On November 6, 2018 the Financial Reporting Council (FRC) published a report setting out findings from its thematic review of smaller listed and AIM company disclosures in their annual reports and accounts. The review, which was conducted by the FRC’s Corporate Reporting Review, considered the annual reports and accounts of 22 listed companies outside the FTSE 350 and 18 AIM quoted companies with year ends ranging from December 31, 2017 to March 31, 21018.
The main objective of the report is to encourage better quality reporting that better enables users to assess the quality of management’s decisions and to provide preparers with examples of better disclosure. The report covers the following topics:
Alternative performance measures (APMs) and strategic reports
The FRC has noted improvements in the presentation of APMs but most of the improvements identified involved incremental changes to existing disclosures (for example, clarifying narrative elements, providing a better balance between APMs and IFRS measures and explaining the calculation of APMs), rather than major redrafting of the report and accounts. However, it has also noted several inconsistencies with the reporting requirements and comments that companies should not use labels that are likely to be confused with terminology defined by IFRS or normally used in the context of IFRS reporting. In addition, only a few companies provided specific, rather than general disclosures to explain their rationale for excluding certain items from an APM. The FRC does expect companies to explain why individual items have been excluded from an APM.
In considering the overall comprehensiveness of strategic reports, the FRC notes that the quality of the discussion in relation to cash flow matters varied significantly, with weaker narrative failing to present a comprehensive view of the cash position or showing inconsistencies with the financial statement. Better examples specifically address the effect on cash flows of individually significant transactions separately from ongoing trends and provide supplemental information to support the analysis where required.
While there were improvements in previously reported information, and most companies, for example, disclosed key pension valuation assumptions, they did not always provide the required sensitivity analyses. The FRC also expects companies to explain any judgement made when assessing pension trustees’ rights and this assessment should be made both when there is a pension surplus, as well as when total committed contributions under a minimum funding requirement exceed the net defined benefit liability.
Accounting policies, including critical judgements and estimates
The FRC notes that there were markedly fewer judgements than estimates reported. It comments that companies should differentiate between judgements that do not involve estimation uncertainty and those that do, as there are different reporting requirements. It also notes that there were cases where the auditor’s report included commentary on matters involving significant judgement or estimation by management that had not been disclosed as such in the accounts.
Cash flow statements
The FRC notes that companies should explain key cash flows and their cash position in the strategic report. In some cases, the classification of cash flows appear to be inconsistent with IAS 7 requirements and while the FRC understands that reverse factoring/supplier financing arrangements are common, these were only referred to by one company reviewed.
A number of the companies reviewed presented their effective tax rate reconciliation clearly. However, the FRC did challenge companies where significant movements in the tax charge were labelled “other”, potentially reducing the usefulness of the analysis of the charge, or credit, for the period or the reconciliation to a standard applicable rate. The FRC comments that better tax disclosures provide a clear explanation of the matters requiring estimation, the amounts in question and sources of uncertainty affecting them.
Table of reminders
A table in section 8 of the report sets out the FRC’s expectations in each of the areas above and provides guidance on what should be included so as to assist companies in considering the requirements of the Companies Act 2006 and relevant IFRSs.
(FRC: Corporate reporting publications - Small Listed and AIM Quoted Companies, 06.11.18)