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FRC letter to investors ahead of the 2017 shareholder meeting season

  • FRC Image

12 Apr 2017

The Financial Reporting Council (FRC) has issued a letter to investors ahead of the 2017 shareholder reporting season highlighting recent changes and developments 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 expectations”.

The letter highlights the following key areas of focus and indicates what investors should be looking out for: 

  • The Strategic report. The letter:
    • covers business model reporting and references to the Financial Reporting Lab’s report in October 2016 which indicated that there is room for improvement in business model reporting.
    • indicates that the FRC will “continue to monitor how alternative performance measures (APMs) (or ‘non-GAAP measures’) are used to report performance”. The FRC says that investors “should expect to see disclosures that give a clear and complete understanding of the APMs presented, how they are calculated and why they are useful and, where relevant, reconciliation to amounts presented in the financial statements”.  The FRC highlights its Frequently Asked Questions on APMs and its thematic study on the use of APMs in interim reports in November 2016.
    • covers risk reporting and viability statements and highlights that companies should be providing “clear disclosure of why the period of assessment selected is appropriate for the particular circumstances of the company, what qualifications and assumptions were made, and how the underlying analysis was performed”.
    • covers Brexit and highlights that companies should consider the impact of Brexit on their business with respect to risks and uncertainties. It draws attention to the FRC press release on this matter in July 2016.  The FRC indicates that “as the economic and political effects are developed and become more certain in the medium and longer term, we would expect Boards to provide increasingly company specific disclosures with, ultimately, quantification of the effects”.
  • Governance reporting. The FRC indicates that where Boards elect not to comply with key provisions of the UK Corporate Governance Code, “they should provide specific explanations”.  The FRC encourages investors “to challenge companies where they do not believe that explanations given are sufficiently persuasive”
  • Audit committee report. The FRC highlights that investors  “should expect to see” audit committees evaluating and reporting on audit quality in the context of the company’s business model and strategy, the business risks it faces, and its perception of the reasonable expectations of the company’s investors and other stakeholders.
  • Financial statement disclosures. The FRC indicates that:
    • with respect to tax it would expect improved reporting of the amount of tax provisions than in previous years. The FRC highlights its thematic study of tax reporting which identified areas for improved disclosure.
    • with respect to divided disclosure, whilst there have been “examples of improved disclosure”, it expects to see further improvements in this area. The FRC highlights that investors may wish to “challenge companies that provide insufficient information in this area” and draws attention to the Lab’s 2015 report.
    • with respect to low interest rates, companies should already be considering the impacts on the amounts reported in the financial statements especially around the valuation of long-term assets and liabilities.  The FRC highlights that companies may need to provide sensitivity analysis to highlight potential impacts.
    • investors should expect to see improved disclosures of accounting policies, particularly in relation to revenue recognition. It highlights that investors should be able to see  “a clear link between the sources of income described in the business model and revenue recognition policies”.  The FRC also indicates that investors should “expect companies to identify the precise nature of the judgements they make rather than merely repeat the accounting standards” as this will help them assess the quality of management’s policy decisions.
    • 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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