Narrative reporting

We consider what the narrative reporting requirements of private companies. If you live in the Surrey area we, at Joseph Louis & Co, can provide advice to ensure that your accounts include information which is appropriate to your business.

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 current size limits are as follows:

Micro Small Medium
Turnover £632,000 £10.2m £36m
Total assets £316,000 £5.1m £18m
Employees 10 50 250

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.


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 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:

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.

The reporting requirements are in the process of being enhanced, with additional disclosures being introduced. Before these are considered though let’s examine the existing narrative reporting requirements.

Strategic report

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

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:

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.

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:

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.

New requirements applicable to periods commencing on or after 1 January 2019

The Companies (Miscellaneous Reporting) Regulations 2018 take effect for accounting periods commencing on or after 1 January 2019.

These regulations only make one change to the strategic report, and this is only applicable to large companies. A new requirement has been introduced to include 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:

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.

The regulations also have the following implications for the directors’ report:

New environmental reporting requirements applicable to periods commencing on or after 1 April 2019

As part of the need to address climate change and encourage companies to consider their responsibilities towards the environment new regulations have been introduced that apply to large companies for periods commencing on or after 1 April 2019 that require them to include disclosures in their directors’ report on environmental matters.

For low energy users, that is a large company 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 that do not qualify as low energy users will need to disclose the following:

Although this new requirement only applies to large companies (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’.

Clearly these disclosure requirements are going to prove challenging to many companies. The Government had produced detailed guidance to assist companies meet their obligations.

How we can help

If you live in the Surrey area we, Joseph Louis & Co, will be very pleased to discuss the impact on your company of the narrative reporting requirements outlined above. If you would like to discuss these issues in more detail, please contact us.