September 9, 2014 Disclosing a true and fair view
At the beginning of September the Financial Reporting Council (FRC) launched a consultation document on accounting standards for small entities. Released as part of the overall consultation on the implementation of the EU Accounting Directive, the document mainly relates to small and micro-entities, ie those posting turnover which falls under the new proposed £10.2M ceiling. However, the consultation does highlight some interesting reporting aspects which larger entities would do well to consider.
Prime amongst these is the FRC’s emphasis on users of statutory accounts receiving “high-quality understandable financial reporting proportionate to the size and complexity of the entity and users’ information needs.” This consideration is in line with the FRC’s ongoing review of governance and reporting issues and the way in which it seeks to encourage companies to paint a true and fair view of the business for the benefit of investors. But when it comes to smaller entities, the FRC is concerned that the proposed regulations may pose some problems.
For example, the new Accounting Directive for smaller companies only specifies a limited number of disclosures. This makes sense as it is intended to reduce the reporting burden for smaller entities. However, companies are still required to report over and above these specified disclosures to give a true and fair view. In its consultation the FRC is concerned that the determination and reporting of this extra information will place a greater burden on company directors.
Small company or not, the way in which a true and fair picture is painted can have huge implications for businesses and their shareholders/investors. Organisations with strong governance ideals need to find a way to reflect those ideals through their reporting documentation without seeming to sound trite or parrot meaningless phrases. Often, the way in which governance shows up is in the care which is taken to structure reports so that they not only meet statutory requirements but also present a clear and balanced viewpoint for stakeholders.
This almost requires organisations to ‘step outside’ and look back from a third party point of view. Plans and values which the board live with on a daily basis may not be as obvious to outsiders. Accounting ‘one-off’ entries may be circumscribed by regulation but helping investors to differentiate between the truly exceptional item and that which may well re-occur is a fine art. And when a company is growing, helping investors to understand future trends from an ever changing base is the job for an expert. But whatever the challenge, whatever the company size, the key is to bear in mind the true and fair view objective.