1. Lab project summary: Accounting policies and integration of related financial information July 2014

2. Accounting policies and integration of related financial information This project provides insight from investors on each of the following areas to aid companies when considering their future reporting: Accounting policies: which policies are disclosed, the content of what is disclosed, and their placement within the report; Notes to the financial statements: ordering, grouping/combining notes; and Financial review: integration within the primary financial statements. 16 companies and 19 institutional investors, analysts and representative organisations took part, and input was received from over 200 retail investors through an online survey. Key findings Investors associate current policy disclosures with “boilerplate” text, repetition of language in accounting standards and not being specific enough to the company. Investors desire: prominence given to significant policies; and enhanced policy disclosure for significant policies. Project overview

3. Project observations – accounting polices 1 Which policies should be disclosed? Institutional investors: only significant policies are needed in annual reports with remainder available on the company website. Retail investors: all disclosed policies should be retained in the annual report with prominence given to significant policies. Moving non-significant policies to an appendix within the annual report may be a helpful compromise. Investors indicate the following attributes which, alone or together, may indicate significant policies: materiality of the transactions, classes and amounts; importance to the nature of the business; distinct revenue streams (policies on revenue are always significant); choice of policy in IFRS, or significant judgement in selecting a policy; and significant levels of estimation or judgement in applying the policy. “I only want significant / material policies. If there is little choice / room for interpretation, there is no need for disclosure.” Large buy-side investor Accounting policies and integration of related financial information

4. Project observations – accounting policies 2 Content of policy disclosures – Investors suggest that companies: write using plain, understandable language; describe any judgements made in selecting the policy applied and the rationale for them ; describe the company’s application of accounting policies (not only a summary of the IFRS standard), including the estimation/judgements made and their significance to reported amounts; describe new IFRS requirements only if they significantly, or are likely to significantly, impact the financial statements; and present the impact of changes in tabular format. “Policies need to be written in plain English and explain how the companies apply the policy to enable me to determine if management are conservative or aggressive in application.” Large buy-side investor Accounting policies and integration of related financial information

5. Project observations – accounting policies 3 Investors have diverse views in relation to the placement of policies in the financial statements. In one note: is preferred by investors who often refer to more than one policy; has been the norm for many years which investors are used to and are able to locate them quickly and easily in an early note (often note 1) of the financial statements; and helps companies to see the length of the disclosure and may aid them in identifying non-significant policies. Integrated into each note or section of notes: provides necessary context together with the numbers; reduces duplication within the notes; and improves the readability of notes. No preference this view was more common for investors that use search functions to interrogate digital versions of financial statements to locate information they require, rather than reading through the whole financial statements. Accounting policies and integration of related financial information

6. Project observations – notes to the financial statements On note order, grouping and combining of notes, Investors indicate: the combining of notes on tax expense and on balance sheet amounts is viewed as logical; the case for combining or grouping other notes, and for significant change in note order, has not been made; consistency of note order across companies and time is highly valued; and a table of contents can be helpful in navigating through to the desired information, especially where notes are ordered in a relatively different manner. “The easiest accounts are where I know everything is going to be in the same place every year, I'm sort of inclined to take it to an extreme stance that it’s the same place for every company” Large buy-side investor Accounting policies and integration of related financial information

7. Project observations – financial review Investors value a consistent story across the narrative sections and financial statements but were not convinced on the integration of the financial review with the financial statements: there is limited support for integrating financial review and financial statement information; some see merit in increased analysis of financial statement line items; and most prefer the traditional approach of placing management commentary and financial statement information in separate sections of the annual report. Accounting policies and integration of related financial information

8. Read the full report This report supports the FRC’s initiative on Clear & Concise reporting. For more information see: https://www.frc.org.uk/Our-Work/Headline-projects/Clear-Concise.aspx The full Lab report provides further details on the project observations and provides some helpful examples of good company practice. Copies of the Lab report can be downloaded freely from: https://frc.org.uk/Lab/Published-project-reportshttps://frc.org.uk/Lab/Published-project-reports, where you will also find copies of the Lab’s other reports. Accounting policies and integration of related financial information

9. What is the Financial Reporting Lab? The Financial Reporting Lab has been set up by the Financial Reporting Council to improve the effectiveness of corporate reporting in the UK. The Lab provides a safe environment for listed companies and investors to explore innovative reporting solutions that better meet their needs. Lab project reports do not form new reporting requirements. Instead, they summarise observations on what investors find useful. Find out more about the Lab including information about other projects at: http://www.frc.org.uk/lab You can also follow us on Twitter @FRCnews or on LinkedIn in Accounting policies and integration of related financial information