FRC champions year-end advice to preparers of annual reports

THE Financial Reporting Council (FRC) is writing to around 1,200 financial directors at smaller listed and AIM quoted companies with helpful advice on ways that improvements can be made to annual reports in areas of interest to investors.

The accounting and auditing watchdog’s report – ‘Improving the Quality of Reporting by Smaller Listed and AIM Quoted Companies‘ – revealed the importance investors place on the annual report when making investment decisions in the absence of other key sources of sectoral information, such as analysts’ reports.

Core investor expectations include the strategic report being clear, concise, balanced and understandable, with a clear explanation of how the company generates cash flow. Another critical element is that accounting policies are clear and specific, particularly in relation to revenue recognition and expenditure capitalisation.

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 has also vowed to write to larger listed companies with specific advice for the preparation of their annual reports.

In response to the regulator’s decision, Big Four outfit PwC said that investors want a “brighter spotlight focused on the reporting of risk and strategy, in discussions around sensitivities, markets, performance and likely key cash flows”. Such an approach would help build a longer-term view of a business that can drive a positive perspective on its long term prospects.

According to a recent PwC FTSE 350 review, some annual reports – especially the strategic reports – contained what it dubbed “rare gems of information not presented elsewhere” as well as insights into past performance or future potential.

However, many strategic reports often contain a mass of annual data and text, which is largely backward looking and gives very little insight into a company’s current and future prospects.

Meanwhile, the firm’s recently published “Searching For Buried Treasure” analysis found that as much as 41% of the FTSE 350 only felt comfortable looking as far ahead as next year and 30% were more vague, preferring to talk about “the future” in broad generic terms.

Mark O’ Sullivan, corporate reporting director at PwC, said: “Reports are getting larger – and in some cases are the length of a blockbuster novel. It’s vital that the key information – of the financial and non-financial variety- is included. But it also must be easy to find and understand.

“PwC recently adopted a ‘digital only’ approach for our latest annual report. But for listed companies adhering to current requirements, embracing the digital aspect to reinforce their annual report might be one way to enable greater transparency – and accessibility – of information in a way not possible on paper alone.”

More companies need to explain the interconnect between their strategy and business model, he said, and how risks affect strategic plans, what resources and relationships drive the business and how these are being managed and progress measured through KPIs.