FRC letter to investors ahead of the 2016 shareholder meeting season

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18 Mar, 2016

The Financial Reporting Council (FRC) has issued a letter to investors ahead of the 2016 shareholder reporting season highlighting recent changes in reporting and encouraging investors to “engage with companies to provide a steer on what information they believe is relevant and to challenge where reporting falls short of these expectations”.

The letter highlights the following key changes in corporate reporting and indicates what investors should be looking out for:

  • Risk, internal control and viability.  The FRC highlights that listed companies and groups, for the first time, will be required to apply the 2014 version of the UK Corporate Governance Code. Applicable for periods commencing on or after 1 October 2014, key changes have been made in relation to going concern, risk assessment and internal control including a requirement for Boards to provide a longer-term viability statement.  The FRC indicates that the period for the longer-term viability statement “should be significantly longer than 12 months”.  It highlights that investors “should see an explanation of the period chosen, taking into account the circumstances of the company” and these should not be ‘boiler plate’.   The FRC also highlights that investors should challenge companies where key risks are not included as part of their ‘principal’ risks and uncertainties disclosure in their strategic reports.   
  • Brexit.  The FRC indicates that if the UK’s renegotiation of its EU position and potential exit is considered as a principal risk by the Board then it should be disclosed as such to shareholders.
  • Alternative Performance Measures.  Where companies use these, the FRC comments that these should be “clearly defined, consistent and include reconciliations to, and explanations of, how they relate to GAAP measures”.
  • Audit reporting.  The FRC highlights the changes introduced in 2013 in relation to extended audit committee and auditor reporting requirements.  Investors should expect to see sufficient information about the audit “to allow for an informed discussion with the company”.  It also draws attention to its recently published guide on the impact of extended auditor reports. 
  • Dividend disclosures.  The FRC indicates that investors “may wish to challenge companies that provided insufficient information in this area” and points to the recently published Financial Reporting Lab report in this area.
  • Governance Reporting.  The FRC recognises that “not all parts of the Corporate Governance Code are relevant to all companies at all times”.  It indicates that where Boards elect not to comply with key provisions of the Code, “they should provide specific, meaningful explanations to investors”.  The FRC “encourages investors “to challenge companies where they do not believe that explanations given are sufficiently persuasive”.
  • Accounting policies and the impact of new standards.  The FRC indicates that companies should explain critical judgements made and accounting policy choices.  The FRC highlights that investors should be able to understand the precise nature of the judgements made by the company rather than just a repeat of what the standards require.  Investors should also expect companies to indicate the likely impact of IFRS 15 Revenue from Contracts with Customers, IFRS 9 Financial Instruments and IFRS 16 Leases in their financial statements where it has been concluded by the company that the impact can be reasonably estimated.

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

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