This quick guide provides a brief summary of the business review requirements under section 417 of the Companies Act 2006 and the proposed replacement of the business review with a standalone strategic report.
This is one of a series of quick guides, see Quick guides.
A business review is an element of the directors' report (www.practicallaw.com/7-107-6118). It aims to inform the members of the company and help them assess how the directors have performed their duty to promote the success of the company under section 172 of the Companies Act 2006 (CA 2006) (section 417(2), CA 2006). For further information on the duty under section 172 of CA 2006, see Practice note, Directors' duties: directors' general duties under the Companies Act 2006: The duties (www.practicallaw.com/7-376-4884).
A business review must be included in the directors' report itself, but its content can be incorporated from elsewhere in the financial reports by cross-referencing within the directors’ report.
All companies must prepare a directors' report for each financial year (section 415, CA 2006). The directors' report of all companies, other than small companies, must contain a business review. For details of the criteria to qualify as a small company, see Practice note, Small and medium-sized companies: accounts and reports: Qualification as a small company (www.practicallaw.com/8-379-0750).
The business review of all companies (except small companies) must contain:
A fair review of the company’s business (section 417(3)(a), CA 2006).
A description of the principal risks and uncertainties facing the company (section 417(3)(b), CA 2006).
A balanced and comprehensive analysis of the development and performance of the company’s business during the financial year, and the position of the company’s business at the end of that year, consistent with the business's size and complexity (section 417(4), CA 2006).
To the extent necessary for an understanding of the development, performance or position of the business, analysis using financial key performance indicators (KPIs) and, where appropriate, analysis using other KPIs, including information relating to environmental and employee matters (section 417(6), CA 2006). KPIs mean factors by reference to which the development, performance or position of the company can be measured effectively. Medium-sized companies are not required to use non-financial KPIs but they may decide to report voluntarily, where appropriate, in recognition of the benefits that such disclosure brings to the business's operation (section 417(7), CA 2006). For details of the criteria to qualify as a medium-sized company, see Practice note, Small and medium-sized companies: accounts and reports: Qualification as a medium-sized company (www.practicallaw.com/8-379-0750)
Where appropriate, references to, and additional explanations of, amounts included in the company’s annual accounts (section 417(8), CA 2006).
A quoted company's (www.practicallaw.com/9-381-0489) business review must contain (to the extent necessary for an understanding of the development, performance or position of the business) the following additional disclosures:
An analysis of the main trends and factors likely to affect the future development, performance or position of the company's business (section 417(5)(a), CA 2006).
Information on environmental matters, employees and social and community issues, including information about the company’s policies in these areas and the effectiveness of those policies (section 417(5)(b), CA 2006).
Information about persons with whom the company has contractual or other arrangements which are essential to the company's business (section 417(5)(c), CA 2006). As this could require disclosure of commercially sensitive information, disclosure is not required where it would, in the directors' opinion be seriously prejudicial to the other party to the arrangements and contrary to the public interest (section 417(11), CA 2006).
If the review does not contain any of the information referred to in the second and third points above, the quoted company must include a statement to the effect that it is not including information of this kind (section 417(5), CA 2006).
Information on impending developments or matters in the course of negotiation do not need to be included in a business review if the directors consider that such disclosure would be seriously prejudicial to the company's interests (section 417(10), CA 2006). For companies subject to the Transparency Rules (www.practicallaw.com/8-209-4960), it may be difficult to make use of section 417(10) if this conflicts with the true and fair view requirements of the Transparency Rules. For further information, see Practice note, Listing Rules and Disclosure and Transparency Rules: continuing obligations: Financial information (www.practicallaw.com/7-203-5631).
The company auditor must state in the auditor's report (www.practicallaw.com/0-107-6452) on the company's annual accounts, whether the information in the directors' report, including the business review, is consistent with the accounts (section 496, CA 2006).
A director is liable to compensate the company for any loss it suffers as a result of any untrue or misleading statement in, or omission from, the directors’ report (including the business review), only if the director knew or was reckless as to whether the statement was untrue or misleading or knew the omission to be dishonest concealment of a material fact (section 463, CA 2006) (see Practice note, Statutory liability for false or misleading statements, omissions and dishonest delay: company reports and published information relating to securities (www.practicallaw.com/6-378-9413)).
The Financial Reporting Review Panel has the legal authority to review directors’ reports (including the business review) and, if the report fails to comply with the statutory requirements, to go to court and compel a company to revise its report (section 456, CA 2006).
There is no statutory reporting standard for the business review but compliance with the Accounting Standards Board (ASB) Reporting Statement: Operating and Financial Review (January 2006) is recognised by the Financial Reporting Council and the government as best practice in narrative reporting. For further information, see Practice note, Voluntary operating and financial review (www.practicallaw.com/6-376-4455).
Other institutions have also published guidance to help companies in reporting on climate change or environmental risks in their annual corporate reports. For example, the Department for Environment, Food and Rural Affairs (www.practicallaw.com/4-203-6731) has published guidance (www.practicallaw.com/4-201-8765) on KPIs and how to use them in reporting. For further information, see Practice note, Environmental reporting for companies: mandatory: CA 2006 relevant guidance (www.practicallaw.com/5-501-2161).
The government has published a consultation (www.practicallaw.com/0-521-9499) on the draft Companies Act 2006 (Strategic Report and Directors' Report) Regulations 2013, which are scheduled to come into force on 1 October 2013 and have effect in relation to financial years ending on or after that date. Under the draft Regulations, the business review requirement will be replaced by a new requirement to produce a standalone strategic report. For further information, see Practice note, Business review: BIS: consultations on narrative reporting and draft Companies Act 2006 (Strategic Report and Directors' Report) Regulations 2013: 1 October 2013 (www.practicallaw.com/8-376-4138).
For links to company annual reports which contain business reviews, see: