FRC publishes its Annual Review of Corporate Reporting

The Financial Reporting Council (FRC) has recently published its Annual Review of Corporate Reporting 2022/23.

It includes:

• Its reporting expectations for companies amidst a period of high interest rates, persistent inflation and ongoing economic uncertainty;
• The FRC’s key disclosure expectations for 2023/24; and
• Reminders on the top ten topics they raised with companies in 2022/23.

“Companies have faced several years of economic and geopolitical turbulence following the pandemic and Russia’s invasion of Ukraine. Interest rate rises in response to persistent inflation, the related impact on consumer behaviour, and limited growth remain immediate concerns in many economies. There are also considerable uncertainties surrounding companies’ exposures to climate change and their plans for the transition to a low carbon economy. This presents a challenging environment for financial reporting as companies need to consider, and communicate to investors, how these issues affect their business, as well as the assumptions underpinning the values of assets and liabilities in their financial statements. The development and consolidation of the sustainability reporting ecosystem continues at pace, with the phased introduction of climate related disclosures in the UK and a major milestone, the publication of the first International Sustainability Standards Board (ISSB) standards, this year, reflecting the demand for investor-focused information in this area.”

The FRC expect companies to carefully consider how current economic conditions may impact on financial and narrative reporting in 2023/24. In particular:

Key reporting issues for 2023/24 include:

• High inflation and rising interest rates may drive significant changes to discount rates and expected future cash flows which can have effects ranging from additional impairments to a reduction in pension scheme liabilities and the potential recognition of a surplus; and
• The range of uncertainty over a number of economic factors, including inflation, has increased. This may increase the degree of judgement required by management in determining inputs to the financial statements, and require disclosure of sensitivities to a wider range of reasonably possible outcomes.

Developments in corporate reporting:

• Changes to IFRS accounting standards for the coming reporting season are relatively minor, with the exception of the implementation of IFRS 17. This will have a greater impact on reporting in the insurance sector, but companies outside the sector will need to assess whether they have any contracts within its scope, which could include certain warranties, breakdown or product replacement cover, and guarantees.
• Sustainability-related disclosure requirements continue to develop at pace. This year, in addition to those subject to the FCA’s comply or explain TCFD listing rules, a larger range of companies and LLPs will be required to provide mandatory, TCFD-based, climate[1]related financial disclosures in their annual reports.

The FRC outlines its overall expectations with regard to disclosures in 2023/24 as follows bringing together the major themes identified above and in conjunction with the top ten findings noted below as follows:

• Ensure disclosures about uncertainty are sufficient to meet the relevant requirements and for users to understand the positions taken in the financial statements.  In particular: 
  • The values of key assumptions and sensitivities or a range of reasonably possible outcomes, must be provided, where required for impairment tests and major sources of estimation uncertainty;
  • Significant accounting judgements must be described;
  • Disclosures should be re-assessed each year to ensure they remain relevant and assumptions, and the range of outcomes used for sensitivity disclosures, remain appropriate;
  • Better disclosure helps users understand the linkage between narrative reporting on uncertainties such as inflation and climate change, and the assumptions made in the financial statements.

• Give a clear description in the strategic report of risks facing the business, their impact on strategy, business model, going concern and viability, cross-referenced to relevant detail in the reports and accounts;
• Provide 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; the approach to and significant assumptions made in the measurement of expected credit losses; concentrations of risks and information about covenants (where material);
• Provide a clear statement of consistency with TCFD (where required by the Listing Rules, or an explanation of the reasons for not doing so) which explains, unambiguously, whether management considers they have given sufficient information to comply with the framework in the current year;
• Perform sufficient critical review of the annual report and accounts, including 
  • Taking a step back to consider whether the report as a whole is clear, concise and understandable, omits immaterial information and whether additional information, beyond the requirements of specific standards, is required to understand particular transactions, events or circumstances; and
  • A robust pre-issuance review to consider issues the FRC commonly challenges including: internal consistency; whether accounting policies address all significant transactions; and presentational matters, such as cash flow and current/non-current classification.

The FRC’s Annual Review of Corporate Reporting provides detailed findings from their corporate reporting review activities during the year.  The FRC noted that “the general quality of corporate reporting across the population of FTSE 350 companies they reviewed has been maintained. Our reviews resulted in a similar number of substantive questions to previous years and we were able to resolve these enquiries through open and constructive engagement with companies. This is a positive outcome in the context of a challenging trading and reporting environment.”

Improvements in a number of areas was noted, with Alternative Performance Measures (APMs) falling out of the ‘top ten’ issues for the first time in several years.

The most frequently raised issues this year were impairment of assets, and judgements and estimates. This may reflect the heightened economic uncertainties companies need to factor into their financial reporting. Reduced headroom in impairment tests may trigger additional disclosure requirements for assumptions and sensitivities; and estimates, such as discount rates, may need to reflect a wider range of possible outcomes than in previous reporting periods. Companies have not always provided adequate disclosures on these points for users to understand the positions taken. The FRC note that these areas are expected to remain areas of risk, and close CRR focus, for the coming reporting season.

We also note that cashflow statements continue to remain a point of the FRC’s focus with the frequency of questions raised only slightly lower than last year.  It also remains one of the most frequent reasons for companies making a prior year restatement as a result of the FRC’s enquiries.

Other areas of challenge include:

• Strategic report and other Companies Act 2006 matters
• Financial instruments
• Income tax
• Revenue
• Provisions and contingencies
• Presentation of financial statements
• Fair value measurement

A link to the full report which includes both key highlights and findings in greater depth can be found here.

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