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The Charity Commission and the Office of the Scottish Charity Regulator (OSCR) have issued an information sheet on how trustees should prepare a strategic report for certain charitable companies.

Information Sheet 5 The Strategic Report and Company Charities has been published following the introduction of changes to Companies Act 2006 that require all large and medium-sized companies  to prepare a strategic report for periods ending on or after 30 September 2013.

The requirement to include a business review in the directors’ report of such companies has also been removed from Companies Act, with the same effective date, as the business review has been replaced by the strategic report.

The legislative requirements that set out the duty to prepare and the content of a strategic report are included in the new sections 414A to 414D of Companies Act 2006.

Only charitable companies that do not qualify as small are required to prepare a strategic report. Small companies are defined in section 381 and section 382 of the Companies Act 2006. A parent company only qualifies as small, under section 383 of the Act, if the group headed by it qualifies as small.

A company qualifies as small in relation to its first financial year if two or more of the following qualifying conditions are met in that year:

(i) annual turnover (gross income) not more than £6,500,000

(ii) balance sheet total not more than £3,260,000

(iii) average number of employees not more than 50.

A group qualifies as small in relation to its first financial year if two or more of the following qualifying conditions are met in that year:

(i) aggregate annual turnover (gross income) not more than £6,500,000 (or £7.8m gross – before consolidation adjustments)

(ii) aggregate balance sheet total not more than £3,260,000 (or £3.9m gross – before consolidation adjustments)

(iv) average aggregate number of employees not more than 50.

Albeit the information sheet acknowledges that the purpose and required content of the strategic report does not differ significantly from that of the business review, which it replaces, it provides some additional guidance on the components of the strategic report and how they fit with the requirements for the trustees’ annual report under the SORP 2005.

In particular the information sheet explains that ‘affected charities should incorporate the strategic report into the Trustees’ Annual Report and Accounts (TAR). In approving the TAR, charity trustees must also approve the Strategic Report.’

The strategic report must contain:

  • a fair review of the company’s business
  • a description of the principal risks and uncertainties facing the company.

In section 4.3 of the information sheet it is highlighted that the strategic report is a distinct report, ie a separate report from the trustees’/directors’ report as prescribed by Companies Act 2006 that requires separate approval by the company’s directors, who are also the charity’s trustees.

However, ‘as most of the information required by the strategic report is already required under SORP 2005, to remove unnecessary duplication, the strategic report should be included within the trustees’ annual report as a separate clearly delineated section headed strategic report. Where information is provided in a “strategic report” section of the trustees’ annual report, it will form also part of trustees’ annual report and so will not need to be repeated in other sections of the trustees’ annual report in order to comply with the SORP’s requirements.’

Additionally the guidance recommends that in ‘approving the trustees’ annual report, the trustees must include a clear statement that they are also approving the strategic report in their capacity as company directors’.

The information sheet also contains a suggested structure for this combined report that would allow the information required in a strategic report to be presented as a separate section of the trustees’ annual report. The proposed structure is as follows:

  • reference and administrative details of the charity, its trustees and advisers
  • structure, governance and management
  • objectives and activities
  • strategic report which includes:
    • achievements and performance
    • financial review
    • plans for future periods
    • principal risks and uncertainties
  • funds held as custodian trustees on behalf of others.

It is also important to remember that the strategic report should be consistent with the size and complexity of the charitable business.

Further guidance on the new strategic report is available on ACCA’s Technical Advisory webpages while the Charity Commission has published Information Sheet 5.

Article from ACCA In Practice