Both companies (16) and institutional investors (19) took part in the project.  Further input was received from “over 200” retail investors. 

The project report; ‘Accounting policies and integration of related financial information’ is part of the Financial Reporting Council’s (FRC’s) programme  of work to support clear and concise reporting; a project which began with the publication of ‘Guidance on the Strategic Report’, in June 2014.

The project report provides a number of observations in the areas of accounting policies, notes to the financial statements and integration of financial review:

Accounting policies

The project report highlights a number of “clear messages” for companies in relation to improving the placement of significant accounting policies and enhancing the quality of their disclosures.  It highlights that institutional investors “consider that policies that are not significant are clutter” and were more concerned with the quality of disclosures rather than their placement. 

The project report notes that investors are “generally happy” for companies to make their own judgements as to what their significant accounting policies are.  However investors identified a number of attributes that, if taken alone or together, may indicate that a significant accounting policy would need to be disclosed:

materiality of transactions classes and amounts, and importance to the nature of the business;

policies for all distinct revenue streams;

where there is choice of policy under IFRS, or significant judgement in selecting the policy; and

where there is need for management to apply significant levels of estimation or judgement in applying the policy. 

The project report also identifies what “good quality” looks like for investors in relation to policy disclosures and highlights that “accounting policy disclosure should be company-specific” and avoid “boiler-plate” disclosures.

Investors identified that policies should:

be written using plain, understandable language;

describe any judgements made in selecting the policy applied, and the rationale for them;

describe the company’s application of accounting policies (not summarise the IFRS standard), including the estimation/judgements made and their significance to reported amounts; and

describe new IFRS requirements only if they significantly, or are likely to significantly, impact the financial statements; and present the impact of changes in tabular format.

Many companies currently disclose additional accounting policies (beyond those that are significant) and the project report indicates that there are “diverse views” among investors with “some” retail investors preferring a complete list of policies to be disclosed in the annual report and others, such as institutional investors, preferring that only significant accounting policies are disclosed.

Notes to the financial statements

The project report highlights that, among other things, consistency of note order across companies and time is “highly valued” by investors.  

Integration of financial review

The project report indicates that most investors “prefer the traditional approach of placing management commentary and financial statement information in separate sections of the annual report”.

A number of examples are provided in the project report of current good practice in these areas.

The press release and the full project report are available from the FRC website. A slide deck summarising the key findings of the report is also available to download from the FRC website.