On 10 October 2017, the FRC published its letter to Audit Committee Chairs and Finance Directors drawing companies' attention to areas of investor focus for 2017/18 annual reports. The letter confirms that the FRC will consult on its eagerly awaited fundamental review of the Corporate Governance Code in November 2017. It is therefore unlikely that the new Code will be published any earlier than the first quarter of 2018. Similarly, the FRC indicates that it aims to finalise the revised Guidance on the Strategic Report (which is currently being consulted on) in the first half of 2018, so many companies will be preparing their 2017/18 annual reports without the benefit of the final form of this Guidance. 

In the interim, the FRC has issued a factsheet on the impact of the amended requirements for the Strategic Report (as required by regulations implementing the EU Non-Financial Reporting Directive (2014/95/EU)). In its letter, the FRC highlights the following areas for preparers of a company's 2017/18 annual report:

  • implementation of new accounting standards (IFRS 9 (Financial instruments), IFRS 15 (Revenue from contracts with customers) and IFRS 16 (Leases)) - include detailed quantitative disclosures explaining the expected impact of implementation of the new standards in the last set of financial statements before the implementation date.
  • the Strategic Report:
    • non-financial reporting - take account of the consultation on amendments to the Strategic Report Guidance, which are intended to: (1) reflect the UK's implementation of the EU Non-Financial Reporting Directive; and (2) improve the effectiveness of section 172 of the Companies Act 2006 and encourage companies to consider the broader drivers of value that contribute to the long-term success of the company.
    • performance reporting - take note of the FRC thematic report on alternative performance measures due to be published by the end of 2017 and previous publications on the same.
    • viability statements - rather than the typical three year period, consider a broader range of time periods to take account of the full range of factors that should be considered. Consider the Financial Reporting Lab's (the "Lab's") report on risk and viability reporting, due to be published by the end of 2017.
    • Brexit - consider making more detailed / specific disclosures on the likely risks to business.
  • Financial Statement disclosures:
    • statement of cash flows - consider the new standards issued by the IASB and the amendments to IAS 7 (effective for periods beginning on or after 1 January 2017).
    • dividends - take account of the Lab's recommendations in its implementation study on dividends.
    • critical judgments and estimates - avoid boilerplate disclosure and consider the FRC's thematic review on this topic, due to be published by the end of 2017.
    • accounting policies – sufficiently tailor disclosure to the individual company's circumstances.
    • defined benefit pension schemes - improve transparency regarding the risks they pose and consider the FRC's thematic review on this topic, due to be published by the end of 2017.
    • business combinations - clear disclosure on this is imperative.
  • audit quality and effectiveness - the FRC will be looking for evidence that the auditor challenged management and reported clearly to the audit committee.

The FRC's letter came out a day after the Institute of Directors published its third annual Good Governance Report, which ranks the UK's largest listed companies based on their corporate governance performance, with the drinks giant Diageo PLC topping this year's list, closely followed by the insurer, Aviva PLC, the engineering firm, GKN PLC, and Barclays PLC. According to the Report, which examines a range of 47 factors including board diversity, executive pay and the length of a company's auditor appointment, energy companies outperformed other companies overall, while IT companies underperformed.