Financial reporting in 2017

16 January 2017

Getting your Strategic Report right

The FRC’s Financial Reporting Review Panel has published its report on the accounts of Sports Direct International plc for the year ended 26 April 2015. The principal issue arising related to whether the 2015 strategic report complied with the Companies Act 2006 requirement to be balanced and comprehensive. The fact that a Press Notice was published on the report is tangible evidence of the increased focus the FRC has placed on narrative reporting in recent times, and not just for high profile groups.

In its Annual Review of Corporate Reporting 2015/16 ( see BE November 2016), the FRC noted that its review team continued to identify situations where it is not clear whether a company’s strategic report contained a review of the business that was fair, balanced and comprehensive. It stated that the balance of strategic reports was challenged where:

  • The narrative focused solely on positive trend information but certain trends were negative
  • There was no discussion of the results of material parts of the business, or
  • The discussion focused exclusively on the income statement.

The FRC also stated that a comprehensive review of the business should include all aspects of performance, including cash flows, and the company’s closing financial position. Examples of missing information identified included a lack of discussion of:

  • A company’s effective tax rate and its sustainability (this informed the FRC’s decision to launch a thematic review of tax reporting (see BE November 2016 for the report of the review)
  • Relevant non-financial KPIs, such as order book status
  • Working capital movements
  • The effect of a business combination on the balance sheet.

The FRC also noted that missing balance sheet or cash flow narrative was identified more often in smaller company accounts.

We expect the FRC’s close scrutiny of strategic reports to continue into the coming reporting period and beyond.

The FRC will be watching

Following on from its thematic review on tax disclosures (see BE November 2016), the FRC has announced a further three corporate reporting thematic reviews that it intends to conduct in 2017. The topics for these new thematic reviews are:

  1. Significant accounting judgments and sources of estimation uncertainty
  2. Pension disclosures
  3. Alternative Performance Measures (APMs).

The FRC’s aim is to drive continuous improvement in the quality of corporate reporting and to identify good examples of clear and concise disclosures – it will share good examples to help others raise the quality of their reporting.

As with previous thematic reviews, the FRC will write to a number of companies prior to their year-end, inform them that it will review disclosures in their next published reports and specify the topic under review. Many companies that will be participating in these thematic reviews will be receiving letters in the next couple of weeks as the reviews include December 2016 annual reports. Aside from the three theme areas that will be closely scrutinised, the FRC has announced that it will also monitor and report on companies’ disclosures relating to:

  • The impact of new IFRSs, including the timeliness and usefulness of the information provided, and
  • Principal risks and uncertainties relating to Brexit and the low interest rate environment and the extent to which they are company specific.

For help and advice on financial report please contact Richard Matthews.

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