FRC’s Financial Reporting Lab issues report on disclosures of supplier relationships and commercial income

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27 Jan, 2017

The Financial Reporting Council’s (FRC's) Financial Reporting Lab has published a report on disclosures of Supplier Relationships and Commercial Income. The report specifically focuses on disclosures of supplier relationships and commercial income for WM Morrisons Supermarkets PLC’s (Morrisons).

The report follows Morrisons through the reporting on commercial income in 2014/15 and 2015/16 and highlights that investors found the approach that it adopted was helpful.  The report highlights the disclosures made (in areas such as the accounting policies note, the CFO report, in the audit committee report and in the financial review) by Morrisons in 2014/15 when initially providing an enhanced level of disclosure (compared to others within the retail industry) when responding to increased FRC and investor interest in the nature and impact of commercial income.  It also then provides an indication as to how the focus of value to investors of the disclosures changed and how Morrisons met this challenge in the second year of disclosure. 

The report also notes that investors wish to understand the quality of supplier relationships and their place in a food retailer’s wider business model and indicates that this might be difficult to report in the confines of an annual report.  However it highlights that disclosures such as those provided by Morrisons, which drew out differential aspects of its relationships with its supply base, as part of the business model disclosures, are helpful to allow investors to understand the importance of these relationships to the company. 

Although specifically focusing on the disclosures which Morrisons made and which will be most relevant in the retail industry, the messages in the report are applicable more widely. 

The report provides valuable insight into how investors’ views on reporting and disclosure on emergent issues evolve over time and how companies could usefully adopt a similar model to Morisons when reporting on an emerging industry issue. 

Specifically the report highlights:

  • In year 1 of the emerging issue:
    • the disclosures should provide context to the emerging issue by describing the nature of the issue and detailing the significance or magnitude of the issue.
    • the disclosure should ultimately provide the investor with comfort by describing the processes and controls in place to seek to mitigate the risks associated with the emerging issue.
  • In subsequent years:
    • Companies should consider at what point the full detailed disclosure could be reduced or removed or how the disclosure can change to continually meet the changing focus of investors. Questions asked could include:
      • Is it still useful to inform investors on the original issue?
      • Is it useful to investors to now provide trend or other information?
      • Failure to make this assessment might lead investors to view the disclosure as adding clutter to the accounts especially once the initial purpose of the disclosure has passed. 

Additionally the report indicates that whilst investors value transparency of disclosure, timing, driven by a company’s financial reporting processes, is also important.  Specifically the report highlights a “strong opinion from investors” that confidence in a company’s finance processes and transparent reporting translates positively into overall confidence in the company. 

The full lab report is available on the FRC website.

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