Problems with poor quality accounts produced by smaller listed and AIM quoted companies are still an issue according to the latest Financial Reporting Council’s (FRC) annual Corporate Reporting Review (CRR) although larger public companies are producing better quality annual reports
Ten companies had to make adjustments to their annual reports following an FRC review. They include WH Smith, which failed to recognise liability for a minimum pension funding requirement, Rolls-Royce Group, where there were issues with accounting for entry fees received from key suppliers, and GKN, which was challenged over its accounting for a pension funding arrangement involving a Scottish Limited Partnership.
The Co-operative Bank and Royal Bank of Scotland were also on the list of companies which failed to meet some element of their reporting requirements initially, along with Anglo-Eastern Plantations, Anglo Pacific Group, Eland Oil & Gas, Pendragon and Kazakhmys.
In general, the FRC says FTSE 350 companies in particular are meeting standards for reporting, including efforts to reduce clutter and improve clarity by removing immaterial or unnecessary disclosures. In April 2014, it established a project to help improve the quality of reporting by smaller companies within the next three years, which is currently assessing the issues.
Richard Fleck, chair of the FRC’s financial reporting review panel, said: ‘We believe that trustworthy information engenders trustworthy behaviour, which in turn encourages investors to continue providing long term finance in capital markets.’
The CRR also identified areas where it believes finance directors and audit committee members should have particular focus when planning their next report and accounts.
These include the need to assess the accounting effect of any changes in the structure of pension arrangements following the introduction of IAS 19, Employee Benefits. The regulator noted that there had been ‘variable practice’ regarding companies’ quantification of their minimum pension funding requirements, and will be monitoring whether the information provided is adequate.
The FRC wants companies to consider the effect of new accounting standards in areas such as consolidation and revenue, and says it will be looking at how companies have applied IFRS 10, Consolidated Financial Statements, on its initial adoption.
In addition, the regulator wants companies considering acquisitions to revisit their approach to identifying and recognising intangible assets, such as brands or customer lists, acquired as part of a business combination.
The report is based on a review of 271 sets of reports and accounts in the year to 31 March 2014, of which 100 companies (37%) were approached for further information and explanation.