News November 2015 Year-end advice to preparers of annual reports

Year-end advice to preparers of annual reports

11 November 2015

PN 66/15

The Financial Reporting Council (FRC) is writing to around 1,200 smaller listed and AIM quoted companies with advice on ways that improvements could be made to annual reports in areas of particular interest to investors. Read or download the FRC Letter: Year end advice to preparers - smaller listed companies (PDF).

In the FRC’s report ‘Improving the Quality of Reporting by Smaller Listed and AIM Quoted Companies’ published earlier this year, investors highlighted their focus on the annual report when making investment decisions in the absence of other sources of information in this sector such as analysts’ reports.

In particular investors expect:

  • The Strategic Report to be clear, concise, balanced and understandable;

  • Accounting policies to be clear and specific, particularly in relation to revenue recognition and expenditure capitalisation; and

  • A clear explanation of how the company generates cash flow.

Stephen Haddrill, FRC chief executive, said:

"It is imperative that annual reports enable investors to understand exactly how the company is performing to enable them to assess the long term prospects for their investment.

For smaller quoted companies in particular, investors rely heavily on the annual report because other information is relatively scarce – they look for company specific information, rather than a standard templated report, that they can understand and use to make informed decisions.”

The FRC will also write to larger listed companies shortly with specific advice for the preparation of their annual reports.
Notes to editors:

1.   The FRC is responsible for promoting high quality corporate governance and reporting to foster investment.  We set the UK Corporate Governance and Stewardship Codes as well as UK standards for accounting, auditing and actuarial work.  We represent UK interests in international standard-setting.  We also monitor and take action to promote the quality of corporate reporting and auditing.  We operate independent disciplinary arrangements for accountants and actuaries; and oversee the regulatory activities of the accountancy and actuarial professional bodies.
2.    In terms of the strategic report, investors want to see a clear narrative which includes a clear description of the company’s business model and strategy; the main trends and factors likely to affect the future development, performance or position of the business; and linkages between information presented within the strategic report and in the annual report more broadly i.e. are descriptions of different revenue generating activities consistent with the business segments disclosed in the financial statements?

Investors also want to look further into accounting policies that appear unusually aggressive or out of line with similar companies in the industry. They also seek to understand the more judgmental areas of the financial statements.

With cash flow statements, they want to understand how a company converts its profits into cash and its liquidity. They are concerned that the cash flow statement is sometimes left to the last minute and be incorrect.