FRC Annual Review of Corporate Reporting 2022/23

The number of reports the FRC reviewed in the 2022/23 cycle is up by 4%, from 252 to 263. 112 companies received queries that required substantive correspondence with the FRC—up 9% on the prior review cycle—and 25 had to restate their financial statements. While the FRC continues to focus on larger listed entities, 2 in every 5 companies reviewed were outside the FTSE 350, including AIM-quoted and large private companies, which is an increase compared to two years ago.

It is promising to see that issues related to IFRS 9, 15 and 16, which presented significant challenges for companies in prior years have reduced in prominence. With falling but still high inflation levels, the highest interest rate levels since 2008, volatile exchange rates, and climate change amongst other events driving global uncertainty, companies are facing a different set of challenges today compared to when these Standards were issued. Against this backdrop, it is unsurprising that the significant sources of issues raised by the FRC in this review cycle relate to impairments, and judgements and estimates – as well as cash flow statements which has retained its spot in the top-three ranked issues as in the last two review cycles.

In this period of uncertainty, it is even more important that the narrative reporting in the front-half of annual reports clearly reflect the risks and issues companies are facing and the specific actions being taken to address these. The FRC Review suggests companies still have some work to do to improve the quality of their narrative reports.

Financial Reporting

The front half of UK companies’ annual reports is undergoing a pivotal transformation: changes to the UK Corporate Governance Code (Code) from the FRC are expected and the first two IFRS^® Sustainability Disclosure Standards published by the International Sustainability Standards Board (ISSB) is set to increase the prominence of sustainability reporting in annual reports. The government is also taking a fresh look at the non-financial reporting requirements to identify potential opportunities to simplify and streamline existing reporting, so investors and other stakeholders have the important information needed to make decisions.

While we await the finalisation of these developments in the UK, companies need to be especially cognisant that their narrative reporting is not only about content that “ticks the box” on the applicable requirements. As with financial reporting, judgement is paramount – this means including additional information where existing content in the narrative report does not provide investors and other stakeholders with meaningful and company-specific information or indeed, removing information that is irrelevant, immaterial or excessively detailed. 

The FRC Review provides a number of matters to consider as companies review their existing narrative disclosures.

Simply put, there is more work to do to ensure annual reports and accounts, as a whole, meet investors’ and other stakeholders’ need for high-quality, decision-useful information. 

For your 2023/24 annual reports and accounts, the FRC expects to see:

• disclosures about uncertainty that are sufficient to meet the relevant requirements and allow users to understand the positions taken in the financial statements.
• clearer description in the strategic report of risks facing the business, their impact on strategy, business model, going concern and viability with cross-references to relevant detail in the annual report and accounts.
• transparent disclosures of the nature and extent of material risks arising from financial instruments.
• for listed companies, a clear statement of consistency with the TCFD framework which explains, unambiguously, whether management considers they have given sufficient information to comply with the framework in the year. However, companies in scope of the UK-CFD¹ requirements under Companies Act are reminded that those requirements apply on a mandatory basis and only some are subject to materiality assessment. 
• sufficient critical reviews of the annual report and accounts and robust pre-issuance reviews that consider the issues the FRC has commonly raised to companies. 

Companies could look at the specific issues from the FRC Review and seek to address these as they apply to them. However, a more pragmatic approach would be to question whether the overall content of the annual report is fit for purpose and use the required disclosures – alongside FRC’s findings and disclosure expectations – as an opportunity to report in a company-specific way that provides relevant and connected information for investors and other stakeholders.

Please get in touch if you would like to discuss these findings further.