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.
FRC issues advice for preparing 2017/18 annual reports
The Financial Reporting Council has written a letter to audit committee chairs and finance directors to highlight recent changes to reporting requirements, as well as the key areas that companies need to improve when preparing their annual reports ahead of the 2017/18 reporting season.
The FRC letter draws companies’ attention to the following issues, which have been raised by investors:
- Implementation of IFRS 9, IFRS 15 and IFRS 16: Companies should make detailed, quantitative disclosures explaining the expected impact of the new standards on their reporting in the last set of financial statements before the implementation date. Disclosures should be tailored to the company's specific circumstances and transactions, and describe any key judgements that management will need to make in complying with the new standards.
- Non-financial reporting: Companies should consider the broader drivers of value that contribute to their long-term success, including disclosures relating to sources of value that have not been recognised in the financial statements and how those sources of value are managed, sustained and developed. Companies should be aware that the new regulations implementing the EU directive apply to financial years beginning on or after 1 January 2017; the FRC is currently consulting on amendments to the Guidance on the Strategic Report to reflect these new requirements.
- Viability statements: Improving viability statements remains an investor priority. Companies should consider the prospects of the company over a period reflecting its business and investment cycles, and then state whether they have a reasonable expectation that the company will be able to continue to meet its liabilities as they fall due over their assessment period, drawing attention to any qualifications or assumptions.
- Dividends: Companies are encouraged to disclose their capacity to pay dividends.
- Critical judgements and estimates: Investors rely on the clear disclosure of key judgements and estimates in order to understand the impact of management’s accounting policy decisions. Companies should therefore avoid boilerplate and generic disclosures and instead provide more granular information about a smaller set of judgements and estimates that had a significant impact on results and explain why certain assets were subject to significant risk of material change.
- Defined benefit pension schemes: Continued low interest rates and the economics of defined benefit pension arrangements means companies must improve their transparency regarding their pension arrangements.
The Best Practice Principles Group consults on its best practice principles for shareholder voting research
The Best Practice Principles Group for Shareholder Voting Research Providers (BPP Group) has launched a consultation on its best practice principles for shareholder voting research and analysis.
The principles were developed by a group of proxy advisers to provide a voluntary performance and reporting framework that would help to promote a greater understanding of the industry’s role, the integrity and efficiency of processes and controls related to the provision of these services and management of any conflicts of interest.
The consultation considers whether the principles and supporting arrangements should be revised in light of the experience of implementing them, as well as the market and regulatory developments since the principles were introduced in 2014.
The BPP Group is particularly keen to receive the views of small and mid-size quoted companies.
Please complete the questionnaire by Friday 15 December 2017.
Financial Reporting Lab finds improvement in dividend disclosures
The FRC’s Reporting Lab has published an implementation study regarding the quality and quantity of dividend policy and practice disclosures.
The Lab reviewed 313 annual reports published during 2016 and concluded that 132 of those companies have implemented some of the disclosure recommendations from the 2015 report. The study identified four development areas for improving the disclosure of dividends:
- Identifying the explicit links between dividend, principal risks and viability: A company’s dividend strategy should be a clear element of all three, either as one of the outcomes (business model), something that may be impacted by risks or as an important part of potential mitigation response (viability).
- Enhancing disclosure on constraints: Companies should provide details on the sustainability of the dividend or by clarifying the level of distributable profits/cash or other constraining factor.
- Explaining more fully what policy means in practice: Companies should either explain what makes their policy ‘progressive’ in terms of growth or clarify how their ‘pay-out ratios’ are calculated.
- Enhancing understanding of structure and process: Where profit is generated in the group, companies should clarify how profits might flow to the top company.