Article:

FRC encourages active investors

08 May 2017

The Financial Reporting Council (FRC) has written an open letter to investors ahead of the 2017 shareholder meeting season to highlight some recent developments in reporting – ie areas where they should expect to see better and more useful reporting. It also refers to the fact that the FRC’s year end reminder letter to companies in 2016 highlighted many of the same matters.

The principal matters investors are encouraged to look for are:

  • Business model reporting – Clearer explanations of how a business makes money and what differentiates it from its peers.
  • Alternative performance measures (APMs) – Disclosures that give a clear and complete understanding of the APMs presented, how they are calculated, why they are useful and, where relevant, reconciliation to amounts presented in the financial statements.
  • Risk reporting and viability statements – Clearer disclosure of why the period of assessment selected is appropriate for the particular circumstances of the company, what qualifications and assumptions were made, and how the underlying analysis was performed.
  • Brexit – Increasingly company-specific disclosures with, ultimately, quantification of the effects as the economic and political consequences become clearer.
  • Governance reporting – Fuller explanations of non-compliance with the provisions of the UK Corporate Governance Code, including background, a rationale for the action being taken and describing mitigating activities.
  • Audit committee reporting – Better reporting on the assessment of the effectiveness of the external audit process.
  • Financial statement disclosures – Drawing attention to key financial reporting matters highlighted by the FRC over the past year, including improved disclosures on:
    • Material tax uncertainties
    • Dividend policy and practice
    • The effect of low interest rates on the valuation of long-term assets and liabilities
    • Revenue recognition policies and their linkage to the business model
    • Critical accounting judgements
    • Significant sources of estimation uncertainty, including quantitative disclosures so users of the financial statements can fully understand their potential effect
    • Developments in International Financial Reporting Standards (IFRSs) – The company’s progress on the implementation of new standards (principally IFRSs 9, 15 and 16), including the likely impacts once they can be reasonable estimated.

Active Investors

The letter encourages investors to engage with companies to tell them the nature of information that they want to see and to actively challenge companies that fall short of expectations. The developments it highlights are likely to form the focus areas for the FRC’s Corporate Reporting Review team in the coming months.

Read the FRC's open letter.

For help and advice on corporate reporting please contact Richard Matthews

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