FRC guidance on materiality in annual reports

Read the complete FRC guidance

What is the issue highlighted in the FRC guidance?

The guidance highlights concern that annual reports are becoming increasingly lengthy and complex due to the inclusion of information that may not be material to investors and other primary users.

The FRC states that excessive disclosure can obscure the most important information, making annual reports less useful as a decision-making tool. The guidance aims to help companies focus their reporting on information that genuinely matters, highlighting that under company law, the purpose of the annual report in the UK is to inform shareholders. UK entities may also need to consider the information needs and decisions of other existing and potential investors, lenders and other creditors.

The guidance emphasises that immaterial information should be excluded from the annual report as it may obscure material information, except in the case of certain legal or regulatory disclosures that are mandatory regardless of materiality. In such cases, entities may still have room to consider the appropriate level of detail to disclose, which may be influenced by materiality.

What does this mean?

The guidance reinforces that materiality is a matter of judgement. Information is considered material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions of shareholders, investors, lenders or other primary users of the annual report, when looking at the annual report as a whole.

Key messages of the FRC guidance include:

• Materiality applies throughout the entire annual report, not just the financial statements.
• Directors are responsible for determining what information is material.
• Both quantitative factors (for example, financial impact) and qualitative factors (such as strategic importance, risks, governance issues or climate-related uncertainties) should be considered, alongside the nature of the matter, and the context and circumstances of the business.
• Companies should avoid including immaterial information that could distract from key messages.
• Annual reports should present a clear, connected and coherent story linking strategy, risks, performance and future prospects.
• Strong connectivity helps make material information understandable and credible. Inconsistency or lack of connectivity between related disclosures in different parts of the annual report could raise concerns about the adequacy and appropriateness of information. For example, the UK Sustainability Reporting Standards (UK SRS) require disclosures about the effects of sustainability-related risks on the entity’s business model, strategy and financial statements, including effects in the current period and anticipated effects in the future.

What are the FRC’s six practical takeaways to consider when applying materiality to your next report?

1. Know your audience: start with primary users (investors, lenders, creditors) and what decisions they're making. Use stakeholder feedback and analyst reports to guide you.
2. Use your sources to identify potentially material information: scan board packs, risk registers, sustainability assessments, market trends and peer reports but avoid taking a checklist approach or adding disclosures ‘just in case’.
3. Filter the information: ask the materiality question: “could this information influence primary users’ decision-making?” If not, cut it or move it to your website.
4. Tell your story: structure disclosures around strategic themes. Use cross-referencing to link ideas and avoid duplication.
5. Step back and reassess: read the report cover to cover. Is it fair, balanced and understandable? Does it include all material information? Are the messages coherent and consistent internally, as well as with other communications such as investor presentations?  
6. Refresh your assessment every year: materiality isn't static, so make sure to remove content that is no longer relevant and, if necessary, redraft sections to reflect the latest strategic themes and key issues.

Who is the FRC guidance applicable to?

The guidance is relevant to:

• UK companies preparing annual reports.
• Boards of directors and audit committees responsible for corporate reporting.
• Finance, accounting and reporting teams involved in annual report preparation.
• Investors, lenders and other creditors who rely on annual reports for decision-making.
• Auditors and advisers supporting companies with financial and narrative reporting.