Watchdogs have stressed yet again that companies be plain in disclosing their performance prospects as a result of the pandemic in their reporting.

The warning comes in the Financial Reporting Council’s (FRC) annual review of corporate disclosures which highlights key areas for improvement in annual reports.

Detailing expectations for 2020–21, the FRC says disclosures should be made that “provide insights into the board’s assessment of the business’s prospects” and the methods and assumptions underlying the assessment.

The review sees the watchdog maintain pressure on companies to come clean to stakeholders about the effects of the pandemic.
There is also a stress on companies being open about “material changes” in business models as a result of Covid-19 and the lockdowns that followed.

The pandemic and future prospects

The review reveals that the FRC looked at 216 sets of accounts. Of those, 96 faced “substantive questions” about their reports. Fourteen were found to be in so far from compliance with reporting standards they were required to restate their accounts. The FRC also lists a “top ten” list of areas where companies need to improve their reporting.

According to David Rule, the FRC’s executive director of supervision, companies are expected to act on the areas of concern. “Given the heightened need for high-quality disclosures as a result of the Covid-19 pandemic, it is vital companies carefully consider the FRC’s findings ahead of the next reporting cycle.”

The next round of FRC inspections will focus on issues arising from the pandemic, such as disclosure of risk and the use of “judgments” in the accounts.

Judgments and estimates made in accounting are the number one issue on the FRC’s hit list. Statements about the impairment of assets come in at number two, while revenue recognition, a perennial bugbear in accounting, comes in third.

Throughout the year the FRC has been pushing a message to companies that they must provide “more extensive” disclosures because of the pandemic. The FRC has previously said that even though financial reporting may look “sufficient”, investors are looking for more detail.

In July David Rule said the issue was not only reporting performance but also reporting “future prospects”, a theme picked up and pushed in this week’s annual review.

Elsewhere auditors have been warned to prepare themselves for companies that may opt to hide the full implications of the pandemic on their finances.

Public interest reporting

A consultation on the future of financial reporting is also under way at the FRC. The watchdog proposes that companies begin producing what it terms a “public interest report” to sit alongside separate business and financial reports.

According to Mark Babington, the FRC’s executive director of regulatory standards, annual reporting has grown to include ever increasing volumes of information, a fact that has undermined their “purpose and usability”.

“To build trust in business we need a modern corporate reporting system that is transparent, flexible and puts users of corporate reporting at its heart.”

The FRC found in a survey that 51% of those who use company disclosures are “always interested” in the way a company’s activities affect the environment, communities and suppliers.