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Nov 16, 2015

FRC calls for clear, ‘understandable’ year-end reports from smaller firms

UK study emphasizes importance of year-end reports to investors analyzing small companies

The UK’s Financial Reporting Council (FRC) is calling on smaller listed companies to write concise – and understandable – year-end reports with clear explanations of how they generate cash flow and detailed information about accounting policies.

The call is part of the FRC’s year-end advice aimed at 1,200 smaller listed and Alternative Investment Market-quoted companies as they start preparing year-end reports. The council says the reports are particularly important for smaller firms, as they may form the bulk of the information investors can easily access about the companies.

‘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,’ says Stephen Haddrill, chief executive of the FRC, in a press statement announcing the release of the council’s advice.

‘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 says strategic reports should set out a clear narrative describing the company’s business model and strategy, the main factors likely to affect the company in the future, and the links between the information in the strategic report and in the annual report. For example, the FRC says, descriptions of revenue streams in the strategic report should be consistent with the disclosures in the financial statements.

The council adds that companies should describe accounting policies for all significant transactions and revenue streams, be clear about when revenue is recognized for each revenue stream and exclude policies that are insignificant to the annual report.

It also says that when creating cash flow statements, companies should make sure their classification of operating, investing and financing cash flows are consistent with the business model described in the strategic report. Late adjustments should be outlined in the cash flow statement, too.