The 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 as well as 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 that 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,” said Stephen Haddrill, Chief Executive of the FRC. “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 comments that 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 the annual report. The council adds that companies should describe accounting policies for all significant transactions and revenue streams, be clear about when revenue is recognised for each revenue stream and exclude policies that are insignificant to the annual report.
Furthermore, it adds 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, whilst late adjustments should be outlined in the cash flow statement.