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Essential Corporate News: Week ending September 27, 2019

Publication September 2019

FRC Financial reporting lab: Report on disclosures on the sources and uses of cash

On September 25, 2019 the Financial Reporting Council’s Financial Reporting Lab (FRC Lab) published a report on disclosures by companies on the sources and uses of cash (Report). The Report follows a project launched by the FRC Lab in December 2018 (Project) and considers how companies can answer questions investors may have around how a company generates cash and how it intends to use that cash.

The Report provides practical guidance on how companies can give more information and context around their cash disclosures, beyond those in the cash flow statement. The Report highlights that investors would like disclosures that provide a clear description of the drivers of current (and future) performance and position, in the context of cash, supported by appropriate metrics, as well as details about the sources of cash, both now and in the future. In particular, the Report notes that investors are looking for further detailed disclosures, all underpinned by strong processes, controls and clearly communicated assurance, on

  • The sources of cash – disclosure should explain how the company’s business model generates cash, cover the drivers of performance that generated cash in the current period and link to strategy, working capital and risks to allow an assessment of future cash generation.
  • The uses of cash – disclosure should explain a framework of priorities for the cash generated, support understanding of the priorities in action and highlight relevant risks, restrictions and variabilities.

The Report also noted that disclosure in relation to distributions is very useful to those seeking to value and assess companies. Information on dividend capacity and resources helps to assess the stewardship of a company and the approval of dividends. More detailed disclosure is sought in this area (depending on each company’s circumstances), and may include the timing and size of returns, the availability and nature of dividend resources and the risks, restrictions and variability that might impact future returns. The Report notes that the Investment Association is due to provide further guidance in relation to distribution policies in Autumn 2019.

While the Project has identified a number of areas where improvement in disclosure would be welcome, the Report highlights that investors do not seek to overburden preparers of reports. Many of the areas are relevant to investment decision-making and therefore (where relevant) they seek additional disclosure.

(FRC Financial reporting lab: Disclosures on the sources and uses of cash, 25.09.19)


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