FRC tips for 2017/18 annual reporting requirements

The Financial Reporting Council (FRC) has written to companies to highlight changes to reporting requirements and key areas where improvements can be made when preparing annual reports for the 2017/18 reporting season, with a particular focus on meeting investors’ requirements

The letter covers a number of areas which the regulator says investors will want to focus on. They include the implementation of new accounting standards (IFRS 9, IFRS 15 and IFRS 16), where companies should be making detailed, quantitative disclosures explaining the expected impact of the new standards on their reporting in the last set of financial statements before the implementation date.

The FRC states: ‘In the last set of financial statements before the implementation date we expect to see detailed quantitative disclosure regarding the effects of the new standards. We expect companies to have made a step change in the quality of their disclosures this year, particularly in respect of IFRS 15 and IFRS 9.’

The FRC points out that new regulations implementing the EU directive on non-financial and diversity information are effective for financial years beginning on or after 1 January 2017. It is consulting on amendments to the guidance on the strategic report to reflect the new requirements, which are expected in 2018 but has provided an interim factsheet on the issue.

The letter says the proposed amendments to the guidance also look to improve the effectiveness of section 172 of the Companies Act 2006 and the FRC is encouraging companies to consider the broader drivers of value that contribute to the long-term success of the company.

It also wants to see further improvements to viability statements which it suggests could be done in two stages. The first step is to consider the prospects of the company over a period reflecting its business and investment cycles, while the second is to state whether they have a reasonable expectation that the company will be able to continue to meet its liabilities as they fall due over the assessment period, drawing attention to any qualifications or assumptions.

The letter points out that only 30% of FTSE 250 companies are reporting on the level of their distributable profits/ reserves, and says it wants to see more reporting on the capacity to pay dividends.

It repeats previous FRC concerns around boilerplate and generic disclosures, and says information value can be improved by providing more granular information about a smaller set of judgements and estimates that had a significant impact on results and explaining why certain assets were subject to significant risk of material change.

On accounting policies, the letter says some accounting policy disclosures reviewed by the FRC ‘appear to be out of date, irrelevant, immaterial or based on boilerplate text taken from the standard. This tends to be more common in the accounts of smaller listed companies’.

The regulator wants companies to ensure that their disclosures are sufficiently tailored to their circumstances. For example, revenue accounting policy disclosures should cover each significant business stream.

Finally, the FRC points out that continued low interest rates and the economics of defined benefit pension arrangements have increased the need for companies to improve the transparency regarding their pension arrangements.

The letter concludes: ‘The annual report provides an opportunity to communicate key information to investors about the company’s performance, strategy and future prospects.  It should therefore be presented in a user-friendly, clear and concise manner.’

FRC advice for preparing 2017/18 annual reports is here.

Report by Pat Sweet

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