In the June 2015 edition of Business Edge, we highlight the publication of a discussion paper by the Financial Reporting Council (FRC) which proposed a programme of measures for improving the quality of reporting by smaller listed and AIM-quoted companies. As part of this initiative, the FRC has written a letter to around 1,200 smaller listed and AIM-quoted companies, with advice on ways in which improvements could be made to annual reports in areas that are of particular interest to investors.
In the letter, the FRC notes that investors:
- Stressed that good quality reporting by smaller companies was of considerable importance to them
- Relied on the annual report because other sources of information (such as analysts’ reports) were relatively scarce
- Valued high quality, company-specific reporting that communicates a meaningful picture of the business (ie avoids generic or ‘boilerplate’ information).
In particular, the letter highlights the qualities that investors expect to see in three key areas of the annual report.
Strategic report
Investors expect the strategic report to be clear, concise, balanced and understandable. In particular, it should include:
- A clear description of the company’s business model and strategy. Although this is only a requirement for quoted companies, it can be difficult to understand the strategic report without it.
- The main trends and factors likely to affect the future development, performance or position of the company.
- Linkages between information in the strategic report and annual report more widely. For example, are the descriptions of the revenue-generating activities consistent with the business segments in the annual report?
- The principal risks and uncertainties, not a long list of generic risks. The associated descriptions should explain why they are material and how they are managed or mitigated.
- Key performance indicators that are consistent with other information presented in the annual report.
The FRC refers readers to their Guidance on the Strategic Report for best practice guidance.
Accounting policies, significant judgements and estimates
Investors expect to be able to understand the more judgemental areas of the financial statements. For example:
- Accounting policies should be included for all significant transactions and revenue streams.
- Revenue recognition policies should allow readers to understand the point at which revenue is recognised for each material revenue stream.
- Asset capitalisation policies should make it clear how the capitalisation criteria are met.
- The disclosure of significant judgements and estimates should be clear and explain how management have made them.
- Accounting policies should be company-specific and relevant.
The FRC refers readers to the Financial Reporting Lab report on accounting policies and integration of related financial information for practical advice on what to think about in this area.
Cash flows
Investors expect the classification of cash flows, including unusual or non-recurring cash flows, to be appropriately classified as operating, investing or financing.
The FRC also draws attention to the Corporate Reporting Review team’s 2015 Annual Report, which highlights continued concern at the quality of financial reporting in smaller listed companies, and expands further on the common issues it has highlighted in the course of its work this year. Together, the letter and the 2015 Annual Report provide a good indication how the FRC will be looking for small companies to improve their reporting for the coming reporting season.
View the Business Edge 2015 index
Subscribe to receive the latest BDO News and Insights
Please fill out the following form to access the download.