In light of recent changes to annual reporting requirements, the UK’s Financial Reporting Council (FRC) has issued a reminder of the implications for those involved in the preparation of financial statements.
The guidance is mainly relevant for statutory annual reports, but preparers are encouraged to bear in mind the underlying principles when producing preliminary statements also.
Over the past year, the FRC has called upon companies to ensure that annual reports provide information that is relevant to investor requirements. “We encourage you and your management to consider how best to tell the story of your company’s strategies, performance, position, and prospects as clearly and concisely as possible to improve the accessibility of relevant information for investors,” Stephen Haddrill, CEO, said in a news release.
For the current reporting season, preparers should consider the following:
- Materiality. Preparers are encouraged to consider the materiality of information provided in strategic reports, as well as how the information is organised, so that relationships between strategies, KPIs, and director remuneration are evident and the language used is clear. Examples of how early adopters sought to implement change in the 2013 reporting cycle can be found in the FRC report Towards Clear & Concise Reporting.
- Fair, balanced, and understandable accounts. Also in 2014, the UK Corporate Governance Code established a requirement for accounts to be “fair, balanced and understandable.” Companies are therefore urged to explore how they might continue to improve in this area. A revised UK Corporate Governance Code was issued in September, and though the changes apply to years beginning after October 2014, companies may wish to adopt the provisions before that.
- Reporting on issues considered in relation to the financial statements. The FRC also encourages preparers to improve the quality of reporting on the issues considered by the audit committee in relation to the financial statements, as well as how these issues were addressed. In addition, an extended report should be provided to outline how the committee responded to the risks of material misstatement and applied materiality. Haddrill said in the news release that disclosures should reflect changes in the relevance and magnitude of risks in the stated year, as well as current responses, These recommendations relate to changes to the UK Corporate Governance Code and UK Auditing Standards in 2012 and 2013.
- Impact of pending international reporting standards. With regard to corporate reporting, where new international reporting standards have been introduced but not implemented at the time of publication, any material impacts these might have on the accounts must be disclosed if they can be reasonably estimated. In this context, preparers are encouraged to consider making disclosures on the likely impact of IFRS 9 on financial instruments and IFRS 15 on revenue, as issued by the International Accounting Standards Board in 2014.
- Dividend policy and capacity. Finally, though the subject is currently under review with a report expected to be published in mid-2015, preparers may wish to examine the clarity of disclosures on dividend policy and capacity. Areas of interest include “disclosure of overall dividend policy; of risks to dividends under the policy; and of links to the company’s strategy, capital commitments, capital investment, and liquidity needs.”
—Samantha White (firstname.lastname@example.org) is a CGMA Magazine senior editor.