Essential Corporate News – Week ending October 14, 2016

Welcome to Essential Corporate News, our weekly news service covering the latest developments in the UK corporate world.

On October 11, 2016 the Financial Reporting Council (FRC) published a letter addressed to audit committee chairs and finance directors of listed companies highlighting key issues and improvements that can be made to annual reports in the 2016 reporting season to help to foster investment in the UK.

The FRC’s advice addresses various issues within separate parts of the annual report, including the following:

Strategic report

• Clear and concise presentation – while material matters need to be explained in sufficient detail to be useful and understandable, the FRC points out that explanations can still be clear and concise. Smaller companies are reminded to consider whether they have adequately discussed their financial position and cash flows as well as their company’s performance.
• Business model reporting – the FRC notes that it will be releasing a Financial Reporting Lab report on this topic later in October 2016 and that the biggest areas for improvement are the clarity of the explanation of how the company makes money and what differentiates it from its peers.
• Alternative performance measures (APMs) – APMs are often used in strategic reports, to supplement information prepared in accordance with IFRS or UK GAAP and the FRC believes it is important that their use does not replace or obscure IFRS or UK GAAP information. It reminds issuers that the European Securities and Markets Authority’s (ESMA) 2015 Guidelines on Alternative Performance Measures codify best practice in this area, that the FRC issued FAQs on this topic in May 2016, and that it will publish a thematic study on the use of APMs in interim reports in November 2016.
• Risk reporting and viability statements – the FRC encourages companies to consider a broad range of factors when determining the principal risks and uncertainties facing the business, for example cyber security and climate change. In relation to viability statements, it encourages disclosure of why the selected assessment period is appropriate, the qualifications and assumptions made and how underlying performance was analysed.
• UK referendum result – the FRC states that companies will need to consider the consequential risks and uncertainties in the political and economic environment and the impacts of those risks and uncertainties on their business. Not all businesses will be affected to the same extent and boards must determine what disclosures, if any, are required to meet the needs of investors and comply with regulatory requirements.

Financial statement disclosures

• Tax – the FRC states that companies’ tax arrangements are an area of increasing public focus, which can give rise to significant risk and that companies need to respond to increasing stakeholder scrutiny of their tax strategies, including where they pay tax, and to consider carefully whether they are sustainable and ensure that any material risks to which this gives rise are clearly described in the report and accounts.
• Dividends – the FRC has noted examples of improved dividend disclosures but considers that there is room for further improvement in linking more detailed disclosure of how dividend policies operate in practice to how those policies may be impacted by the risks and capital management decisions facing the company. Additionally, the FRC notes that the Local Authorities Pension Fund Forum (LAPFF) recently wrote to a number of listed companies urging companies to disregard the position taken by the FRC. Despite this, the FRC’s position remains that it encourages good disclosure and companies paying close attention to their investors’ views whilst noting that the Companies Act 2006 does not require the separate disclosure of a figure for distributable profits or, specifically, multiple figures for distributable profits.
• Low interest rates – the FRC states that companies should consider the impact of low interest rates on the amounts reported in their financial statements and give careful consideration to the valuation of long term assets and liabilities, for example the effects of adjusted discount rates on pension scheme liabilities and suppressed returns on pension scheme assets. Companies may need to provide sensitivity analysis to highlight the potential impacts.
• Critical judgements and estimates – disclosures of critical judgements should explain clearly the specific judgements the board has made and their effect on the financial statements. Companies should consider whether quantitative disclosures, such as sensitivities or ranges of outcomes, are required so that users of the accounts can fully understand the potential effect of estimates.
• Accounting policies – the FRC believes there is room for improvement in the disclosure of accounting policies, particularly in relation to revenue recognition. There should be a clear link between the sources of income described in the business model and revenue recognition policies and the FRC expects companies to explain exactly when revenue from complex long-term contracts is measured.
• Developments in IFRS – the FRC notes that the International Accounting Standards Board has published three major standards that will become effective in the next few years (IFRS 15, IFRS 9 and IFRS 16). Given that comparative periods for IFRS 15 and IFRS 9 will be commencing from January 1, 2017, the FRC expects that most companies that apply IFRS will have made substantial progress in their implementation of these standards and notes that companies should provide information on this progress and disclose the likely impacts of each of the new standards once they can be reasonably estimated.

Remuneration reporting

• The FRC states that investors would like more clarity and brevity in remuneration reporting and it notes the August 2016 publication by the GC100 and Investor Group of a revised version of its Directors’ Remuneration Reporting Guidance.

Audit committee reporting

• The FRC notes that investors would like to see more informative reporting about the specific actions taken by audit committees and the significant issues that they have considered. It also refers to its “Audit Quality Practice Aid” published in 2015 which helps audit committees evaluate and report on audit quality.

(FRC, Letter: Year End Advice to Preparers 2016, 11.10.16)