FRC letter to investors highlighting recent changes and developments in reporting

The Financial Reporting Council (FRC) has published an open letter to users of the financial statements in advance of the 2017 shareholder meeting season. Its purpose is to help investors understand some suggestions the FRC has made to help companies improve the quality and usefulness of disclosures as well as highlighting the projects the FRC has undertaken to improve reporting.

The FRC encourages investors to engage with companies to provide a steer on what information they believe is relevant and to challenge where reporting falls short of expectations. Those preparing of financial statements should be aware of this guidance and take steps to ensure that their financial reporting meets the expectations of their investors.

The FRC has called attention to the following specific reporting areas:

Strategic report

  • Companies should disclose more thorough information relating to their business model and how they differentiate from their peers. Where alternative performance measures (APMs) are used, sufficient disclosure should be included to allow users to understand how they are calculated, why they are useful and how they reconcile to figures presented in the financial statements. Companies should consider disclosure of the company specific effects of Brexit and quantification of these effects.

Corporate governance reporting

  • Where viability statements are presented, companies are encouraged to provide disclosure which is relevant to the circumstances of the company rather than a generic statement. In addition, companies are encouraged to explain the period of assessment, why it was selected, the qualifications and assumptions applied and how the underlying analysis was performed.
  • Where companies elect not to comply with key provisions of The UK Corporate Governance Code, they should provide specific explanations. This means setting out the background, providing a clear rationale for the action being taken and describing any mitigating activities.

Audit Committee reporting

  • Audit Committees should report on the quality and effectiveness of the external audit process in accordance with the FRC’s 2015 publication: ‘Audit Quality Practice Aid for Audit Committees’.

Financial statement disclosures

  • Companies should include more disclosure on how material tax uncertainties have been accounted for.
  • Companies should consider the effect of low interest rates on amounts reported in the financial statements and provide sensitivity analysis to highlight the potential impact on recognised assets and liabilities, where appropriate.
  • Accounting policy choices should be clearly explained. There should also be a clear link between the sources of income described in the business model and the entity’s disclosed revenue recognition policies.
  • The FRC has noted that dividend disclosure has improved following the 2015 Financial Reporting Lab report on dividend best practice. View further information on how clear dividend disclosure can help attract investment;
  • Quantitative analysis is encouraged to support narrative descriptions of key sources of estimation uncertainty where this will aid understanding.
  • Users of the financial statements are encouraged to challenge companies where disclosure is insufficient. 

IFRS developments

  • IFRS 15 Revenue from Contracts with Customers and IFRS 9 Financial Instruments are effective for periods beginning on or after 1 January 2018. In addition, IFRS 16 Leases is effective for periods beginning on or after 1 January 2019. Given comparative information will be presented for 2017 and 2018 years ends respectively, it is expected that substantial progress will have been made with regards to their implementation. Companies should disclosure their progress on the implementation of these standards and the likely impacts once they can be estimated reliably.

Read full shareholder letter here.