FRC guidance on annual reports

The Financial Reporting Council (FRC) has issued guidance on key issues and improvements that can be made to annual reports in the 2016 reporting season to help to foster investment in the UK. The guidance is contained in a letter sent to audit committee chairs and finance directors involved in the preparation of annual reports of around 1,200 large and smaller listed companies. See http://bit.ly/2dhkFxA.

The annual report provides an opportunity to communicate key information to investors about the company’s performance, strategy and future prospects. In particular, investors expect:

•        a clear explanation of the relationship between IFRS or UK GAAP measures and any alternative performance measures used;

•        business model reporting to provide clear explanations of how the company makes money and what differentiates it from its peers;

•        disclosure of a clear link between the business model and the revenue recognition policies; and

•        dividend disclosures to detail how dividend policies operate in practice and how these policies may be impacted by risks and capital management decisions facing the company.

The letter notes that companies’ tax arrangements are an area of increasing public focus, which can give rise to significant risk. Companies need to respond to increasing scrutiny of their tax strategies, including where they pay tax; consider whether these strategies are sustainable; and ensure that any material risks are described clearly in the report and accounts.

Three major standards will become effective in the next few years: IFRS 15 Revenue from contracts with customers (effective for periods beginning 1 January 2018); IFRS 9 Financial Instruments (effective 1 January 2018); and IFRS 16 Leases (effective 1 January 2019). Companies should provide information on progress made towards the implementation of these standards and disclose the likely impacts of each once they can be reasonably estimated.