FRC publishes year end advice for preparers of annual reports

The Financial Reporting Council has issued guidance to those involved in the preparation of annual reports of listed companies. This highlights key reporting issues and areas where reporting could be improved.

Narrative reports

In relation to narrative reports:

  • Investors call for annual reports to be more user-friendly and for information to be presented more clearly.
  • In the business model, more explanation should be provided on how the company makes money and what differentiates it from its peers. Also, there needs to be a clear link between sources of income described in the business model and revenue recognition policies.
  • Companies should follow ESMA's guidance on alternative performance measures and ensure that their use of APMs (such as some KPIs) does not replace or obscure IFRS or UK GAAP information.
  • Companies should consider a broad range of factors when determining principal risks and uncertainties facing the business, such as cyber security, climate change and Brexit. The FRC expects boards to provide increasingly specific disclosures on Brexit as the economic and political effects become more certain. It refers companies to its July 2016 reminder on matters to consider.
  • In the viability statement, companies should provide clear disclosure of why the period of their assessment is appropriate for the particular circumstances of the company, what qualifications and assumptions were made and how the underlying analysis was performed.
  • Investors would like to see more clarity and brevity in remuneration reporting.
  • Audit committees should disclose more about the specific actions they have taken. When disclosing significant issues under the UK Corporate Governance Code, they should also mention (i) any interaction with the FRC's Corporate Reporting Review team and (ii) any significant findings of the FRC's Audit Quality Review team and the actions being taken in response to those findings.

Disclosures in financial statements

In relation to disclosures in the financial statements, the FRC places a new emphasis on tax disclosures alongside dividends and more general accounting issues. In particular:

  • Companies need to respond to increasing stakeholder scrutiny of their tax strategies, including where they pay tax, and to consider whether they are sustainable. Any material risks should be clearly described in the report and accounts.
  • Companies should articulate better how they account for material tax uncertainties by explaining the bases for recognition and measurement. The FRC expects more companies to disclose the amount of their tax provisions in the notes to the accounts.
  • Detailed disclosure of how dividend policies operate in practice should be linked to how those policies may be affected by the risks and capital management decisions facing the company.
  • In the FRC's view, there is no requirement in the Companies Act 2006 for companies to disclose a figure for distributable profits or multiple figures for distributable profits. However, it encourages companies to pay close attention to their investors' views. The Local Authority Pension Fund Forum has repeatedly called for separate disclosures.
  • Companies should consider carefully the valuation of long-term assets and liabilities, e.g. the effects of adjusted discount rates on pension scheme liabilities and suppressed returns on pension scheme assets. It may be necessary to provide sensitivity analysis to highlight potential impacts.
  • There is a need for improvement in the disclosures of accounting policies, especially revenue recognition, and of critical judgments and estimates, especially the sources of estimation uncertainty that are likely to have a material effect on the following year's results.
  • The FRC expects companies to explain exactly when revenue from complex long-term contracts is measured.
  • Companies should provide information on progress in implementing IFRS 15 (revenue from contracts) and IFRS 9 (financial instruments) and disclose the likely impacts of each of the new standards once they can be reasonably estimated.

The FRC is expected to issue further publications on reporting in the next few weeks. These include its annual corporate reporting review, a Financial Reporting Lab report on business model disclosures and thematic studies on (i) alternative performance measures and (ii) tax reporting.

The FRC's letter can be found here.