FRC tells companies how they can improve their annual reports

The Financial Reporting Council has written to companies to remind them of recent changes to reporting requirements and to highlight areas where reporting could be improved when they prepare their annual reports in the 2017/18 reporting season.

New accounting standards

The FRC notes that three new accounting standards, IFRS 9 (Financial instruments), IFRS 15 (Revenue from contracts with customers) and IFRS 16 (Leases), are soon to be implemented and may have a significant effect on companies' financial statements. It reminds companies to

  • disclose the likely impact as soon as this can be reliably measured;
  • provide clear disclosure by reference to their existing accounting policies;
  • provide detailed quantitative disclosure regarding the effects of the new standards, accompanied by explanations to show the underlying analysis. Disclosures should be tailored to the company's specific circumstances and transactions and describe the key judgements that management needed to make to comply with the new standards.

Strategic report

The strategic report is one of the areas which is most frequently subject to challenge through the FRC's monitoring activity. The FRC warns against "a compliance-focused approach" where this leads to lack of coverage or the report appears to lack balance. It also encourages companies to improve explanations of the relationships and linkages between different pieces of information, and draws specific attention to the need to explain linkages between KPIs and remuneration policies.

Non-financial reporting

The FRC is consulting on guidance on the new requirements to publish non-financial information in the strategic report. Pending finalisation of the guidance, companies should refer to the FRC factsheet. Consistent with the Government's evolving agenda for corporate governance reform, the FRC also encourages companies to:

  • provide better information on how boards have fulfilled their duty under Section 172 of the Companies Act 2006 to have regard to interests of specific groups of stakeholders and non-financial matters when taking business decisions;
  • disclose information on the broader sources of value which contribute to the long-term success of the company, although they may not be recognised in the financial statements. These include sources such as a highly-trained workforce, intellectual property or internally generated intangible assets;
  • describe how they engage with key stakeholders and how allocation of resources supports the achievement of company strategy and impact on stakeholders (e.g. what proportion of resource is directed to investing in research and development, to capital investment or to dividends).

Performance reporting

The FRC refers companies to its publications on alternative performance measures (financial measures not defined in IFRS or GAAP, such as sales per square metre or EBITDA), which explain how to comply with ESMA's guidelines on APMs. An update to the FRC 2016 thematic report on APMs is due to be published shortly.

Risk reporting and viability statements

Many companies use three years as the basis for the viability statement, partly because it reflects the medium-term business plan. Investors would like to see greater variation and the FRC suggests that the period should also reflect investment and planning periods, the board's stewardship responsibilities, the nature of the business and its stage of development and previous statements made, especially in raising capital. It therefore encourages companies to develop their viability statement in two stages:

  • consider and report on the prospects of the company over a period reflecting its investment and well as its business cycles;
  • state whether have a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due over the period of the assessment, drawing attention to any qualifications or assumptions as necessary.

The Financial Reporting Lab will publish a report on risk and viability reporting later this year to provide practical guidance to companies and highlight areas of good practice. The FRC is also conducting its own review.


Companies should keep their disclosures on the effects of the EU referendum under review. The FRC notes that some companies are starting to measure the longer-term effects of the decision and identify in more detail the specific nature of the likely risks.

Statement of cash flows

The FRC notes that, under IAS 7, companies are required to provide an explanation on changes in their financial obligations for financial years commencing on or after 1 January 2017. It refers to investor concern on disclosures on the use of financial facilities, such as invoice discounting arrangements and calls for companies to provide more detail on their reliance on such arrangements.


The FRC encourages companies to adopt the recommendations of the Financial Reporting Lab's implementation study on dividend disclosures and to report on their capacity to pay dividends, including the extent to which profits can be distributed by subsidiary companies.

Accounting policies

The FRC urges companies (especially smaller listed companies) to tailor their disclosures to the circumstances of the company and to take care to avoid out of date, irrelevant, immaterial or boilerplate disclosures. As an example of good practice, the revenue accounting policy disclosure should cover each significant business stream.

The FRC notes investor concern about disclosures in relation to accounting for teaser rates to encourage consumers to transfer credit card debts and mortgage rate offers. If the activity is material, companies should be transparent about the method applied to their income recognition.


Pensions disclosures should provide sufficient transparency of the nature and risks to which the pension scheme exposes the company and include informative explanations of deficit funding arrangements and risk management. The FRC will publish a thematic review shortly to encourage improvements in this area.

Further information

As noted above, a number of FRC thematic reviews will be published shortly to highlight best practice in relation to pensions disclosure, critical judgements and estimates and APMs. Also awaited are the FRC's annual review of corporate reporting and the Financial Reporting Lab's report on viability reporting.

Click here for the letter and accompanying press release.