The Financial Reporting Council (FRC) has recently published its Annual Review of Corporate Reporting 2021/22. It includes:
- a summary of key issues relevant to companies’ reporting in uncertain times;
- the FRC’s key disclosure expectations for 2022/23; and
- reminders on the top ten topics they raised with companies in 2021/22.
Reporting in uncertain times
The Russian invasion of Ukraine in February sent geopolitical shockwaves around the world while increasing economic uncertainty created by the Covid-19 pandemic. More recently rising inflation, slowing economic growth, increasing interest rates and constraints in the labour market are some of the challenges that businesses are facing. Consequently, in this period of heightened uncertainty businesses need to remain agile and continually reassess the evolving risks which they will need to reflect in their strategy and reporting.
The FRC have reminded companies that:
- They should clearly explain the risks and changes in the business environment they are facing and how the risks and uncertainties have been reflected in the strategy, business model and going concern and viability assessments, drawing attention to various guidance that the FRC have produced on Viability and Going Concern.
- The explanation of the business performance and financial position at the end of the year should be made in the context of the business strategy and reflect the risks.
- Any changes to definitions and/or calculations of APMs (for example, inflation-adjusted measures) should be adequately explained, drawing attention to the thematic review that the FRC produced on APMs.
- They should consider the effect of uncertainty on the recognition, measurement and disclosures within the financial statements.
Key disclosure expectations for 2022/23
In their review, the FRC outline where they expect to see improvements in the 2022/23 reporting season. Their expectations are as follows:
- Unambiguous description in the strategic report of risks facing the business, their impact on strategy, business model, going concern and viability, and cross-referenced to relevant details in the reports and accounts.
- Specific, balanced and well-integrated information about the impact of climate change on the company in narrative reporting, and appropriate reflection of material climate-related commitments, risk and uncertainties in the financial statements; clarity about the relationship between assumptions and sensitivities considered in any TCFD scenarios* (including any Paris-aligned scenarios) and those applied in the financial statements.
- Impairment disclosures that assign values to, and explain how, the key assumptions used have been determined, with reference to future expectations regarding external conditions and the company’s own strategy.
- Clear disclosure of significant management judgements and key assumptions underlying major sources of estimation uncertainty, including information about the sensitivity of reported amounts to changes in assumptions.
- Transparent disclosure of the nature and extent of material risks arising from financial instruments, including changes in investing, financing and hedging arrangements; the use of factoring and reverse factoring in working capital financing and the approach to and significant assumptions made in the measurement of expected credit losses; concentrations of risk and information about covenants (where material).
- Company-specific information that meets the disclosure objectives of the relevant accounting standards and not just the specific disclosure requirements. Additional information (beyond the standards’ requirements) should be included where needed to understand the impact of particular transactions, events or circumstances.
- Clear explanations of the nature of significant inflationary features in revenue, supply, leasing and other financing contracts, and their effect of the financial statements.
- Clear, concise, and understandable disclosure that omits immaterial information.
*Where required by the Listing Rules, or an explanation of the reasons for not doing so.
Reminders to companies on the top ten areas of Corporate Reporting Review (CRR) challenge
The FRC’s Annual Review of Corporate Reporting provides detailed findings from their corporate reporting review activities during the year. The FRC note the improvement that has been noted in the reporting of judgements and estimation uncertainty, impairment of non-financial assets, revenues and Alternative Performance Measures (APMs) however they note their expectation of the quality to be maintained in these areas.
One of the key areas of concern for the FRC is cash flow statements with the number of errors found in the cycle doubling compared to the prior year. Cash flow statements have been identified as an area of focus for audit quality inspections in the 2022/23 review cycle.
Other areas of challenge are:
- Financial instruments
- Income taxes
- Strategic report and other Companies Act matters
- Provisions and Contingencies
- Alternative performance measures (APMs)
- Judgements and estimates
- Impairment of assets
- Presentation of financial statements and related disclosures