governance reporting. Questions include the following:

• What is the appropriate threshold for corporate governance reporting?
• Is there value in private companies reporting on corporate governance, or should this be restricted to very large companies and public companies?
• Whether governance and risk reporting should be set at a group level, with the Government setting out its view that corporate governance reporting should be moved to a group level.
• Whether (i) there should be a clearer, simpler definition of “Corporate Governance” in the 2006 Act; and (ii) some or all corporate governance reporting materials should be published only on the company’s website.

Remuneration

The Government is seeking feedback on remuneration reporting by quoted companies given feedback that directors’ remuneration reports are too long and complex. Views are being sought on how reporting can be streamlined and which current specific disclosures are investor-critical. The area most likely to generate feedback is the proposal to remove the current advisory vote on the directors’ remuneration report. The Government’s view is that, given the vote is non-binding and that the policy must be agreed every three years, putting the vote to an AGM takes up valuable time and resource that could be directed elsewhere. Investors may not agree with this view.

The Government is keen to use new technology in the following areas:

• Digital communications with shareholders
  The proposal is that all communications with shareholders should be sent to shareholders electronically without the need for prior agreement as is currently the case. Individual shareholders would have the right to opt into receiving hard copy communications and companies would still be required to notify shareholders individually by electronic means to the fact that new documents were available on the company’s website. The Government is seeking views on questions such as when the changes should come into force and whether they should only apply to listed companies.

• Fully virtual AGMs
  The Government confirms that it will clarify the law in relation to fully virtual annual general meetings (AGMs) and will make clear that a “place” can include virtual locations if there is shareholder consent. This is because the 2006 Act requires that the notice of AGM should state the place of the meeting, meaning that very few companies have held fully virtual meetings due to the legal uncertainty. Questions raised relate to safeguards for shareholders and include the nature of the shareholder consent and best practice guidance. Since publication of the consultation, the Investment Association has published updated guidance in relation to virtual meetings which states that if companies choose to include a virtual element in their AGM, its members prefer hybrid meetings that combine a physical meeting with the option to participate virtually. Companies using virtual elements are expected to meet clear shareholder safeguards and shareholder reapproval of virtual AGM arrangements should be sought every three years. It will be interesting to see investor feedback on the Government’s proposal given the Investment Association guidance which is, as expected, not in favour of fully virtual meetings (although it does note that their members hold a range of views).

• Website reporting
  The Government is keen to explore the possibility of relocating some of the disclosures which currently need to be included in a company’s annual report to company websites or online portals, for example as already takes place with modern slavery statements. This could lead to shorter annual reports which are more straightforward and reduce time pressure on companies around the publication of annual reports. It is seeking views as to which types of disclosures should be published on a company’s website or online portal as well as how the process would work in terms of retention timelines, frequency of updates and other factors.