This year, the Financial Reporting Council’s annual review, published on 27 October 2022, focused on FTSE 350 companies in the travel, hospitality, retail, property and financial services sectors. The FRC noted that, despite the backdrop of increased uncertainty (precipitated by the effects of the pandemic and exacerbated by Russia’s invasion of Ukraine), the quality of corporate reporting remained good within the FTSE 350.
However, the review found that scope for improvement remains within financial reporting—particularly in respect of financial instruments and deferred tax—and that cash flow statements “remain an area of considerable concern”.
The review sets out the various key areas for improvements, and includes specific inflation and interest rate related considerations for companies to take into account when making disclosures.
The FRC’s report provides links pointing companies to various publications containing useful practical advice.
Top ten corporate reporting issues
1. Cash flow statements
2. Financial instruments
3. Income taxes
4. Strategic report and other Companies Act 2006 matters
6. Provisions and contingencies
7. APMs (alternative performance measures)
8. Judgements and estimates
9. Impairment of assets, and—in joint ninth place—presentation of financial statements and other disclosures
Section 3 of the report takes each of these ten topics in turn and provides specific examples of issues identified by the FRC’s review team and how they should be resolved. Links are provided to additional guidance from previous years and from this year, which companies are encouraged to consider in order to ensure the expected quality of reporting.
Issues with strategic reports
Particular issues arising from the FRC’s review of strategic reports include:
• The CA 2006 requirement for strategic reports to be “fair, balanced and comprehensive”
“In some cases, the financial review focused on the financial performance of the company, with limited or no information on significant movements in the statement of financial position or cash flow statement.”
“…information was omitted or lacked specific detail about matters that appeared significant to the company, such as prior year restatements, government funding and climate related matters.”
• SECR (Streamlined Energy and Carbon Reporting):
– Several large private companies omitted energy and carbon reporting disclosures.
– One listed company did not disclose its energy consumption, separate emission figures and the methodology used to calculate the annual emissions.
• Section 172 Statement:
– In several instances, the annual report lacked a statement about the company’s engagement with suppliers, customers and others in a business relationship, and the effects on the principal decisions taken by the company during the year.
– One company did not provide a Section 172 statement at all.
• Distributable profits: a number of queries were raised concerning disclosures around the lawfulness of dividends for varying reasons, including a lack of support shown in the company’s latest audited accounts, failure to file the supporting accounts at the proper time, and unclear or inappropriate accounting treatment of capitalisation of amounts.
The FRC review encourages companies to consider the FRC’s Guidance on the Strategic Report which was published in June 2022, and to consider the guidance provided in the FRC’s SECR thematic report, to help with improving disclosures in the strategic report in the next cycle.
Reporting in uncertain times
A recurring concern throughout the FRC’s review concerns the uncertain backdrop against which companies have reporting in this latest cycle. The FRC notes that “the Russian invasion of Ukraine…sent geopolitical shockwaves around the world and exacerbated the economic uncertain created by the Covid-19 pandemic. Rising inflation, slowing economic growth, increasing interest rates, stresses in supply chains, constraints in the labour market and changing consumer behaviour, are some of the challenges business are currently facing.”
To that end, the FRC’s overarching advice to companies to improve their reporting in uncertain times is to ensure that they:
• Clearly explain risks and changes in the business environment that they are facing; and
• How the risks and uncertainties have been reflected in the strategy, business model and going concern viability assessments (and any changes to definitions and/or calculations of APMs (for example, inflation-adjusted measures) should be adequately explained).
Disclosure expectations for 2022/2023
The FRC flags that it will be looking for the following in next year’s review of company annual report disclosures:
• 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 detail 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, risks 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 risks 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 explanation of the nature of significant inflationary features in revenue, supply, leasing and other financing contracts, and their effect on the financial statements; and
• Clear, concise and understandable disclosure that omits immaterial information.
Companies should consider whether any of the “Top Ten” recurring areas for improvement, and any of the specific examples highlighted in Section 3, might be an area which they can improve upon for the next cycle, and take into account the FRC’s practical suggestions and various guidance materials in order to address any weaknesses and/or gaps in its own reporting.
Click here for a copy of the FRC’s Annual Review of Corporate Reporting 2021/22”.
Click here for a copy of the FRC’s Annual Review of Corporate Reporting 2021/22: Corporate Reporting Highlights.
Click here for a copy of the “Key matters for 2022/2023 reports and accounts”.
This article was produced in association with White & Case UK’s Public Company Advisory team. Read their original alert here.