It's that time of year where you find yourself preparing for your annual report for 2019/2020.
As a director, you have duties under company law regarding how you, together with the board, conduct the business of the company. The annual report is one of the most important mediums of communication for how the board have discharged those duties.
In the current economic and regulatory environment, that annual report will be subject to heightened scrutiny by users, including regulators and, more often in recent times, the media. In addition, previously issued legal and regulatory changes become effective for this reporting cycle and with change comes increased chance of falling short of expectations of all users of annual reports.
So, what should you be looking out for?
Luckily, several recent publications by the FRC should provide you with a glimpse into the future, highlighting areas likely to be scrutinised and allowing you to address them before putting pen to paper and releasing your annual report to the diverse and interested user base eagerly awaiting them.
The FRC’s year-end open letter to Audit Committee chairs and Financial Directors contains recommendations following their monitoring work, recent thematic reviews and topical focus areas. The letter places emphasis on recent changes to reporting requirements designed to address broader matters of increasing concern to investors and other stakeholders, which will require consideration by the Board in preparing the next annual report.
It’s 2020, by now IFRS 9,15 and 16 should be fully implemented or, at a minimum, be in the period of transition. These new standards represent sweeping changes to the way in which entities account for and report significant transactions relating to how entities are financed and how they generate revenue.
For IFRS 9 and 15 you should, for the most part, be in the second year of application, and for IFRS 16 the year of transition. Users, including regulators such as the FRC will be expecting entities to be far more comfortable with reporting under the new standards and will be expecting a clear view of the impact of IFRS 16 on the operational performance, financial position and cash flows of the entity.
Further, the FRC’s Annual Corporate Reporting Review for the period covering 2018/2019 has been released,highlighting the key “hot topics” that the regulator will continue to scrutinise and seek improvement on. The top 10 topics has remained relatively consistent over the last few years with only two new entrants.
Cash and climate related corporate reporting
In addition to the above publications, the FRC Lab has issued two reports relating to cash and climate-related corporate reporting. The reports provide insight into the views of users including that understanding the generation, availability, and use of cash is fundamental to the investment process, both in the assessment of management’s historical stewardship of a company’s assets, and in supporting analysis of future expectations. Users would also like companies to report:
how boards consider and assess the topic of climate change
whether, and how, the business model may be affected by climate change, whether it remains sustainable, and how the company may respond to the challenge posed by climate change
what the opportunities and risks are, including the prioritisation of risks and their likelihood and impact
what changes the company might need to make to strategy to capitalise on a changing climate, and related opportunities
what scenarios might affect the company’s sustainability and viability, and how
how the impact is measured and how the company measures the climate-related challenges and the success of its strategy through strategically aligned, reliable, transparent metrics and financially relevant information.
Lastly, with the UK leaving the EU, regulators and users will be expecting disclosures on the uncertainty regarding Brexit and its impact on the principal risk, going concern, viability and recognised amounts in the financial statements during both the transition period and thereafter, based on whether the government is able to ratify a trade deal with the EU and its potential contents.
If you want to discuss your financial reporting or want more information on how you can get your business prepared, get in touch with Chris Smith.