The review focused on those areas of the annual report and accounts which are of most importance to users and where it has frequently identified issues when performing reviews of listed companies as reported in its latest Annual Review of Corporate Reporting.
The FRC found that reporting was ‘mixed’ particularly where companies explained material matters that were complex or judgemental. The FRC indicates that many of the issues identified could have been avoided if a sufficiently critical review of the annual report and accounts had been conducted prior to finalisation.
Companies are encouraged to consider the findings and expectations in the thematic review when drafting their forthcoming annual reports and accounts. The FRC expects companies to focus their efforts on disclosure of the most significant, complex or judgmental matters. Specifically, the FRC expects companies to:
- provide a strategic report that contains a balanced analysis focused on those elements of development, performance and position that are key for an understanding of the company.
- explain how the company or subgroup fits into a wider group structure to allow a user to understand fully the context in which it operates.
- tailor accounting policies for transactions and balances that are complex or judgemental and keep policies under review to ensure that they remain complete, relevant and accurate.
- disclose revenue policies explaining the nature of each significant revenue stream, when it is recognised and how its value is determined.
- provide specific details of judgements taken and clearly explain the rationale for the conclusion reached.
- clearly distinguish which estimates have a significant risk of material adjustment to the carrying amount of assets and liabilities in the next financial year. In addition, companies should provide additional quantitative detail where it is necessary for an understanding of the significance of the estimate.
- disclose clearly the nature of the obligation giving rise to a provision and the associated uncertainty in timing or amount for significant provisions.
- explain the nature of each significant financial instrument risk within the company. Where necessary for an understanding of the exposure, this should include quantification and provide information on the sensitivity to potential future changes.
- conduct a critical review of the annual report and accounts prior to finalisation. This includes considering whether the report as a whole is clear, concise and understandable, as well as checking for internal consistency and more detailed presentation and disclosure matters.
A press release and the full report are available on the FRC website.