FRC’s perspective on matters relevant for larger listed companies’ 2015 annual reports
The Financial Reporting Council (FRC) has written to audit committee chairs in larger listed companies summarising key developments relevant for 2015 annual reports. This letter follows a similar letter written to 1,200 smaller listed and AIM-quoted companies in early November - see the December 2015 edition of Business Edge . The areas highlighted in the letter to larger listed companies are as follows:
Clear and concise reporting
Companies are encouraged to avoid boilerplate disclosures and to ensure that the annual report contains only information that is material to investors. The letter refers to the IASB’s recent amendments to IAS 1: Financial statements - Presentation which, although mandatory for periods beginning on or after 1 January 2016, are available for early adoption. In those amendments, the IASB notes that the inclusion of immaterial information in financial statements can obscure relevant information. See also FRC publishes guidance on clear and concise narrative reporting.
The letter encourages companies to consider materiality in reporting ‘principal’ risks in their strategic report, noting that investors do not expect to see a long list of all possible risks. The letter does indicate, however, that investors have expressed surprise that risks relating to data protection in IT systems, other ‘cyber risks’ and risks arising from climate change are not more often reported as principal risks. The letter also highlights the new longer-term viability statement disclosures that are required under the UK Corporate Governance Code (September 2014) (see Business Edge September 2015) and, in particular, the requirement for directors to explain their reasoning for choosing the period covered by the statement.
Particular areas where companies are encouraged to improve their disclosures are:
- Critical judgements and accounting policy choices
- The likely impact of the adoption of IFRS 9: Financial instrumentsand IFRS 15: Revenue from contracts with customers
- Alternative performance measures
On disclosure of dividends, the letter highlights the recently published Financial Reporting Lab report ‘Disclosure of dividends – policy and practice’ . It also notes, with reference to a letter recently written to a number of company chairmen on the subject, that BIS has confirmed to the FRC that the Companies Act 2006 does not require the separate disclosure of a figure for distributable profits.
The UK GAAP reduced disclosure framework
Companies are reminded that groups that apply EU-endorsed IFRSs in their consolidated financial statements can choose to apply UK GAAP (including, subject to meeting the required conditions, the reduced disclosure options - see Business Edge September 2015) in the individual financial statements of the companies (ie parent and subsidiaries) within the group.
The letter highlights that the Financial Reporting Lab’s report ‘Digital present’ notes that investors identify the PDF as their preferred digital mechanism for reading and viewing the annual report and encourages companies to ‘think screen first’ when drafting the document.
The letter notes that institutional investors have told the FRC that they support the move away from quarterly reporting. They have also asked the FRC to encourage companies, when they are reporting outside of the annual report cycle, to focus on matters that are of importance to the longer-term prospects of the company.
Finally, the letter indicates that the FRC will be seeking to make changes in the transparency of its corporate reporting review operations during 2016. This will involve a consultation process to the extent that the changes affect their current operating procedures.
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