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Financial Reporting for Listed Companies

Matthew Stallabrass, Partner, Corporate Audit
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For listed companies, the annual report is a key moment to engage with investors and other stakeholders, providing insight into performance, the attitude of management and the strength of the governance arrangements. For many smaller quoted companies the release of the annual report is also the main point in the year where they are able to engage with their investors while also serving as an important reference document on investor relations websites for a number of years to come.

The pressure is for the annual report to be of high quality, but what is meant by high quality? In essence, high quality reporting looks at the spirit, and not just the letter, of the standards and seeks to produce reporting that is tailored and specific to a company’s circumstances as opposed to boilerplate and generic. High quality reporting is often shorter with lengthier reporting, often making it difficult to identify the essential information.

Recent changes to financial reporting have aimed at embedding this vision of higher quality reporting within the accounting standards. For example, the change to IAS 1 applying to years commencing 1 January 2023 or later, is aimed at getting companies to revise their accounting policies and disclose entity specific information as opposed to simply repeating the requirements of the accounting standard. Other changes have been focused on helping companies make materiality judgements with confidence.

High quality reporting applies to all areas of the annual report, not just the financial statements that have to comply with IFRS. Narrative reporting that is insightful, balanced and in an appropriate amount of detail reflects a board that understands its strategy, is focused on the key areas of the business and manages its risk. Poor quality narrative reporting can reflect the opposite.

The Strategic Report, and any accompanying statements, and the governance report therefore merit as much attention as the notes to the financial statements. The Strategic Report should be fair, balanced and comprehensive. It is designed to help investors assess how effective management have been as the stewards of the business, it is not designed as a marketing document. The business model should be clearly explained, performance discussed in a balanced and appropriately detailed manner and material changes in the business highlighted.

Governance reporting should adhere to the comply or explain nature of the UK’s governance codes, whether the UK Corporate Governance Code used on the main market or the QCA Code commonly used by small and mid-cap companies. Reporting here should also avoid boilerplate statements or assertions and focus on providing insight in terms of how boards or committees have complied. One example of this is the increasing focus around internal controls and risk management and explaining to shareholders how assurance concerning operational effectiveness has been obtained.

The quality of the annual report matters. Investors, who are used to comparing companies with their peers, both larger and smaller, know what they are expecting and reporting that seeks to provide only the bare minimum stands out in a negative way. At the other end of the spectrum high quality reporting gives confidence in the quality of the management team responsible for its preparation.

Expectations of investors, and other stakeholders, also changes over time and hence high quality reporting is constantly evolving. Ten years ago the amount and depth of reporting over environmental and social matters was relatively low but nowadays all companies, regardless of the market they are on, are having to give this careful consideration. This is driven in part by regulatory change but also by changed investor demand with green and ethical criteria increasing being part of the investment decision. Failing to engage with this risks companies being unable to access certain pools of green capital.

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Matthew Stallabrass
Matthew Stallabrass
Partner, Corporate Audit