Listed companies outside the FTSE 350 and AIM quoted companies are advised to follow FRC recommendations when preparing their annual report and accounts. This includes particular attention to certain aspects of strategic reports, accounting policies and cash flow statement reporting, which investors consider to be an important source of information.
The FRC’s corporate reporting thematic review provides details of specific deficiencies identified through a review of 40 such companies as well as identifying useful examples of good practice.
Summary of FRC expectations
1. Strategic Reports
'Strategic reports should contain a fair review of the business. The review should be a balanced and comprehensive analysis of performance and the position at the end of the year.'
2. Alternative Performance Measures
'The presentation of Alternative Performance Measures (APMs) should be transparent, reliable and understandable. APMs should not distract from the presentation of measures directly stemming from financial statements.'
Our summary of the FRC’s thematic review of APMs provides further guidance.
3. Pension disclosures
'Pension disclosures should enable users to understand the relationship between the pension expense, cash payments to the scheme and the surplus or deficit. They should also enable investors to appreciate the nature of scheme assets, the scheme’s investment strategy, the extent of its liabilities and associated risks.'
Our summary of the FRC’s thematic review of Pension disclosures provides further guidance.
4. Accounting policies, critical judgements and estimates
'Accounting policies should explain the application of the principles set out by relevant standards to the entity’s specific circumstances.'
Accounting policies should be specific to the business with appropriate tailoring. It will be important for companies to consider whether additional disclosures are required to explain large or unusual transactions in the current year.
'Revenue recognition policies should align with the business model, covering all material sources of revenue; redundant policies should be removed as soon as they cease to be relevant; and new policies should be included promptly.'
The FRC’s Thematic Review on IFRS 15 disclosures in Interim Statements, also provides guidance on specific areas where IFRS 15 disclosures can be improved for year-end reporting.
'Disclosure of judgements should provide an understanding of complex judgements made in applying accounting policies and enable a comparison of judgements made by different companies.
Disclosure of assumptions and sources of estimation uncertainty (estimates) should enable users to understand the potential impact of any changes on reported results.'
A summary of the FRC’s thematic review of judgements and estimates provides further guidance.
5. Cash flow statements
'Cash flow statements should separately present operating, investing and financing activities to allow users to assess their impact on the financial position of the entity and the amount of its cash and cash equivalents.'
- Cash flows should only be presented as investing activities where they result in a recognised asset and as financing activities when they result in changes in the company’s equity and borrowings.
- Cash flows from operating activities should include those that do not meet the definition of investing and financing activities.
- Cash effect of exceptional items should be disclosed.
- Information should be available on undrawn credit facilities and changes in liabilities arising from financing activities.
6. Tax disclosures
'Tax disclosures should show the current and future tax consequences of the recovery (settlement) of the carrying amount of recognised assets (liabilities), as well as the current and future tax consequences of current period transactions and other events.'
There should be:
- an explanation of the reported and future effective tax rates;
- effective tax rate reconciliations with informative labelling;
- application in the tax reconciliation of the most appropriate tax rate to pre-tax profit;
- explanations for the recognition of deferred tax assets where there is a history of losses; and
- disclosure of tax on items in other comprehensive income and equity.
In addition, for multi-national groups, the implications of future tax changes should include implications of issues such as restricted relief for interest expense, US tax reform and European Commission’s investigations into illegal state aid.
For further information please contact Louise Ward.