The year-end advice covers the following key areas:

The strategic report

The FRC indicates that “companies should consider whether information in the strategic report is presented in a clear and concise manner” and should ensure that there is a fair review of the business that is “balanced and comprehensive”.  In particular the FRC notes that there is “room for improvement in the strategic reports of many smaller companies, including the need to consider whether they have adequately discussed their financial position and cash flows as well as their company’s performance”.  Areas covered include:

• Business model reporting

The FRC indicates that this is a key area for investors and highlight that the biggest areas for improvement are “the clarity of the explanation of how the company makes money and what differentiates it from its peers”.  A report from the FRC’s Financial Reporting Lab is due out in October which will suggest practical ways that companies might consider meeting investor needs in this area.

• Alternative performance measures (APMs)

The FRC highlights that “there is an increasing regulatory focus on the use of APMs” and notes that the use of APMs should not replace of obscure IFRS or UK GAAP information.  The FRC draws attention to the European Securities and Market Authorities’ (ESMA’s) ‘Guidelines on Alternative Performance Measures’, providing best practice guidance in this area, which companies should consider and its frequently asked questions on those guidelines published in May 2016.  A thematic review of APMs will be published by the FRC in November.

• Risk reporting and viability statements

The FRC encourages companies to fully consider the principal risks and uncertainties facing their businesses, including areas such as cyber security and climate change.  It also notes that “companies should consider how solvency, liquidity or other principal risks affect the long-term viability of the business”.  With respect to the longer-term viability statement introduced with the 2014 UK Corporate Governance Code, the FRC also indicates that companies should make it on how they have chosen their period of assessment and why this is appropriate.

• UK referendum result

The FRC indicates that companies should consider the “consequential risks and uncertainties in the political and economic environment” and the impact of these on their business stemming from the UK’s decision to leave the European Union (EU).  It draws attention to its ‘Reminders for half-yearly and annual financial reports following the EU referendum’, published in July, which highlighted areas for boards to consider in this regard.

Financial statement disclosures

Aside from the above points around the strategic report, the year-end advice also contains a number of additional points related to financial statement disclosures including:

• Tax

Improvements are expected in tax disclosures.  Key areas for improvement include disclosures around companies’ explanations of their effective tax rates especially around factors affecting the tax rate and their sustainability, disclosures around how companies account for material tax uncertainties and greater disclosure around the amount of companies’ tax provisions including disclosures of estimates and judgements.   Additionally the FRC highlights that “companies’ tax arrangements are an area of increasing public focus which can give rise to significant risk” and notes that companies should consider any further disclosures that are required in relation to any material risks that these create.

• Dividends

Although the FRC notes that it has seen “examples of improved disclosure” in this area, it expects to see further improvements around dividend policy in the coming reporting period.  The FRC draws attention to the FRC Lab report in this area. 

• Low interest rates

The FRC indicates that “companies should consider the impact of low interest rates on the amounts reported in their financial statements” with particular consideration to the valuation of long-term assets and liabilities.

• Critical judgements and estimates

The FRC highlights that disclosures of critical judgements should “explain clearly the specific judgements the Board has made and their effect on the financial statements” and that disclosure of estimates should be sufficient to enable users to fully understand their potential effects.

• Accounting policies

The FRC identify that “there continues to be room for improvement in the disclosure of accounting policies particularly in relation to revenue recognition”.  It expects that disclosures are company-specific.

• Developments in IFRS

The FRC expects companies to provide information on the progress that they have made in implementing, and the likely effects of, new IFRSs especially IFRS 15 Revenue from Contracts with Customers and IFRS 9 Financial Instruments.  The FRC also identifies that investors “continue to have an interest” in cash flow disclosures especially in the area of net debt reconciliations.

Additionally the letter indicates that investors expect to see “more clarity and brevity” in remuneration reporting and that they would like to see “more informative reporting about the specific actions taken by Audit Committees” in the audit committee report. 

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