Directors' know how is a monthly article, which highlights key rule changes, proposed changes and market updates so that you know what is coming down the track.
The FRC issues advice to preparers of annual reports for listed companies
The FRC has issued guidance to preparers of annual reports for listed companies. The letter sets out key issues for preparers to consider, emphasising the importance of making annual reports more user-friendly and accessible for investors and stakeholders.
The FRC advises companies to:
- Ensure that the strategic report is user-friendly, clear and concise.
- Consider a broad range of factors when determining principal risks and uncertainties facing the business and performing their analysis of the viability statement.
- Make sure that business model reporting contains clear explanations of how the company makes money and what differentiates it from its peers.
- Clearly define where they pay tax within their tax strategies.
- Provide a clear explanation of the relationship between IFRS or UK GAAP measures and any alternative performance measures.
- Disclose the clear link between the business model and the revenue recognition policies.
- Provide more information when reporting the actions of the Audit Committees.
In addition, as the political and economic effects of the UK’s decision to leave the European Union become more certain in the medium and longer term, the FRC expects boards to provide increasingly company specific disclosures with quantification of the effects.
FRC publishes its annual review of corporate reporting
The FRC has published its Annual Review of Corporate Reporting 2015/16. It finds that although the quality of financial reporting is generally good and the introduction of the strategic report has improved the quality of narrative reporting, companies still have room for improvement.
Failure to recognise when things have not gone so well, the excessive use of underlying profit figures or inappropriate use of alternative performance measures (APMs) are highlighted by the FRC as issues which undermine the overall quality of corporate reporting and erode trust.
The report includes a list of nine characteristics which the FRC has identified as good corporate reporting:
- A single story – The narrative is consistent throughout the report, with significant points in financial statements fully explained.
- How the money is made – The strategic report gives a clear and balanced account of the company’s business model, performance and position.
- What worries the board – The strategic report contains clear explanations of the risks and uncertainties that concern the board, as well as any mitigating actions taken, so that the reader understands why they are important to the company.
- Consistency – Highlighted or adjusted figures, key performance indicators and non-GAAP measures included in the strategic report are aligned with the relevant figures in the accounts, with reasons for any adjustments clearly explained.
- Cut the clutter – Highlight important messages and remove immaterial detail, using effective cross-referencing to avoid repetition.
- Clarity – The language used to explain complex issues is precise and clear, avoiding jargon and boilerplate.
- Summarise – Items are reported with an appropriate and relevant amount of detail and maintain consistency with the wider narrative of the report.
- Explain change – Significant changes from the previous period are properly explained.
- True and fair – The spirit and the letter of accounting standards is followed in accordance with UK and EU law.
Tomorrow’s Company issues guide to help boards determine how they approach culture
Tomorrow’s Company, in collaboration with the City Values Forum, has published a guide to board leadership in purpose, values and culture, drawing upon practical experience, research and consultations with senior chairmen, and executive and non-executive board members. The guide emphasises that culture plays a key role in ensuring the long-term sustainable success of a company and helps distinguish an organisation from its competitors.
The guide states that boards have a dual leadership role in developing an organisation’s culture. First, they are accountable for ensuring that there is no ambiguity about purpose and values and for embodying the behaviours needed to deliver the company’s strategic goals; and second, they must assure themselves that the board’s culture is the desired culture and that the executive team is taking the appropriate measures to ensure that this is reflected across the whole organisation.
According to the report, boards that fulfil the dual leadership role properly focus on six pillars of success:
- Inspiring purpose and a set of values;
- Aligning purpose, values and strategy;
- Promoting and embodying purpose and values;
- Guiding decisions using purpose and values;
- Encouraging desired behaviours; and
- Assuring progress is being achieved.