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FD Intelligence

FRS 102: how to make your financial statements better

The transition to FRS 102 has probably meant making sure that your financial statements are compliant with the new standard. But what now? Here's three things you need to consider to make your financial statements even better.

Now may be a good time to reflect on the transition process and the adoption of FRS 102 – what went well and where is there still room for improvement? A rethink about the format and content of your financial statements more generally could be a useful exercise.

Whilst there are clearly ‘rules’ in terms of what needs to be included and where, there is still flexibility to personalise, simplify and ensure that the key messages and important information stands out for your stakeholders.

Consider the three questions below and see if you can identify some ways to make your financial statements even better. 

1. Does the front end narrative communicate a clear story?

Whilst some of the front end is required by legislation, it's not just about compliance but communication too. Language doesn't need to be boiler-plate and there may be an opportunity to use graphs and diagrams to tell a more compelling story. A highlights page can also be a useful way to set the scene.

A strategic report, required for many companies, should provide a fair review of the company's business and describe the principal risks and uncertainties.  Consider whether the report gives a clear explanation of the business model, its strategy, the key issues, risks and uncertainties affecting the business.

Principal risks and uncertainties should be specific to the company and reflect changes in the company's business model or relevant changes in the economic environment. For example, if Brexit is likely to give rise to a significant risk or uncertainty then discuss the possible implications in the context of your business.  

The discussion of key performance indicators should be limited to those measures that really matter to the development, performance or position of the company's business – not a long list.  

And make sure that there is proper linkage between the front end and the remainder of the accounts. If the front end discusses a major event or transaction, the accounting policies and notes should reflect this too.

Similarly, where you discuss alternative measures of performance that are not readily ascertainable from the financial statements ensure that their basis of calculation and purpose is clear.  

2. Will people understand how you account for material transactions and balances?

Accounting policies will have been updated for changes arising from FRS 102, but they really need to explain how transactions and balances are accounted for in your business and not simply repeat the accounting standard.

Revenue is likely to be one of the most significant balances in the accounts, but is often a policy which is not well drafted. Remember that accounting policies need only be given for significant transactions and balances so if you have included a policy for a transaction or balance that your business does not have or is immaterial then remove it.  

You could also consider the order in which policies are presented. Why not start with those policies that relate to the most significant items or require the most judgement and leave the more straightforward policies to the end?   

3. Do the notes give sufficient prominence to those transactions and balances that are significant?

You will have tackled unfamiliar disclosure requirements in your first set of FRS 102 accounts. FRS 102 requires that your notes are presented in a ‘systematic manner’, as far as practicable.

This might suggest that there is some leeway in the way in which notes are organised or presented.  Unfortunately, the EU Accounting Directive, which has been implemented in the UK by The Companies, Partnerships and Groups (Accounts and Reports) Regulations 2015, require accounts prepared under the Companies Act to present the notes in the corresponding order of presentation in the balance sheet and profit and loss account.

This regulation therefore restricts the ability to present notes in what might otherwise be a more user- friendly order or to give prominence to those matters that are of greater significance by addressing them first. However, better signposting at the front end of the accounts to notes which deal with matters that are likely to be of most significance to your stakeholders could help focus attention.

There may also still be an opportunity to remove notes that deal with immaterial items or do not add value, for example where they simply repeat a figure that is ascertainable from the primary statements without further commentary.   

Three reasons this matters

  • The quality of the financial statements can have an impact on investment and lending decisions – both access to and cost of capital
  • Having clear accounting policies will enable stakeholders to understand whether the policies are in line with those of similar businesses or whether management have been unusually aggressive or conservative in their application
  • In many cases, the financial statements represent the main opportunity to communicate with investors and other stakeholders and evidence suggests that good quality reporting matters to them

For more detail or support on the presentation of your financial statements, please contact your usual Grant Thornton contact or Jon Wallis.