The detailed six-page letter sets out key issues for reporters to consider, stressing the importance of making annual reports more user-friendly and accessible for investors and stakeholders. It has been issued earlier than normal this year to respond to concerns about the current economic uncertainty and provide preparers with timely help.

With Brexit front of mind for many companies, the FRC recognises that it is too early to provide specific commentary and disclosures on the immediate impact of the referendum result and potential impact on companies, but it stresses ‘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’.

On the hot topic of tax, which is increasingly coming under the government spotlight and the imminent introduction of country by country reporting (CBCR), it is essential for companies to consider their tax disclosures carefully.

Although the regulator does not provide advice or recommendations on how to deal with CBCR, the FRC warns: ‘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 any material risks to which this gives rise are clearly described in the report and accounts.’

Problems with revenue recognition reporting are also highlighted as potential risk areas, with room for improvement in the disclosure of accounting policies. Companies need to provide ‘specific, granular policy information and there should be a clear link between the sources of income described in the business model and revenue recognition policies. We expect companies to explain exactly when revenue from complex long-term contracts is measured,’ the FRC stated.

On disclosure of distributable profits, the FRC points to the Companies Act, which is a matter for the government, rather than the accounting regulator, as the starting point for reporting, without stating a particular position on the issue.

The FRC states 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. The Act is a matter for the Department for Business, Energy and Industrial Strategy’. 

Audit committees

There are also a number of recommendations for audit committees to ensure the highest standards of oversight.

Where a company’s audit has been reviewed by the FRC’s audit quality review team as part of the annual audit review process, the audit committee should discuss the findings with their auditors and consider whether any of those findings are significant. However, the FRC does not want the audit quality category mark to be disclosed. If there were significant issues with a reviewed audit, the company should make disclosures about the findings and the actions they and the auditors plan to take.

Key recommendations

In particular preparers should focus on:

• the relationship between International Financial Reporting Standards (IFRS) or UK GAAP measures and any alternative performance measures used to be clearly explained;
• business model reporting to provide clarity of explanations of how the company makes money and what differentiates it from its peers;
• a clear link between the business model and the revenue recognition policies to be disclosed; and
• dividend disclosures to detail how dividend policies operate in practice and how these policies may be impacted by risks and capital management decisions facing the company.

On 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, such as cyber security and climate change.

Companies should also consider how solvency, liquidity or other principal risks affect the long-term viability of the business.

It also points to the guidelines on the use of viability statements when reporting the longer-term view of a company’s prospects, which were set down in the amended UK Corporate Governance Code issued in 2014.

Paul George, FRC’s executive director for corporate governance and reporting, said: ‘Annual reports are the main source of information for investors who need to understand how the company is performing to allow them to judge the long-term prospects for their investment.

‘In the light of Brexit, it is imperative to promote strong investment in UK markets, and to do so there must be constructive engagement between investors and companies.

‘The annual report is the main factor in this engagement and by enabling investors to make more informed decisions, the long-term prospects of the company will be enhanced.’

The FRC Year End Advice to Preparers 2016 is available here