FRC's Corporate Reporting Annual Review 2016
The Financial Reporting Council (FRC) has published its Corporate Reporting Annual Review for 2015/2016. As in previous years, the review is based upon the work of the FRC during the course of the year, including its reviews of annual reports and the work of the Financial Reporting Lab.
The FRC finds that:
- compliance with the accounting framework, particularly by larger public companies is generally good and the introduction of the strategic report has improved the quality of narrative reporting (see below);
- there is room for further improvement in reporting particularly as not all companies provide sufficient balance;
- many companies still need to provide more specific, granular accounting policies, particularly around revenue recognition;
- companies should provide quantified information on how changes to estimates could affect the following year's results;
- there continue to be examples of companies giving too much emphasis to alternative performance measures or proforma information prepared on a non-IFRS basis and failing to discuss their IFRS results;
- companies need to respond to increasing stakeholder scrutiny of their tax strategies;
- there is room for further improvement in linking more detailed disclosure of how dividend policies operate in practice to how those policies may be impacted by the risks and capital management decisions facing a company;
- a clear description of a company's culture, values and behaviour expectations with an assessment of how they are measured can provide a valuable basis for a deeper conversation both with investors and other stakeholders; and
- companies should consider how they might report concisely on how their directors have discharged their duty to have regard to other stakeholders, as required by section 172, Companies Act 2006.
Specific findings on the strategic report were that:
- situations continue to be identified where it is not clear whether a company has complied with the Companies Act 2006 requirement for the strategic report to contain a review of the business that is fair, balanced and comprehensive; and
- the balance of strategic reports were challenged where the narrative focused solely on positive trend information but certain trends were negative and there was no discussion of the results of material parts of a particular business.
The FRC has also taken the opportunity to repeat its nine characteristics of good corporate reporting and provide various case studies dealing with:
- significant accounting judgements and estimates; and
- pensions disclosures.
Examples of other good disclosures, for example as regards transparency in tax, are also set out.
FRRP publishes technical findings for 2015/2016
The FRC's Conduct Committee has published a presentation which sets out the accounting and corporate reporting issues raised most often during the work of its Financial Reporting Review Panel (FRRP) during 2015/2016. This supplements the Corporate Reporting Annual Review mentioned above.
The presentation highlights that the most frequent areas of questioning including in relation to the strategic report, accounting policies and critical judgements, and where reports contain estimates.
As regards the strategic report, the FRRP challenged companies where:
- reviews did not appear to be appropriately balanced;
- reviews did not discuss all relevant aspects of performance;
- financial information appeared not to be comprehensive;
- there was a question as to whether all risks and uncertainties were genuinely principal or there was no discussion of how risks were managed or mitigated; and
- there was a lack of linkage between KPIs and strategic elements of the business, or where KPIs were not adequately identified and discussed.