The FRC has published a letter of advice to around 1,200 smaller listed and AIM quoted companies on how to improve annual reports in areas of particular interest to investors. Underpinning the advice is the fact that investors value high quality reporting that is company specific, avoids generic information and gives a meaningful explanation of the business.
In particular, the FRC highlights the following three points:
- The strategic report should be clear, concise, balanced and understandable. It should provide a clear description of the company’s business model and strategy and include the principal risks and uncertainties that are material to the development, performance, position or future prospects of the company.
- Accounting policies should be clear and specific, particularly in relation to revenue recognition and expenditure capitalisation. Policies should also generally be in line with similar companies in the sector.
- The report should include a clear explanation as to how the company generates cash flow. A company should devote sufficient time to considering whether the classification of operating, investing and financing cash flows is consistent with the business model set out in the strategic report.
The FRC has also indicated that it will write to larger listed companies with specific advice for the preparation of their annual reports shortly.