FRC’s year-end reminder letter
11 November 2016
As usual, the Financial Reporting Council (FRC) has written to the audit committee chairs and finance directors of large and smaller listed companies highlighting improvements that can be made to annual reports and key issues that should be addressed. The key points raised for the 2016 reporting season are summarised below.
- Clear and concise initiative – The FRC sees room for improvement in the strategic reports of many smaller companies, including the need to consider whether they have adequately discussed their financial position and cash flows as well as their performance.
- Business model reporting – The clarity of the explanation of how a company makes money and what differentiates it from its peers is a key area of improvement for business model disclosures. The FRC draws attention to the recently published Financial Reporting Lab report on the subject.
- Alternative Performance Measures (APMs or non-GAAP measures) – The FRC says that using these should not replace or obscure IFRS or UK GAAP information and draws attention to the ESMA guidelines.
- Risk reporting and viability statements – Companies should consider a broad range of factors when determining the principal risks and uncertainties they are facing. In addition, the letter indicates how companies can improve their disclosures when making longer-term viability statements in accordance with the UK Corporate Governance Code.
- UK EU referendum result – The FRC expects increasingly company-specific and quantified disclosures to be made as the economic and political effects of ‘Brexit’ become more certain (see its 12 July 2016 press release).
Financial statement disclosures
- Tax disclosures – The FRC draws attention to its recently published thematic review report on tax disclosures. [link to BE2]
- Dividends – Further improvements could be made in this area as set out in the Financial Reporting Lab’s report on the disclosure of dividend practice and policy.
- Low interest rates – Companies should pay particular attention to the impact and consider the need for sensitivity analysis to highlight the potential effect on long-term assets and liabilities.
- Critical estimates and judgements – Clearer explanations of critical accounting judgements are needed, not just disclosure of their existence. Where necessary to understand the potential effect of significant estimates, they should be quantified and sensitivities and/or ranges of outcomes disclosed.
- Accounting policies – The FRC continues to call for improved revenue recognition policies which have a clear link to the business model and other front-end narrative.
- Developments in IFRSs – Companies should provide information on the progress of their analysis and implementation of new standards (principally IFRSs 9, 15 and 16) and disclose the likely impacts of each once they can be reasonably estimated.
The FRC highlights the revised guidance issued by the GC100 and Investor Group, which is relevant to quoted companies preparing a Directors’ Remuneration Report.
Audit Committee reporting
There should be more informative reporting about the specific actions taken by audit committees and the significant issues that they have considered.
The themes in this letter are further expanded upon in the FRC’s recently published Annual Review of Corporate Reporting 2015/2016 and are likely to influence the focus of the FRC’s Corporate Reporting Review team in the coming months.
For more information on financial reporting issues please contact Richard Matthews.
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