FRC letters to smaller listed and AIM companies on how to improve annual reports

On 11 November 2015, the Financial Reporting Council (FRC) published a letter of advice to smaller listed and AIM companies on how to improve their annual reports. The advice follows on from the FRC discussion paper on improving reporting by smaller listed and AIM companies published in June 2015.

On 08 March 2016, the FRC published a further letter of advice in response to requests for guidance on how matters such as volatile asset prices and uncertainty over interest rates in certain jurisdictions should be dealt with in annual reports and accounts. 

The FRC reports that investors rely on the annual report. They value high quality reporting that is company specific and avoids the use of generic or "boilerplate" information and provides a meaningful picture of the business.

Strategic report: Investors expect the strategic report to:

• Be clear, concise, balanced and understandable. It should have a clear narrative including a clear description of the company's business model and strategy (best practice for AIM companies as this is only required for quoted companies); the main trends and factors likely to affect the future development, performance or position of the business; and linkages between information presented within this report and the annual report more widely.
• Include the principal risks and uncertainties that are material to the development, performance or position or future prospects of the company that are regularly monitored by the board; not a long list of generic risks. It should also explain why they are material and how they are managed or mitigated.
• Ensure the financial and non-financial key performance indicators are consistent with other financial information presented in the annual report.
• Ensure the analysis of the development and performance of the business in the report is balanced and comprehensive. Does the report provide sufficient explanation of the results, cash flows and balance sheet movements and trends?

Accounting policies, significant judgements and estimates: Investors pay particular attention to policies that are unusually aggressive or out of line with similar companies in the industry. They also seek to understand the more judgmental areas of the financial statements (where management estimation and judgment has been applied). The letter then lists questions companies should consider.

Cash flow statements: a company should ensure it has given adequate time to considering whether the classification of operating, investing and financing cash flows is consistent with the business model described in the strategic report; whether attention has been paid to the classification under accounting standards of unusual or non-recurring cash flows which may nonetheless meet the definition of operating cash flows; and whether late adjustments have been reflected in the cash flow statement.

The FRC also draws companies’ attention to the technical findings of the Financial Reporting Review Panel 2015-2016.