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FRC publishes year-end advice to preparers of smaller listed and AIM quoted company annual reports

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11 Nov 2015

The Financial Reporting Council (FRC) has today published a letter containing year-end advice to preparers of smaller listed and AIM quoted company annual reports.

The year-end advice focuses on those areas that investors pay particular attention to; areas highlighted in the FRC’s report Improving the Quality of Reporting by Smaller Listed and Aim Quoted Companies, published in June 2015.  In that report, investors indicated that good quality reporting by smaller companies was of paramount importance to them; not least as the annual report if where they place most focus for their investment decisions in the absence of other sources of information in the sector such as analysts’ reports.

The year-end advice covers three areas:

Strategic Report

The FRC indicates that in preparing the strategic report a company should:

  • Set out a clear narrative including:
    • a clear description of the business model and strategy;
    • the main trends and factors likely to affect the future development, performance or position of the business; and
    • provide linkage between various aspects of the annual report;
  • Ensure that it only includes the principal risks and uncertainties that are material to the company, explain why these are material and not include generic risks;
  • Ensure that financial and non-financial key performance indicators are consistent with other information presented within the annual report; and
  • Ensure that there is a balanced and comprehensive analysis of the development and performance of the business.

The FRC cites that its Guidance on the Strategic Report, published in June 2014 sets out the requirements and illustrates best practice.

Accounting policies, significant judgements and errors

The FRC indicates that accounting policies should be “clear and specific, particularly in relation to revenue recognition and expenditure classification”.

It sets out a number of questions that preparers should consider when preparing the annual report and highlights that the Financial Reporting Lab report Accounting policies and integration of related financial information will provide practical ideas on what investors would expect to see in this area.

Cash Flow statements

The FRC highlights that the cash flow statement should not be left to the last minute and “adequate time” should be spent in considering the correct classification of cash flows between operating, investing and finance and making sure that these are consistent with the description of the business model in the strategic report.  Attention should also be given to the classification of unusual or non-recurring cash flows and also whether the cash flow statement reflects any late adjustments that have been put through.

The FRC draws attention to the technical findings of the Financial Reporting Review Panel in 2015-2016 indicating that this provides those areas that were commonly challenged.

The FRC will be writing to larger listed companies with year-end advice shortly.

The press release and the full letter are available on the FRC website.

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