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31 October 2016

FRC announcement on key developments for 2016 annual reports

By Tom Ryan

The Financial Reporting Council (FRC) has recently published guidance for listed companies preparing annual reports. This guidance is designed to help foster strong investment in the UK in the light of Brexit.

The FRC guidance focuses on the strategic report, financial statement disclosures, remuneration reporting and audit committee reporting.

Strategic report

When preparing the strategic report, companies need to ensure they comply with all the legal requirements while still providing a user-friendly, informative report for investors.  The FRC noted the following areas where improvement is needed:

  • Disclosure of financial position and cash flows, particularly for smaller companies;
  • Disclosure of financial performance, particularly for smaller companies;
  • Explanations of how the company makes money and what differentiates it from its peers;
  • The use of alternative performance measures;
  • In relation to Corporate Governance, disclosure of the reasons why the period of assessment for risks is appropriate for the company, what qualifications and assumptions were made, and how the underlying analysis was performed; and
  • Specific disclosures in relation to Brexit including quantification of the effects.

Financial statement disclosures

The areas that the FRC have drawn attention to are as follows:

  • Tax, including explanations of the company’s effective tax rate and how they account for material tax uncertainties;
  • Dividends, including more detailed disclosure of how dividend policies operate in practice and how those policies are impacted by risks and capital management decisions;
  • Interest rates, including the impact of low interest rates on the valuation of long term assets and liabilities;
  • Critical judgements and estimates, including the consideration of the use of quantitative disclosures;
  • Accounting policies, in particular in relation to revenue recognition; and
  • Developments in IFRS, including improved disclosure on the impact of new standards such as IFRS 15, IFRS 9 and IFRS 16.

Remuneration reporting

Companies should ensure they provide clarity and brevity in their remuneration reporting while still considering the guidance in the ‘Directors Remuneration Reporting Guidance’.

Audit committee reporting

Companies should provide informative reporting about the specific actions taken by audit committees and should refer to the FRC guidance ‘Audit Quality Practice Aid for Audit Committee’ to assist with evaluating and reporting on audit quality.

Our disclosure checklists include the disclosure requirements needed to ensure that the strategic report and financial statement disclosures comply with all the relevant legal and GAAP requirements.  It is worth reviewing your answers to the checklist using the report function in light of this announcement. If you are having trouble finding any particular disclosure, remember you can use the search function in the Disclose software to find these areas quicker.

For the full FRC press release, this can be found here.

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