The Financial Reporting Council seeks to improve the quality of companies’ reporting in their annual reports and accounts (ARAs) following the publication in October 2022 of its annual review of the current state of UK corporate reporting.
The FRC’s report provides key principles and specific recommendations on the drafting and inclusion of content in the ARAs to key figures in the company specifically involved in the preparation of the ARAs, including audit committee chairs and company secretaries.
High quality ARAs
The FRC’s executive director of supervision highlights the importance of ARAs as the “cornerstone of corporate reporting” and describes high quality ARAs as both “vital, and in the public interest” to promote effective stewardship to investors and stakeholders and provide them with detailed, reliable and accessible information on companies’ performance which is useful for their decision making.
By contrast, the FRC describes lower quality ARAs as “long and full of boilerplate text” with excessive detail. The FRC recommends that the ARA’s information is company specific and tailored to its transactions with jargon-free explanations to avoid boilerplate disclosures. Those who prepare the ARAs should apply materiality to identify and include only the key relevant information to avoid ARAs becoming overlong and too detailed.
The information included should either be quantitatively material through its significant impact in influencing a stakeholder or investor’s perception of the company’s performance or prospects, or qualitatively material through its unexpected or uncommon effect on the company.
The FRC believes a high quality ARA adheres to the following key principles and its report provides good practice examples to show how these principles are reflected in practice:
Accuracy and bias: to comply with the UK Corporate Governance Code’s requirement to be both “true and fair”, the ARA should be balanced and free from material misstatement and error by referencing both the positive and negative aspects of the company’s performance;
Consistency: the package of reports including the narrative reports and financial statements should be aligned and support each other. There should be effective links between different parts of the ARA, such as a company’s principal risks and uncertainties and its key performance indicators;
Completeness: an ARA should be a standalone document with sufficient breadth to include all positive and negative information needed to understand the company’s transactions, financial performance and position, liquidity status and future prospects. Preparers of the ARA can largely be guided by the content requirements of legislation and accounting standards although complex or unusual cases may require additional disclosures;
Timeliness: the FRC encourages companies to ensure that adequate time is given to the preparation and audit of high quality ARAs and the information is useful to its users by publishing the ARA shortly after the balance sheet date;
Accessibility: a good ARA is accessible and easy to navigate, with a detailed hyperlinked contents pages and specific hyperlinked cross references. An ARA published on a company’s website should be easy to find and available for download in its entirety; and
Transparency: an ARA should faithfully represent the economic substance of a company’s transactions by disclosing any significant judgments and additional disclosures that are necessary to fully understand the transactions entered into.
As companies are required to collect and disclose an increasingly wide range of data in new areas of activity, particularly with regards to ESG reporting, it is of increasing importance that companies develop effective information and accounting systems to collect complete data as well as robust data capture internal controls to protect the data’s integrity.
This article was produced in association with White & Case UK’s Public Company Advisory team. Read their original alert here.